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As filed with the Securities and Exchange Commission on May 12, 1998
Registration No. 333-48287
OMB APPROVAL
OMB Number: 3235-0073
Expires: September 30, 1998
Estimated average burden
hours per response.. 413.00
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
Fountain Oil Incorporated
(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
91-0881481
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(I.R.S. Employer Identification Number)
1400 Broadfield Boulevard, Suite 100, Houston, TX 77084, (281) 492-6992
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Susan Palmer, Fountain Oil Incorporated, 1400 Broadfield Boulevard, Suite 100,
Houston, TX 77084, (281) 492-6992
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
From time to time after this Registration Statement becomes effective
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(Approximate date of commencement of proposed sale to the public)
Please forward a copy of all correspondence to:
Alan D. Jacobson, Esq. Brian Hoffman, Esq.
2029 Century Park East, Suite 2600 McDermott, Will & Emory
Los Angeles, CA 90067 50 Rockefeller Plaza
New York, NY 10020
If any of the securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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POTENTIAL PERSONS WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION CONTAINED IN THIS FORM
SEC 1379 (11-96) ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER
</TABLE>
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<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================================================
Proposed Proposed
maximum maximum
offering price aggregate
Title of each class of securities to Amount per unit(2) offering price Amount of
be registered to be registered(1) registration fee
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Common Stock, par value $0.10 per share 22,472,860 0.875 19,663,752.50 5,800.81
===============================================================================================================================
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(1) Based upon the sum of common shares of CanArgo Energy Inc. ("CanArgo Common
Shares") outstanding on December 31, 1997, plus the number of CanArgo Common
Shares subject to outstanding options and purchase rights exercisable on or
before November 1, 1999 (the anticipated closing date of the combination of
Fountain and CanArgo (the "Transaction")) multiplied by 1.6, the exchange
ratio in the Transaction.
(2) Based upon the closing price of one share of Fountain Common Stock on NASDAQ
on March 17, 1998 (a date within five business days prior to filing of this
Registration Statement).
Fountain hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effectiveness date until Fountain shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PART I
INFORMATION REQUIRED IN PROSPECTUS
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CANARGO ENERGY INC. FOUNTAIN OIL INCORPORATED
1580 GUINNESS HOUSE 1400 BROADFIELD BOULEVARD
727 - 7TH AVENUE S.W. SUITE 100
CALGARY, ALBERTA, CANADA HOUSTON, TEXAS, U.S.A.
T2P 0Z5 77084
JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT/PROSPECTUS
On February 2, 1998, CanArgo Energy Inc. ("CanArgo") and Fountain Oil
Incorporated ("Fountain") entered into an agreement, which has since been
amended and restated (the "Combination Agreement"), to combine the two
companies. The combination of Fountain and CanArgo (the "Transaction") is
expected to enable the companies to allocate resources more effectively among a
broader portfolio of projects and to realize economies through the consolidation
of certain functions. As part of the Transaction, CanArgo will become a
subsidiary of Fountain (and will be renamed CanArgo Oil and Gas Inc.) and
Fountain, subject to approval by Fountain's stockholders of an amendment of
Fountain's Certificate of Incorporation, will be renamed CanArgo Energy
Corporation.
In the Transaction, each share of CanArgo will be exchanged for 1.6
shares (subject to adjustment for changes in the capitalization of Fountain) of
a new class of "Exchangeable Shares" of CanArgo (the "Exchangeable Shares"). The
Exchangeable Shares will be exchangeable at any time for common stock, par value
US$0.10 per share, of Fountain ("Fountain Common Stock") on a one-for-one basis
at the option of the holder and will also have an associated right to direct a
vote at meetings of stockholders of Fountain. After the Transaction, the
shareholders of CanArgo will have the right to acquire approximately 47% of the
shares of Fountain Common Stock then outstanding or issuable. The Exchangeable
Share structure is designed to provide an opportunity for Canadian shareholders
of CanArgo to achieve tax deferral in certain circumstances, as described in
this Joint Proxy Statement/Prospectus. Holders of CanArgo Common Shares who
desire to obtain certificates representing Fountain Common Stock upon the
consummation of the Transaction without receiving the Exchangeable Share
certificates otherwise issuable to such holder may do so in connection with the
surrender of certificates representing CanArgo Common Shares following
consummation of the Transaction.
The Transaction cannot be completed unless the stockholders of both
companies approve various matters which are more fully described in this Joint
Management Information Circular and Proxy Statement/Prospectus ("Joint Proxy
Statement/Prospectus"). The notices which follow contain information regarding
the meetings which have been scheduled for the stockholders of Fountain and the
shareholders of CanArgo to vote on proposals related to the Transaction and on
other matters. The Boards of Directors of CanArgo and Fountain unanimously
recommend that you vote in favor of the respective proposals and matters. YOUR
VOTE IS VERY IMPORTANT. Whether or not you plan to attend a meeting, please take
the time to vote by completing and mailing the enclosed proxy card to us.
This Joint Proxy Statement/Prospectus provides you with detailed
information about the Transaction which begins on page 38. YOU SHOULD ALSO
CAREFULLY READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 16 THAT
DISCUSSES IMPORTANT CONSIDERATIONS RELEVANT TO APPROVAL OF THE PROPOSALS AND AN
INVESTMENT BY THE CANARGO SHAREHOLDERS IN THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE TRANSACTION.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Fountain filed as part of a Registration Statement on Form S-3 with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended, registering 22,472,860 shares of Fountain Common Stock issuable in
connection with the Transaction.
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED THE SECURITIES
TO BE ISSUED UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE
Joint Proxy Statement/Prospectus dated , 1998, and first
mailed to stockholders on , 1998.
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FOUNTAIN OIL INCORPORATED
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON______________________ , 1998
To The Stockholders:
Fountain Oil Incorporated ("Fountain") will hold a Special Meeting of
Stockholders at _________________________, on ___________________________ , 1998
at 10:00 a.m. for the following purposes:
1. To approve the issuance by Fountain of up to 24,448,860 shares of its
Common Stock, as presently constituted, and 100 shares of its Series Voting
Preferred Stock (to be issued to a trustee and designed to afford voting power
to holders of Exchangeable Shares of CanArgo Energy Inc. ("CanArgo")
commensurate with the voting power they would have upon exchanging the
Exchangeable Shares for shares of Fountain's Common Stock) pursuant to the terms
of a Combination Agreement between Fountain and CanArgo dated as of February 2,
1998, as amended and restated, by which CanArgo will become a subsidiary of
Fountain and the shareholders of CanArgo will have the right to acquire
approximately 47% of the Common Stock of Fountain outstanding or issuable after
the business combination;
2. To approve an amendment to Fountain's Certificate of Incorporation to
change Fountain's name to "CanArgo Energy Corporation"; and
3. To approve an amendment to Fountain's Certificate of Incorporation to
effect a 1-for-2 reverse stock split of the outstanding Common Stock.
The Board of Directors of Fountain has fixed the close of business on ,
1998, as the record date to determine the stockholders who will be entitled to
notice of and to vote at the Special Meeting.
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU
HAVE SENT IN YOUR PROXY CARD.
SUSAN E. PALMER
Secretary
, 1998
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CANARGO ENERGY INC.
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual and Special Meeting of the
shareholders of CanArgo Energy Inc. ("CanArgo") will be held at the
______________________, Calgary, Alberta on __________ __, 1998 at 11:00 a.m.
(Calgary time) for the following purposes:
1. to consider and, if deemed advisable, to pass, with or without
variation, a special resolution (the "Continuance Resolution")
authorizing CanArgo to apply to the Director under the Business
Corporations Act (Ontario) (the "OBCA") for a certificate of continuance
continuing CanArgo thereunder as if it had been incorporated under the
OBCA (the "Continuance");
2. conditional on the Continuance being approved, to consider, pursuant to
an order (the "Interim Order") of the Ontario Court of Justice (General
Division) (the "Court") issued ___________ __, 1998 and, if deemed
advisable, to pass, with or without variation, a special resolution (the
"Arrangement Resolution") to approve an arrangement (the "Arrangement")
pursuant to Section 182 of the OBCA involving CanArgo and Fountain;
3. to receive the annual report of CanArgo including the financial
statements and auditor's report thereon, for the financial year ended
December 31, 1997;
4. to elect four directors;
5. to appoint independent auditors and to authorize the directors to fix
the auditors' remuneration; and
6. to transact such other business as may properly come before the meeting
or any adjournment thereof.
The full text of each of the Continuance Resolution and the Arrangement
Resolution is set out in Annex A and Annex B, respectively, to this Joint Proxy
Statement/Prospectus. A copy of the Combination Agreement with respect to the
Arrangement, as amended and restated, is reproduced in full as Annex C to this
Joint Proxy Statement/Prospectus.
As the Arrangement is being considered pursuant to the Interim Order and
the Arrangement must be approved by a final order of the Court, a copy of each
of the Interim Order and notice of application for the final order of the Court
is reproduced as Annex D and Annex E, respectively, to this Joint Proxy
Statement/Prospectus.
Holders of common shares of CanArgo are entitled to dissent under and to
be paid the fair value of their shares in accordance with Section 184 of the
Business Corporations Act (Alberta) in respect of the proposed Continuance and
are entitled to dissent under and to be paid the fair value of their shares in
accordance with Section 185 of the OBCA in respect of the Arrangement. These
rights are described in this Joint Proxy Statement/Prospectus.
Shareholders are invited to attend the meeting. Shareholders of record
at the close of business on _____________ __, 1998 will be entitled to vote at
the meeting except to the extent that a person has transferred any common shares
of CanArgo after that date and the new holder of such common shares establishes
proper ownership and requests not later than ten days before the meeting to be
included in the list of shareholders eligible to vote at the meeting.
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DATED at Calgary, Alberta this _____ day of _____________, 1998.
By Order of the Board of Directors
(Signed) Michael R. Binnion
Note: Shareholders are requested to date, sign and return the enclosed form of
proxy for use at the meeting whether or not they are able to attend
personally. All instructions appointing proxies to be used at the
meeting must be deposited with the office of CanArgo's transfer agent,
Montreal Trust Company of Canada, Suite 710, 530-8th Avenue S.W.,
Calgary, Alberta, T2P 358, not less than 48 hours prior to the time of
the meeting or any adjournment thereof or be received by the Chair or
Secretary of the meeting on the day of the meeting.
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TABLE OF CONTENTS
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SUMMARY ........................................................................ 1
GLOSSARY OF CERTAIN TERMS ...................................................... 9
RISK FACTORS ................................................................... 16
Recent Negative Operating Results of Fountain ......................... 16
Recent Operating Results of CanArgo; Limited Operating
History of CanArgo............................................... 16
Possible Limitation on Fountain's Net Operating Loss Carryovers ....... 16
Fountain Liquidity and Capital Resources .............................. 17
CanArgo Liquidity and Capital Resources ............................... 17
Liquidity and Capital Resources of the Combined Company ............... 17
Litigation and Claims ................................................. 18
Relationship between NOC and JKX ...................................... 19
Risks of Foreign Operations ........................................... 19
Concentration of Business in Eastern Europe ..................... 19
Risk of Political Instability ................................... 19
New Market Economy .............................................. 19
Currency Risk ................................................... 20
Foreign Jurisdiction ............................................ 20
Ukrainian Projects .............................................. 20
Georgian Projects ............................................... 21
Volatility of Oil and Gas Prices ...................................... 21
Uncertainty of Reserve Information .................................... 21
Exploration, Development and Production Risks ......................... 22
Extensiveness of Laws and Regulations Applicable to
Oil and Gas Operations........................................... 22
Competition ........................................................... 23
Management and Personnel Changes ...................................... 23
Accounting Treatment of the Transaction ............................... 23
Continued Listing on NASDAQ; Application of the Penny Stock Rules ..... 24
Dividends ............................................................. 24
Anti-Takeover Effects of Stock Issuance ............................... 24
Tax Uncertainties of the Transaction................................... 25
Risk that Ancillary Rights May Be Deemed to Have
Greater Than Nominal Value....................................... 25
Risk of Amendment to Canadian Tax Act............................ 25
Characterization of the Arrangement for United States Federal
Income Tax Purposes............................................ 25
Possibility of Gain Recognition for United States Federal
Income Tax Purposes on Deemed Constructive Sale
Under Section 1259............................................. 25
Risk that CanArgo May Be Treated as a PFIC for United
States Federal Income Tax Purposes............................. 25
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES ................................. 26
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS ..................................... 26
COMPARATIVE MARKET PRICE DATA .................................................. 27
COMPARATIVE PER SHARE DATA...................................................... 28
SELECTED HISTORICAL FINANCIAL DATA ............................................. 29
Fountain .............................................................. 29
CanArgo ............................................................... 29
PRO FORMA FINANCIAL INFORMATION ................................................ 31
FOUNTAIN AND CANARGO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET ...... 32
THE MEETINGS--GENERAL PROXY INFORMATION ........................................ 38
Fountain .............................................................. 38
CanArgo ............................................................... 38
THE TRANSACTION ................................................................ 39
General ............................................................... 39
Background of the Transaction ......................................... 40
Reasons for the Transaction ........................................... 42
Fountain's Reasons for the Transaction .......................... 42
CanArgo's Reasons for the Transaction ........................... 44
Board Recommendations ................................................. 45
Opinions of Financial Advisors ........................................ 45
Opinion of CIBC Oppenheimer ..................................... 45
Opinion of Orkla ................................................ 50
Opinion of Roche Securities ..................................... 51
Interests of Certain Persons in the Transaction ....................... 53
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Transaction Steps and Description of Exchangeable Shares ................. 54
The Continuance .................................................... 54
The Arrangement .................................................... 54
Retraction, Redemption and Call Rights ............................. 55
Exchange, Voting, Dividend and Liquidation Rights of Holders of
Exchangeable Shares ............................................ 56
Fountain Support Obligation ........................................ 57
Certificate of Designation Creating Fountain Special Voting Stock .. 57
CanArgo Options .................................................... 57
The Combination Agreement ................................................ 57
Representations and Covenants ...................................... 57
Non-Solicitation Covenant .......................................... 58
Conditions to Closing .............................................. 58
Termination and Termination Fees ................................... 59
Shareholder Agreements ................................................... 60
Court Approval of the Arrangement and Completion of the Transaction ...... 60
Anticipated Accounting Treatment ......................................... 61
Procedures for Exchange of Share Certificates by CanArgo Shareholders .... 61
Stock Exchange Listings .................................................. 62
Exchangeable Shares; CanArgo Common Shares ......................... 62
Fountain Common Stock .............................................. 62
Eligibility for Investment in Canada ..................................... 62
Regulatory Matters ....................................................... 62
HSR Act and Competition Act (Canada) ............................... 62
Investment Canada Act .............................................. 62
Resale of Exchangeable Shares and Fountain Common Stock Received in the
Transaction .......................................................... 62
United States ...................................................... 62
Canada ............................................................. 63
Ongoing Canadian Reporting Obligations ................................... 63
THE COMPANIES AFTER THE TRANSACTION ............................................... 63
General .................................................................. 63
Management ............................................................... 63
Directors .......................................................... 63
Executive Officers ................................................. 64
Principal Holders of Securities .......................................... 65
Compliance With Section 16(a) of the Exchange Act ........................ 65
Fountain Capital Stock ................................................... 65
Authorized Capital Stock ........................................... 65
Common Stock ....................................................... 65
Preferred Stock .................................................... 65
Special Voting Stock ............................................... 66
CanArgo Share Capital .................................................... 66
CanArgo Common Shares .............................................. 66
First Preferred Shares ............................................. 66
Second Preferred Shares ............................................ 67
CanArgo Exchangeable Shares ........................................ 67
Future Issuances of Authorized Shares .................................... 69
Voting, Support and Exchange Trust Agreement ............................. 69
Voting Rights ...................................................... 70
Optional Exchange Right ............................................ 70
Fountain Support Obligation ........................................ 71
Delivery of Fountain Common Stock .................................. 71
Independent Accountants .................................................. 72
Transfer Agents and Registrars ........................................... 72
TAX CONSIDERATIONS ................................................................ 72
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Canadian Federal Income Tax Considerations to CanArgo Shareholders ....... 72
Shareholders Resident in Canada .................................... 73
Exchange of CanArgo Common Shares for Exchangeable Shares .......... 73
Call Rights ........................................................ 73
Dividends .......................................................... 73
Redemption or Exchange of Exchangeable Shares ...................... 74
Taxation of Capital Gain or Capital Loss ........................... 75
Acquisition and Disposition of Fountain Common Stock ............... 75
Foreign Property Information Reporting ............................. 75
Dissenting Shareholders ............................................ 76
Canadian Federal Income Tax Considerations to Holders of
CanArgo Warrant..................................................... 76
Shareholders Not Resident in Canada ...................................... 76
Non-Resident Holders of CanArgo Warrants ........................... 77
United States Federal Tax Considerations ................................. 77
Holders of Fountain Common Stock ................................... 77
United States Holders of CanArgo Common Shares............................ 78
United States Holders of CanArgo Common Shares ..................... 78
CanArgo Shareholders That Are Not United States Holders ............ 82
Limitation on U.S. Net Operating Loss Carryovers ................... 84
Norwegian Tax Considerations ............................................. 84
FOUNTAIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................................... 85
Qualifying Statement With Respect To Forward-Looking Information ......... 85
Liquidity, Capital Resources and Changes in Financial Condition .......... 85
December 31, 1997 Compared to December 31, 1996 .................... 85
December 31, 1996 Compared to August 31, 1996 ..................... 89
Results of Operations .................................................... 90
Year Ended December 31, 1997 Compared to Year Ended
August 31, 1996................................................. 90
Four Months Ended December 31, 1996 Compared With Four Months Ended
December 31, 1995 .............................................. 91
Twelve Months Ended August 31, 1996 Compared With Twelve Months Ended
August 31, 1995 ................................................ 91
INFORMATION CONCERNING FOUNTAIN ................................................... 93
General Development of Fountain's Business ............................... 93
Ventures in Eastern Europe ............................................... 93
Stynawske Field, Western Region, Ukraine ........................... 93
Lelyaky Field, Pryluki Region, Ukraine ............................. 94
Gorisht-Kocul Field, Albania ....................................... 95
Maykop Field, Adygea ............................................... 95
Risks Associated with Fountain's Eastern European Ventures ......... 96
Properties and Ventures in North America ................................. 97
Sylvan Lake Area, Alberta, Canada .................................. 97
Frog Lake Area, Alberta, Canada .................................... 97
Skiff Sawtooth Field, Alberta, Canada .............................. 98
Rocksprings Field, Edwards County, West Texas ...................... 98
Competition .............................................................. 98
Technology for Enhanced Production of Heavy Oil .......................... 98
EEOR Process ....................................................... 98
Competition ........................................................ 99
Principal Markets ........................................................ 99
Methods of Distribution .................................................. 99
Licenses, Concessions and Patents ........................................ 99
Environmental Matters .................................................... 100
Employees ................................................................ 100
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Properties ............................................................... 100
Legal Proceedings ........................................................ 101
Security Ownership ....................................................... 102
Executive Compensation ................................................... 106
Summary Compensation Table ......................................... 106
Option Grants During the Year Ended December 31, 1997 .............. 108
Directors' Compensation .................................................. 109
CANARGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................................... 111
Qualifying Statement With Respect To Forward-Looking Information ......... 111
Overview ................................................................. 111
Liquidity, Capital Resources and Changes in Financial Condition .......... 111
Results of Operations .................................................... 112
INFORMATION CONCERNING CANARGO .................................................... 114
General .................................................................. 114
History .................................................................. 114
Business and Properties .................................................. 114
Overview ........................................................... 114
The Fields ......................................................... 115
Production Wells and Acreage........................................ 116
Undeveloped Acreage................................................. 116
Independent Expert's Reports ....................................... 116
Location, Access and Infrastructure ................................ 116
Oil Sales .......................................................... 116
Production License ................................................. 117
The Shareholders Agreement ......................................... 117
Production History ................................................. 117
Geology ............................................................ 117
Employees ................................................................ 119
Description of Share Capital ............................................. 119
CanArgo Common Shares .............................................. 119
First Preferred Shares ............................................. 119
Second Preferred Shares ............................................ 120
Warrants ........................................................... 120
CanArgo Special Warrants ........................................... 120
Prior Issuances Of Shares ................................................ 121
Principal Holders Of Securities .......................................... 121
Directors and Officers ................................................... 122
Executive Compensation ............................................. 124
Indebtedness of Directors and Senior Officers ............................ 125
Stock Option Plan ........................................................ 125
Legal Proceedings ........................................................ 126
Interest of Directors in Related Transaction ............................. 126
COMPARISON OF STOCKHOLDER RIGHTS .................................................. 127
Vote Required for Extraordinary Transactions ............................. 127
Amendment to Governing Documents ......................................... 127
Dissenters' Rights ....................................................... 128
Oppression Remedy ........................................................ 128
Derivative Action ........................................................ 129
Shareholder Consent in Lieu of Meeting ................................... 129
Director Qualifications .................................................. 129
Fiduciary Duties of Directors ............................................ 129
Indemnification of Officers and Directors ................................ 130
Anti-Takeover Provisions and Interested Stockholder Transactions ......... 130
DISSENTING SHAREHOLDERS' RIGHTS ................................................... 131
CanArgo .................................................................. 131
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Dissent to Continuance under Section 184 of the ABCA ............... 131
Dissent to Arrangement under Section 185 of the OBCA ............... 133
Address for Notices ................................................ 134
Fountain ................................................................. 134
ADDITIONAL MATTERS FOR CONSIDERATION OF FOUNTAIN STOCKHOLDERS ..................... 135
Proposal to Approve Change of Name ....................................... 135
Proposal to Approve the Reverse Split .................................... 135
General ............................................................ 135
Exchange of Certificates ........................................... 137
ADDITIONAL MATTERS FOR CONSIDERATION OF CANARGO SHAREHOLDERS ...................... 137
Election of Directors .................................................... 138
Appointment of Auditors .................................................. 138
EXPERTS ........................................................................... 138
LEGAL MATTERS ..................................................................... 138
FUTURE STOCKHOLDER PROPOSALS ...................................................... 139
INCORPORATIONS BY REFERENCE ....................................................... 139
ADDITIONAL INFORMATION ............................................................ 139
APPROVAL OF PROXY STATEMENT BY CANARGO BOARD OF DIRECTORS ......................... 141
INDEX TO FINANCIAL STATEMENTS ..................................................... F-i
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ANNEXES:
A - Continuance Resolution
B - Arrangement Resolution
C - Combination Agreement
D - Interim Order (to be filed by amendment)
E - Notice of Application For Final Order (to be filed by amendment)
F - Plan of Arrangement
G - Voting, Support and Exchange Trust Agreement
H - Opinion of CIBC Oppenheimer
I - Opinion of Orkla Finans
J - Opinion of Roche Securities
K - Section 184 of the ABCA and Section 185 of the OBCA
L - Form of Fountain Certificate of Amendment to Change Fountain's Name
M - Form of Fountain Certificate of Amendment to Effect the Reverse Split
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. It is not, and is not intended to be,
complete in itself. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in this Joint Proxy
Statement/Prospectus, which shareholders of CanArgo and stockholders of Fountain
are encouraged to review. Unless otherwise indicated, capitalized terms used in
this Joint Proxy Statement/Prospectus are defined in the Glossary of Certain
Terms which follows this Summary or elsewhere in this Joint Proxy
Statement/Prospectus.
THE COMPANIES
Fountain........................... Fountain is a Delaware corporation that
has held interests in four Eastern
European oil and gas fields with a
productive history that indicated the
potential for increased production
through rehabilitation and utilization of
modern production techniques. Fountain
has not yet, however, been successful in
producing commercial quantities of oil
and gas from these fields, and assets
associated with three of these fields
were impaired during the fourth quarter
of 1997. The remaining field is the
Stynawske Field, located in Ukraine.
Fountain also has interests in oil fields
in Canada.
Fountain's principal executive offices
are located at 1400 Broadfield Boulevard,
Houston, Texas 77084, (281) 492-6992. See
"INFORMATION CONCERNING FOUNTAIN."
CanArgo............................ CanArgo is an Alberta corporation with
interests in oil and gas properties in
the Republic of Georgia. CanArgo's
principal asset is a 55.9% interest in
Ninotsminda Oil Company Limited ("NOC"),
a Cyprus corporation that holds the
rights under a production sharing
contract ("PSC") for the Ninotsminda
Field, the West Rustavi Field and the
Manavi prospect in the Republic of
Georgia. In addition, CanArgo holds the
rights to the Nazvrevi prospect in the
Republic of Georgia under the terms of an
additional production sharing contract.
CanArgo's main focus is the current
development of the producing Ninotsminda
Field and future development of the
Rustavi Field and Nazvrevi prospect.
CanArgo's principal executive offices are
located at 1580 Guinness House, 727-7th
Avenue S.W., Calgary, Alberta, Canada T2P
0Z5, (403) 777-1185. See "INFORMATION
CONCERNING CANARGO."
The Transaction.................... The Combination Agreement between
Fountain and CanArgo (as amended and
restated) (the "Combination Agreement")
provides for the combination of Fountain
and CanArgo in a transaction in which
each holder of common shares of CanArgo
(the "CanArgo Common Shares") will
receive 1.6 Exchangeable Shares (subject
to adjustment for changes in the
capitalization of Fountain) for each
CanArgo Common Share held. The
Exchangeable Shares will be securities
issued by CanArgo that are exchangeable
generally at the option of the holders
for Fountain Common Stock on a
share-for-share basis and entitle their
holders to dividends and other rights
economically equivalent to those to which
holders of Fountain Common Stock are
entitled. Through contractual
arrangements, holders of Exchangeable
Shares will have the right to direct
votes at meetings of stockholders of
Fountain commensurate with the number of
1
<PAGE> 13
shares of Fountain 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
will represent the same rights to
dividends and rights upon liquidation and
will generally have the same voting
rights as shares of Fountain Common
Stock. The Transaction generally will not
result in a taxable event for Canadian
federal income tax purposes or United
States tax purposes for holders of
CanArgo Common Shares. However, such tax
deferred treatment will only be available
to a CanArgo shareholder for as long as
the shareholder holds the Exchangeable
Shares. Generally, for Canadian and
United States federal income tax
purposes, shareholders of CanArgo will
recognize a gain or loss upon the
exchange of their Exchangeable Shares for
shares of Fountain Common Stock and
subsequently upon disposition of such
shares. The Exchangeable Shares will not
be quoted on the Nasdaq Stock Market Inc.
National Market System or listed on any
stock exchange. See "THE TRANSACTION--
Transaction Steps and Description of
Exchangeable Shares" and "TAX
CONSIDERATIONS."
THE MEETINGS
Time, Date and Place............... The Fountain stockholders meeting will be
held at ___________
_______________________________ on
__________ __, 1998 at 10:00 a.m. The
CanArgo shareholders meeting will be held
at
-------------------------------------,
Calgary, Alberta on _________ __, 1998
at 11:00 a.m. See "THE MEETINGS - GENERAL
PROXY INFORMATION."
Record Dates, Shares Entitled
to Vote.......................... Holders of record of Fountain Common
Stock on _______ __, 1998 (the "Fountain
Record Date") are entitled to notice of
and to vote at the Fountain stockholders
meeting. At the close of business on the
Fountain Record Date, there were
outstanding and entitled to vote
__________ shares of Fountain Common
Stock, each of which will be entitled to
one vote on each matter to be acted upon
at the meeting.
Holders of record of CanArgo Common
Shares on ________ __, 1998 (the "CanArgo
Record Date") are entitled to notice of
and to vote at the CanArgo shareholders
meeting except to the extent that a
person has transferred CanArgo Common
Shares after that date and the new holder
of such shares establishes proper
ownership and demands not later than
________ __, 1998 to be included in the
list of shareholders eligible to vote at
the CanArgo shareholders meeting. At the
close of business on __________ __, 1998,
there were outstanding and entitled to
vote __________ CanArgo Common Shares,
each of which will be entitled to one
vote on each matter to be acted upon at
the meeting. See "THE MEETINGS -- GENERAL
PROXY INFORMATION."
Matters to be Considered at the
Meetings......................... At the Fountain stockholders meeting,
Fountain's stockholders will consider and
vote upon: (i) the approval of the
issuance of up to 24,448,860 shares of
Fountain Common Stock, as presently
2
<PAGE> 14
constituted, and 100 shares of Series
Voting Preferred Stock of Fountain, par
value US$0.10 (the "Fountain Special
Voting Stock") (to be issued to a trustee
and designed to afford voting power to
holders of Exchangeable Shares
commensurate with the voting power they
would have upon exchanging the
Exchangeable Shares for shares of
Fountain Common Stock), pursuant to the
Combination Agreement (the "Fountain
Stock Issuance Proposal"); and (ii) the
approval of amendments to Fountain's
Certificate of Incorporation (the
"Fountain Certificate") to change
Fountain's name to "CanArgo Energy
Corporation" and to effect a reverse
stock split of the Fountain Common Stock
so that each two issued and outstanding
shares of Fountain Common Stock will be
combined into one share (the "Reverse
Split") (collectively, the "Fountain
Charter Changes").
At the CanArgo shareholders meeting, the
CanArgo shareholders will consider and
vote upon: (i) the continuance (the
"Continuance Resolution") of CanArgo
under the OCBA; (ii) a resolution to
approve the Arrangement (the "Arrangement
Resolution"); (iii) the election of five
directors to the Board of Directors of
CanArgo (the "CanArgo Board"); (iii) a
resolution to appoint Ernst & Young, as
CanArgo's independent auditors and to
authorize the directors to fix their
remuneration; and (iv) such further
business as may properly come before the
CanArgo shareholders meeting or any
adjournment or postponement thereof.
See "THE MEETINGS -- GENERAL PROXY
INFORMATION."
Votes Required..................... The approval of the Fountain Stock
Issuance Proposal will require the
affirmative vote of a majority of the
shares of Fountain Common Stock present
in person or by proxy at the Fountain
stockholders meeting and entitled to
vote. The approval of each of the
Fountain Charter Changes will require the
affirmative vote of the holders of a
majority of the shares of Fountain Common
Stock outstanding on the Fountain Record
Date. Stockholders of Fountain holding
approximately 5.8% of the outstanding
Fountain Common Stock, including all
directors of Fountain, have agreed to
vote their Fountain Common Stock in favor
of approval of the Fountain Stock
Issuance Proposal and the Fountain
Charter Changes unless the Fountain Board
withdraws its recommendation that the
Fountain stockholders approve the
Fountain Stock Issuance Proposal and
Fountain Charter Changes and instead
recommends that the Fountain stockholders
approve an alternative transaction..
Each of the Continuance Resolution and
the Arrangement Resolution must be
approved by the affirmative vote of not
less than two-thirds of the votes cast in
respect of such resolution. The directors
of CanArgo must be elected by a majority
of the votes cast thereon. The
appointment of Ernst & Young as auditors
of CanArgo at a remuneration to be fixed
by the CanArgo Board must be approved by
the affirmative vote of a majority of the
votes cast thereon. Shareholders of
CanArgo who hold approximately 42.9% of
the outstanding CanArgo Common Shares
have agreed to vote their CanArgo Common
Shares in favor of the Continuance
Resolution and the Arrangement Resolution
unless the CanArgo Board withdraws its
recommendation that the CanArgo
shareholders approve the Continuance
Resolution and the Arrangement
3
<PAGE> 15
Resolution and instead recommends that
the CanArgo shareholders approve an
alternative transaction. In accordance
with the CanArgo Bylaws, two shareholders
of CanArgo present in person or by proxy
at the CanArgo Shareholders Meeting will
constitute a quorum for such meeting.
Recommendations of Boards of
Directors........................ The Board of Directors of Fountain (the
"Fountain Board") believes that the terms
of the Transaction are fair to and in the
best interests of the stockholders of
Fountain and has unanimously approved and
unanimously recommends that stockholders
of Fountain vote to approve the Fountain
Stock Issuance Proposal and the Fountain
Charter Changes.
The CanArgo Board believes that the terms
of the Transaction are fair to and in the
best interests of the shareholders of
CanArgo and has unanimously approved, and
unanimously recommends that shareholders
of CanArgo vote to approve, the
Continuance Resolution and the
Arrangement Resolution. The CanArgo Board
also recommends a vote for each of the
nominees for director and for appointment
of Ernst & Young as independent auditors.
See "THE TRANSACTION -- Board
Recommendations."
Dissenters' Rights................. CanArgo shareholders who oppose passage
of the Arrangement Resolution are
entitled to dissent under Section 185 of
the OBCA in accordance with the interim
order of the Ontario Court of Justice
(General Division) providing for the
holding of the CanArgo shareholders
meeting and other procedural matters.
Additionally, CanArgo shareholders who
oppose approval of the Continuance
Resolution are entitled to dissent under
Section 184 of the ABCA. No rights to
demand appraisal will be available to
holders of Fountain Common Stock with
respect to the Fountain Stock Issuance
Proposal or the Fountain Charter Changes.
See "DISSENTING SHAREHOLDERS' RIGHTS."
THE TRANSACTION
Transaction Steps.................. Under the terms of the Arrangement,
CanArgo will issue 100 CanArgo Common
Shares to Fountain for US$160, and each
CanArgo Common Share (other than the
CanArgo Common Shares held by Fountain or
by holders of CanArgo Common Shares who
have properly exercised their rights of
dissent and are ultimately entitled to be
paid fair value for their shares) will be
exchanged for 1.6 (subject to adjustment
for changes in the capitalization of
Fountain) Exchangeable Shares of CanArgo
at the Effective Time. As a result of
these transactions, Fountain will own all
of the outstanding share capital of
CanArgo other than the Exchangeable
Shares. Holders of CanArgo Common Shares
will be able to obtain a certificate for
the number of Exchangeable Shares to
which they are entitled pursuant to the
Arrangement by duly completing and
returning a letter of transmittal to be
delivered to registered holders of
CanArgo Common Shares after the Effective
Time of the Transaction. See "THE
TRANSACTION-- Transaction Steps and
Description of Exchangeable Shares" and
"-- Procedures for Exchange of Share
Certificates by CanArgo Shareholders."
4
<PAGE> 16
The Exchangeable Shares............ The Exchangeable Shares will be
exchangeable at any time at the option of
the holder on a one-for-one basis for
shares of Fountain Common Stock upon
delivery of a certificate representing
the Exchangeable Shares and written
notice of exercise of the holder's
exchange right. The Trustee under the
Voting, Support and Exchange Trust
Agreement, as holder of the Fountain
Special Voting Stock, will be entitled to
a number of votes on all matters on which
holders of Fountain Common Stock are
entitled to vote approximately equal to
the number of Exchangeable Shares
outstanding from time to time that are
not held by Fountain or its
majority-owned subsidiaries. By
furnishing instructions to the Trustee,
holders of Exchangeable Shares will be
able to direct voting rights with respect
to Fountain commensurate with those they
would have after exchange of their
Exchangeable Shares for Fountain Common
Stock. Holders of Exchangeable Shares
will also be entitled to receive
dividends equivalent to any dividends
paid on the Fountain Common Stock. The
Voting, Support and Exchange Trust
Agreement will restrict Fountain from
declaring or paying dividends on Fountain
Common Stock unless equivalent dividends
are declared and paid on the Exchangeable
Shares. Holders of Exchangeable Shares
will also be entitled to participate in
any liquidation of Fountain on the same
basis as holders of Fountain Common
Stock. See "THE TRANSACTION --
Transaction Steps and Description of
Exchangeable Shares."
Retraction and Redemption of
Exchangeable Shares for
Fountain Common Stock............ Holders of the Exchangeable Shares will
be entitled at any time following the
Effective Time of the Transaction, upon
delivery of a certificate representing
Exchangeable Shares and a duly executed
retraction request, to require CanArgo to
redeem such Exchangeable Shares in
exchange for an equivalent number of
shares of Fountain Common Stock. CanArgo
must notify Fountain of all such
requests. Upon notification, Fountain has
the right to purchase the Exchangeable
Shares that are the subject of the
request in exchange for an equivalent
number of shares of Fountain Common
Stock. If Fountain does not exercise its
purchase right, CanArgo must effect the
requested redemption. On any date on or
after January 30, 2004 (subject to
acceleration in certain circumstances),
CanArgo has the right, but not the
obligation, to redeem all outstanding
Exchangeable Shares in exchange for an
equivalent number of shares of Fountain
Common Stock. Fountain has the overriding
right, but not the obligation, to acquire
the outstanding Exchangeable Shares in
exchange for an equivalent number of
shares of Fountain Common Stock on the
last business day prior to the relevant
optional redemption date established by
the CanArgo Board. If Fountain exercises
the overriding right, CanArgo's right to
redeem the Exchangeable Shares on the
relevant optional redemption date will
terminate. See "THE TRANSACTION --
Transaction Steps and Description of
Exchangeable Shares."
Reasons for the Transaction........ Fountain and CanArgo believe that the
combination of the two companies will
allow them to combine their individual
resources, assets and expertise, allocate
their resources more effectively among
5
<PAGE> 17
a broader portfolio of projects and
realize economies through consolidation
of certain functions. See "THE
TRANSACTION-- Reasons for the
Transaction."
Management after the Transaction... Pursuant to the Combination Agreement,
the Fountain Board will be composed of
six members effective upon completion of
the Transaction, three of whom are
currently directors of CanArgo (Michael
Binnion, Russell Hammond and David
Robson) and two of whom are currently
directors of Fountain (Robert A. Halpin
and Nils N. Trulsvik). The sixth director
will be Peder Paus, who is a shareholder
of CanArgo.
Upon completion of the Transaction, David
Robson and Michael Binnion, currently
directors and executive officers of
CanArgo, will become Chairman of the
Board and Chief Executive Officer, and
President and Chief Financial Officer,
respectively, of Fountain. Einar
Bandlien, a director and Executive Vice
President of Fountain, will remain
Executive Vice President of Fountain
after the completion of the Transaction.
See "THE COMPANIES AFTER THE TRANSACTION
-- Management."
Dividend Policy.................... Determinations to pay future dividends
and the amount thereof will be made by
the Fountain Board and will depend on its
future earnings, capital requirements,
financial condition and other relevant
factors. During the foreseeable future
following consummation of the
Transaction, it is expected that the
earnings of the combined company will be
retained to support current operations,
to fund oil and gas projects and to
provide funds for acquiring oil and gas
properties. See "COMPARATIVE MARKET PRICE
DATA."
Opinions of Financial Advisors..... CIBC Oppenheimer Corp., Orkla Finans
(Fondsmegling) ASA and Roche Securities
Limited have each issued fairness
opinions on certain aspects of the
Transaction. See "THE TRANSACTION--
Opinions of Financial Advisors."
Effective Time of the Transaction.. It is anticipated that the Transaction
will become effective after the requisite
shareholder, court and regulatory
approvals have been obtained and are
final and all other conditions to the
consummation of the Transaction have been
satisfied or waived. It is presently
anticipated that the Transaction will
become effective on or about _________
__, 1998. See "THE TRANSACTION --
Transaction Steps and Description of
Exchangeable Shares."
Conditions to the Transaction...... The obligations of CanArgo and Fountain
to consummate the Transaction are subject
to the satisfaction of certain
conditions, including the approval by the
stockholders of Fountain of the Fountain
Stock Issuance Proposal, the approval by
the shareholders of CanArgo of the
Continuance Resolution and the
Arrangement Resolution and court approval
(without material condition or costs) of
the Plan of Arrangement. See "THE
TRANSACTION-- The Combination Agreement."
Termination........................ The Combination Agreement may be
terminated prior to the Effective Date of
the Transaction, whether before or after
approval of the Fountain stockholders or
the CanArgo shareholders, in
circumstances specified in the
Combination Agreement, including (i)
mutual agreement, (ii) the failure of
conditions to closing that
6
<PAGE> 18
have not been waived and cannot be
remedied, (iii) the failure to consummate
the Transaction by September 30, 1998,
other than as a result of a breach by the
terminating party, (iv) the determination
by a party's board of directors to
recommend to its stockholders that they
vote against the Transaction and approve
instead a competing acquisition proposal,
and (v) receipt of notice by CanArgo that
the holders of more than 10% of the
CanArgo Common Shares intend to exercise
their right to dissent. Under certain
circumstances, including a recommendation
to stockholders that they vote against
proposals to effect the Transaction, a
failure of stockholders to approve
proposals to effect the Transaction and
willful failure to consummate the
Transaction, Fountain or CanArgo may be
required to pay a termination fee of
US$3,000,000. See "THE TRANSACTION -- The
Combination Agreement - Termination Fee."
Interests of Certain Persons....... Certain executive officers and directors
of Fountain and CanArgo have interests in
the Transaction that are different from
or in addition to the interests of the
stockholders of the two companies
generally, including interests arising
from the following: certain directors of
each of the companies will continue as
directors of Fountain after completion of
the Transaction; certain directors of
Fountain and CanArgo who will become
non-employee directors of Fountain will
be entitled to receive compensation and
option grants from Fountain; certain
directors and officers of the companies
have agreed to support the Transaction,
as described under "Agreements to Support
the Transaction" in this Summary; and
Fountain will indemnify the current and
former officers and directors of Fountain
and CanArgo and provide liability
insurance for at least four years after
completion of the Transaction. No
executive officer or director of either
Fountain or CanArgo will receive as a
result of the Transaction any increase in
benefits in connection with the
Transaction or any separation or similar
payments. In addition, no executive
officer or director of either Fountain or
CanArgo will enter into an employment
contract with Fountain in connection with
the Transaction. See "THE TRANSACTION --
Interests of Certain Persons in the
Transaction."
Anticipated Accounting Treatment... The Transaction is expected to be
accounted for as the purchase of CanArgo
by Fountain, with the purchase price
being allocated among CanArgo's assets,
under "purchase" accounting in accordance
with US GAAP. See "THE TRANSACTION--
Anticipated Accounting Treatment."
Canadian and United States Federal
Income Tax Consequences to
CanArgo Shareholders............. The Transaction has been structured with
as a reorganization of capital of CanArgo
resulting in no taxable event for
Canadian federal income tax purposes.
However, such tax-deferred treatment
generally will only be available to a
CanArgo shareholder for as long as the
shareholder holds the Exchangeable
Shares. For Canadian and United States
federal income tax purposes, shareholders
of CanArgo generally will recognize a
gain or loss upon the exchange of their
Exchangeable Shares for shares of
Fountain Common Stock based upon the
7
<PAGE> 19
difference between the fair market value
of the shares of Fountain Common Stock
when received and the tax basis of the
Exchangeable Shares which in certain
taxing jurisdictions (including Canada
and the United States) may be carried
over from the CanArgo Common Shares.
There are other conditions and
limitations on qualifying for tax
deferral. See "TAX CONSIDERATIONS."
CANARGO SHAREHOLDERS ARE URGED TO CONSULT
THEIR TAX ADVISORS.
United States and Norwegian Income
Tax Consequences to Fountain
Stockholders..................... No United States federal income taxation
considerations or Norwegian income tax
considerations are generally applicable
to holders of Fountain Common Stock with
respect to the Transaction.
Eligibility for Investment of
Exchangeable Shares.............. The Exchangeable Shares will be foreign
property under the Canadian Tax Act for
trusts governed by registered retirement
savings plans, deferred profit sharing
plans and registered retirement income
funds.
Stock Exchange Listings............ The Fountain Common Stock is listed on
the Nasdaq Stock Market Inc. National
Market System ("NASDAQ") and the Oslo
Stock Exchange (the "OSE"). There is no
current intention to list the
Exchangeable Shares on any stock exchange
in Canada or the United States or to list
the Fountain Common Stock on any stock
exchange in Canada. CanArgo Common Shares
are quoted on The Canadian Dealing
Network (the "CDN"). Following
consummation of the Transaction, the
CanArgo Common Shares will no longer be
quoted on the CDN.
Agreements to Support the Shareholders of CanArgo holding an
Transaction...................... aggregate of 42.9% of the CanArgo Common
Shares have entered shareholder
agreements to vote in favor of the
Transaction, subject to any fiduciary
duties that they may have. The
shareholder agreements terminate in the
event the CanArgo Board withdraws the
recommendation that CanArgo's
shareholders approve the Transaction and
instead recommends that they approve an
alternative transaction. Stockholders of
Fountain, including all of the directors
of Fountain, who hold an aggregate of
5.8% of the Fountain Common Stock have
entered into stockholder agreements to
vote in favor of the Fountain Stock
Issuance Proposal and the Fountain
Charter Changes, subject to any fiduciary
duties that they may have. The
stockholder agreements terminate in the
event the Fountain Board withdraws its
recommendation that Fountain's
stockholders approve the Transaction and
instead recommends that they approve an
alternative transaction. See "THE
TRANSACTION -- Shareholder Agreements."
8
<PAGE> 20
GLOSSARY OF CERTAIN TERMS
Unless the context otherwise requires, the following terms shall have
the following meanings when used in this Joint Proxy Statement/Prospectus.
"1998 Warrants" means the warrants to acquire 250,000 CanArgo Common
Shares at an exercise price of US$2.20 expiring June 30, 1998.
"ABCA" means the Business Corporations Act (Alberta).
"Adygea" means the Republic of Adygea, a republic within the Russian
Federation.
"ALBJV" means the joint venture between Fountain and Albpetrol to
develop the Gorisht-Kocul Field.
"Albpetrol" means Sh.A. Albpetrol, the Albanian state oil company.
"AMH" means the AMH Group Ltd. of Calgary, Alberta.
"AMH Report" means the evaluation prepared by AMH of CanArgo's interests
in NOC dated and effective as of January 1, 1998 entitled "Evaluation of the
Ninotsminda Oil Interests owned by CanArgo Energy Inc." as supplemented by the
addendum letter dated March 6, 1998 entitled "Ninotsminda Field, Entitlement
Volumes and Values."
"Ancillary Rights" means any and all rights granted by Fountain to
holders of Exchangeable Shares in connection with the Arrangement, including
rights granted pursuant to the Voting, Support and Exchange Trust Agreement and
the documents related thereto (including the Voting Rights and the Exchange
Rights).
"API Gravity" means the industry standard method of expressing the
gravity or density of liquid petroleum products, as defined by the American
Petroleum Institute.
"Arrangement" means the proposed arrangement of CanArgo under Section
182 of the OBCA pursuant to the Plan of Arrangement.
"Arrangement Resolution" means the special resolution of CanArgo
shareholders concerning the Arrangement in the form set out in Annex B to this
Joint Proxy Statement/Prospectus.
"Barrel" or "Bbl" means a measure of liquid volume containing 42 U.S.
gallons or approximately 35 Imperial gallons.
"BCF" means billions of cubic feet of gas.
"BOC" means Boryslaw Oil Company, a Ukranian joint venture company
developing the Stynawske Field.
"BOE" means barrel of oil equivalent.
"BOPD" means barrels of oil per day.
"Brent" means the Brent price of North Sea oil at London, as quoted by
Oil Week.
"Business Plan" means the business plan established by Fountain and
CanArgo with respect to the conduct of their businesses pending the Effective
Date.
"C$" means Canadian dollars.
"Call Rights" means the Liquidation Call Right, the Redemption Call
Right and the Retraction Call Right, collectively.
"Canadian Dollar Equivalent" means the product obtained by multiplying
the relevant U.S. dollar amount by the noon spot exchange rate on such date for
U.S. dollars expressed in Canadian dollars as reported by the Bank of Canada.
"Canadian GAAP" means GAAP in Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), as amended.
"CanArgo" means CanArgo Energy Inc., an Alberta corporation, and, except
where the context otherwise requires, its consolidated subsidiaries.
9
<PAGE> 21
"CanArgo Affiliate" means each affiliate (as such term is defined in
Rule 144(a) under the Securities Act) of CanArgo.
"CanArgo Articles" means CanArgo's Articles of Amalgamation, as amended
from time to time, including (if adopted) the amendment to be effected through
the adoption of the Plan of Arrangement.
"CanArgo Board" means the Board of Directors of CanArgo.
"CanArgo Bylaws" means CanArgo's bylaws, as amended from time to time.
"CanArgo Common Shares" means the common shares in the capital of
CanArgo.
"CanArgo Insolvency Event" means (i) the institution by CanArgo of any
proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or wound
up, (ii) the consent of CanArgo to the institution of liquidation, bankruptcy,
insolvency, dissolution or winding-up proceedings against it, (iii) the filing
of a petition, answer or consent seeking dissolution or winding up under any
bankruptcy, insolvency or analogous laws, including without limitation the
Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency
Act (Canada), and the failure by CanArgo to contest in good faith any such
proceedings commenced in respect of CanArgo within 15 days of becoming aware
thereof, (iv) the consent by CanArgo to the filing of any such petition or to
the appointment of a receiver, (v) the making by CanArgo of a general assignment
for the benefit of creditors, (vi) the admission in writing by CanArgo of its
inability to pay its debts generally as they become due, or (vii) CanArgo not
being permitted, pursuant to solvency requirements of applicable law, to redeem
any Exchangeable Shares pursuant to the Exchangeable Share Provisions.
"CanArgo Material Adverse Effect" means a material adverse effect on the
business, properties, assets, financial condition, or results of operations of
CanArgo and its subsidiaries taken as a whole (excluding the effect of a change
in general economic conditions).
"CanArgo Options" means all outstanding options to purchase CanArgo
Common Shares, including all outstanding options granted under the CanArgo Stock
Option Plan.
"CanArgo Purchase Warrants" means the 1,581,885 common share purchase
warrants issued or issuable pursuant to the CanArgo Purchase Warrant Indenture.
"CanArgo Purchase Warrant Indenture" means the Warrant Indenture dated
October 30, 1997 made between CanArgo and Montreal Trust Company of Canada, as
trustee.
"CanArgo Record Date" means May 25, 1998.
"CanArgo Shareholder Agreements" means the shareholder agreements
entered into by holders of CanArgo Common Shares, Fountain and CanArgo relating
to, among other things, the voting of CanArgo Common Shares at the CanArgo
Shareholders Meeting.
CanArgo Shareholders Meeting" means the annual and special meeting of
shareholders of CanArgo to be held with respect to, among other things, the
consideration by CanArgo's shareholders of the Continuance Resolution, the
Arrangement Resolution, the election of directors and the appointment of
independent auditors.
"CanArgo Special Warrants" means the 1,636,597 common share special
warrants of CanArgo issued pursuant to the terms of the CanArgo Special Warrant
Indenture.
"CanArgo Special Warrant Indenture" means the Special Warrant Indenture
dated October 31, 1997 between CanArgo and Montreal Trust Company of Canada, as
trustee.
"CanArgo Warrants" means the CanArgo Purchase Warrants, the CanArgo
Special Warrants, the Compensation Warrants and the 1998 Warrants.
"CDN" means the Canadian Dealing Network.
"CIBC Oppenheimer" means CIBC Oppenheimer Corp. and Oppenheimer & Co.,
Inc., its predecessor.
"Clearance Certificate" means a clearance certificate pursuant to
Section 116 of the Canadian Tax Act.
"Closing" means the closing of the transactions contemplated by the
Combination Agreement.
"Closing Date" means the date on which the Closing occurs.
10
<PAGE> 22
"Combination Agreement" means the Combination Agreement by and between
Fountain and CanArgo dated as of February 2, 1998, as amended and restated, a
copy of which is attached to this Joint Proxy Statement/Prospectus as Annex C.
"Compensation Warrants" means the warrants to acquire 205,010 CanArgo
Common Shares at an exercise price of US$2.20 expiring April 30, 1999.
"Competition Act" means the Competition Act (Canada), as amended.
"Continuance" means the continuance of CanArgo under the Canada Business
Corporations Act as if CanArgo had been incorporated under the Business
Corporations Act (Ontario).
"Continuance Resolution" means the special resolution of the
shareholders of CanArgo approving the Continuance, in the form set out in Annex
A to this Joint Proxy Statement/Prospectus.
"Court" means the Ontario Court of Justice (General Division).
"Cretaceous" means a geological period of time extending from
144,000,000 years to 67,000,000 years before the present.
"Crude Oil" means crude mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their natural
state.
"Current Market Price" has the meaning set forth in Section 1.1 of the
Exchangeable Share Provisions.
"DGCL" means the General Corporation Law of the State of Delaware, as
amended.
"Dissent Notice" means a written objection to the Continuance or the
Arrangement sent by a CanArgo shareholder to CanArgo as described under
"DISSENTING SHAREHOLDERS' RIGHTS."
"EEOR" means thermal stimulation of oil wells by electric heating called
electrically enhanced oil recovery.
"EEOR Process" means a patented and proprietary method for heating of
heavy and paraffinic oil with an electric current.
"Effective Date" means the date shown on the certificate of arrangement
issued by the Director under the OBCA giving effect to the Arrangement.
"Effective Time" means 2:00 p.m. (Toronto time) on the Effective Date.
"Eocene" means a geological period of time approximately 50,000,000
years before the present.
"Ernst & Young" means Ernst & Young, Chartered Accountants.
"Exchange Act" means the United States Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
"Exchange Ratio" means 1.6:1 (or 0.8:1 if the Reverse Split is effected
at or prior to the Effective Time), being the ratio of the number of
Exchangeable Shares for which each CanArgo Common Share is exchanged pursuant to
the Plan of Arrangement.
"Exchange Rights" means the optional exchange right granted to the
Trustee for the use and benefit of the holders of the Exchangeable Shares
pursuant to the Voting, Support and Exchange Trust Agreement to require Fountain
to exchange shares of Fountain Common Stock for Exchangeable Shares, plus an
additional amount equivalent to any declared and unpaid dividends on such
Exchangeable Shares.
"Exchangeable Share Provisions" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares, which are
attached as Appendix A to the Plan of Arrangement.
"Exchangeable Share Rights" has the meaning set forth under "THE
COMPANIES AFTER THE TRANSACTION -- CanArgo Share Capital -- Associated Rights."
"Exchangeable Shares" means the exchangeable shares in the capital of
CanArgo.
"Farm-Out Partners" means the entities to which Fountain farms out a
portion of its interests in one or more oil and gas ventures and properties.
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<PAGE> 23
"Final Order" means the final order of the Court approving the
Arrangement.
"Fountain" means Fountain Oil Incorporated, a Delaware corporation, and,
except where the context otherwise requires, its consolidated subsidiaries and
entities for which it accounts on the equity method.
"Fountain Board" means the Board of Directors of Fountain.
"Fountain Bylaws" means Fountain's bylaws, as amended from time to time.
"Fountain Certificate" means Fountain's Certificate of Incorporation, as
amended from time to time.
"Fountain Charter Changes" means the proposed amendments to the Fountain
Certificate (i) to change Fountain's name and (ii) to effect the Reverse Split,
as described under "ADDITIONAL MATTERS FOR CONSIDERATION OF FOUNTAIN
STOCKHOLDERS."
"Fountain Common Stock" means the common stock, par value US$0.10 per
share, of Fountain.
"Fountain Debentures" means the 8% Convertible Subordinated Debentures
due December 31, 1997 of Fountain.
"Fountain Liquidation Event" means (i) any determination by the Fountain
Board to institute voluntary liquidation, dissolution or winding up proceedings
(not including a reorganization under applicable bankruptcy laws) with respect
to Fountain or to effect any other distribution of assets of Fountain among its
stockholders for the purpose of winding up its affairs or (ii) receipt by
Fountain of notice of, or Fountain otherwise becoming aware of, any threatened
or instituted claim, suit, petition or other proceeding with respect to the
involuntary liquidation, dissolution or winding up (not including a
reorganization under applicable bankruptcy laws) of Fountain or to effect any
other distribution of assets of Fountain among its stockholders for the purpose
of winding up its affairs.
"Fountain Material Adverse Effect" means a material adverse effect on
the business, properties, assets, financial condition, or results of operations
of Fountain and its subsidiaries taken as a whole (excluding the effect of a
change in general economic conditions).
"Fountain Option" means an option to purchase shares of Fountain Common
Stock.
"Fountain Preferred Stock" means the preferred stock, par value US$0.10
per share, of Fountain.
"Fountain Record Date" means May 22, 1998.
"Fountain Special Voting Stock" means the Series Voting Preferred Stock,
par value US$0.10 per share, of Fountain, 100 shares of which will be issued by
Fountain and deposited with the Trustee pursuant to the Voting, Support and
Exchange Trust Agreement.
"Fountain Stockholder Agreements" means the stockholders agreement
entered into by holders of Fountain Common Stock, Fountain and CanArgo relating
to, among other things, the voting of Fountain Common Stock at the Fountain
Stockholders Meeting.
"Fountain Stockholders Meeting" means the special meeting of
stockholders of Fountain to be held with respect to consideration by Fountain's
stockholders of the Fountain Stock Issuance Proposal and the Fountain Charter
Changes.
"Fountain Stock Issuance Proposal" means the proposal to approve the
issuance by Fountain of up to 24,448,860 shares of Fountain Common Stock and 100
shares of Fountain Special Voting Stock pursuant to the terms of the Combination
Agreement.
"GAAP" means generally accepted accounting principles.
"Gastron" means Gastron International Limited, a British Virgin Islands
corporation.
"GBOC" means the Georgian British Oil Company, the operator of the
Ninotsminda Field under the terms of the PSC.
"Georgian Oil" means the state oil company of the Republic of Georgia.
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<PAGE> 24
"Gorisht-Kocul Field" means the Gorisht-Kocul Field in Albania, a heavy
oil field that is located approximately 35 kilometers east of the Adriatic port
of Vlora.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Intergas" means Intergas JSC, a joint stock company incorporated in
Russia having rights to develop the Maykop Field in Adygea.
"Interim Order" means the interim order of the Court dated ____________
__ 1998, a copy of which is attached hereto in Annex D.
"IRS" means the United States Internal Revenue Service.
"JKX" means JKX Nederland B.V., a subsidiary of JKX Oil and Gas plc, a
public United Kingdom company.
"Joint Proxy Statement/Prospectus" means this joint management
information circular and proxy statement/prospectus relating to the CanArgo
Shareholders Meeting and the Fountain Stockholders Meeting, which also
constitutes a prospectus with respect to the shares of Fountain Common Stock
issuable upon the redemption or exchange of the Exchangeable Shares.
"Kashtan" means Kashtan Petroleum, Ltd., a Ukrainian joint venture
developing the Lelyaky Field.
"Lelyaky Field" means the Lelyaky Field, Pryluki Region, Ukraine.
"Letter Agreement" means the letter agreement, dated October 12, 1997,
among Fountain, CIBC Oppenheimer and Orkla, as amended by letter dated January
15, 1998.
"Letter of Transmittal" means the letter to be delivered to holders of
CanArgo Common Shares, which when duly completed and returned with a certificate
for CanArgo Common Shares will enable such shareholder to exchange such
certificate for a certificate for Exchangeable Shares.
"Liquidation Amount" means an amount to be satisfied by issuance of one
share of Fountain Common Stock for each outstanding Exchangeable Share, plus an
additional amount equivalent to the full amount of all declared and unpaid
dividends on each such Exchangeable Share.
"Liquidation Call Right" means the overriding right of Fountain in the
event of a proposed liquidation, dissolution or winding up of CanArgo, to
acquire all, but not less than all, of the outstanding Exchangeable Shares
(other than Exchangeable Shares held by Fountain) from the holders thereof on
the Effective Date of any such liquidation, dissolution or winding up in
exchange for shares of Fountain Common Stock, plus an additional amount
equivalent to all declared and unpaid dividends on such Exchangeable Shares,
pursuant to the Exchangeable Share Provisions.
"Liquidation Date" means the effective date of the liquidation,
dissolution or winding up of CanArgo.
"m3" means cubic meter.
"Maykop Field" means the 12,500 acre Maykop gas condensate field in
Adygea.
"Minimum Number" means at least that number of the Exchangeable Shares
issued by CanArgo pursuant to the Arrangement that are exchangeable pursuant to
any provision of the Exchangeable Share Provisions or the Voting, Support and
Exchange Trust Agreement into more than 5% of the number of shares of Fountain
Common Stock issued and outstanding at the later of (i) the filing of the
amendment to the Fountain Certificate with the Secretary of State of the State
of Delaware to effect the Reverse Split, provided such filing is made no later
than the close of business in Toronto on the Effective Date and (ii) the
Effective Time.
"MMBbls" means millions of barrels.
"MMSTB" means millions of stock tank barrels.
"MSTB" means thousands of stock tank barrels.
"NASDAQ" means the Nasdaq Stock Market Inc. National Market System.
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<PAGE> 25
"NOC" means Ninotsminda Oil Company, a company incorporated under the
laws of Cyprus.
"Notice of Exercise" means a duly executed notice by a holder of
Exchangeable Shares requesting the exchange of Exchangeable Shares for shares of
Fountain Common Stock in accordance with the provisions of the Voting, Support
and Exchange Trust Agreement.
"OBCA" means the Business Corporations Act (Ontario), as amended.
"Optional Redemption Date" means any date established by the CanArgo
Board for the redemption of Exchangeable Shares pursuant to the Exchangeable
Share Provisions, which must not be earlier than January 30, 2004 unless the
number of Exchangeable Shares outstanding (other than Exchangeable Shares held
by Fountain and its majority-owned subsidiaries and subject to adjustment to
reflect permitted changes to the Exchangeable Shares) is less than 10% of the
number of Exchangeable Shares issued on the Effective Date, as described in "THE
TRANSACTION -- Transaction Steps and Description of Exchangeable Shares --
Exchange and Call Right."
"Orkla" means Orkla Finans (Fondsmegling) ASA.
"OSE" means the Oslo Stock Exchange.
"PFIC" means a passive foreign investment company.
"Plan of Arrangement" means the plan of arrangement proposed under
Section 182 of the OBCA substantially in the form attached hereto as Annex F, as
amended, modified or supplemented from time to time in accordance with its
terms.
"PSC" means the production sharing contract dated February 15, 1996
between NOC and Georgian Oil.
"PSI" means pounds per square inch.
"PV-10" means present value of reserves to be produced in the future
discounted at the rate of 10% per annum.
"RBbl" means reservoir barrels, or barrels of liquid at reservoir
conditions.
"Redemption Call Right" means the overriding right of Fountain to
purchase all of the outstanding Exchangeable Shares (other than Exchangeable
Shares held by Fountain) from the holders thereof on the date fixed for
redemption thereof in exchange for shares of Fountain Common Stock, plus an
additional amount equivalent to all declared and unpaid dividends on such
Exchangeable Shares, pursuant to the Exchangeable Share Provisions.
"Redemption Price" means a price per Exchangeable Share to be satisfied
by issuance of a share of Fountain Common Stock, plus an additional amount
equivalent to the full amount of all declared and unpaid dividends on such
Exchangeable Share.
"Registration Statement" means the Registration Statement on Form S-3
filed by Fountain in connection with the registration of the 22,472,860 shares
of Fountain Common Stock to be issued upon the redemption, purchase or exchange
of Exchangeable Shares.
"Retraction Call Right" means the overriding right of Fountain, in the
event of a proposed retraction of Exchangeable Shares by a holder thereof, to
purchase from such holder on the Retraction Date all of the Exchangeable Shares
tendered for redemption in exchange for shares of Fountain Common Stock, plus an
additional amount equivalent to all declared and unpaid dividends on such
Exchangeable Shares, pursuant to the Exchangeable Share Provisions.
"Retraction Date" means the date five business days after the Retraction
Request is received by CanArgo on which a holder can effect a redemption of
Exchangeable Shares as further set out in the Exchangeable Share Provisions and
described in "THE TRANSACTION -- Transaction Steps and Description of
Exchangeable Shares -- Retraction, Redemption and Call Rights."
"Retraction Request" means a duly executed notice of retraction given by
a holder of Exchangeable Shares in the form of Schedule A to the Exchangeable
Share Provisions, or in such other form as may be acceptable to CanArgo.
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<PAGE> 26
"Reverse Split" means the combination of two issued and outstanding
shares of Fountain Common Stock into one share, to be effective upon the filing
of a Certificate of Amendment to the Fountain Certificate with the Secretary of
State of the State of Delaware.
"Roche Securities" means Roche Securities Limited.
"SCF" means standard cubic feet of gas.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"STB" means stock tank barrels, or barrels of liquid at standard
temperature and pressure.
"Steering Committee" means the committee appointed by Fountain and
CanArgo consisting of two representatives from Fountain and three
representatives from CanArgo.
"Stynawske Field" means the 6,000 acre Stynawske Field located in the
Western Region of Ukraine.
"Transaction" means the transactions contemplated by the Combination
Agreement and by the Plan of Arrangement whereby, among other consequences,
Fountain will become the sole holder, directly or indirectly, of CanArgo Common
Shares.
"Trustee" means Montreal Trust Company of Canada, or any successor
thereto, pursuant to the Voting, Support and Exchange Trust Agreement.
"UK-RAN" means UK-RAN Oil Corporation.
"Ukranafta" means Ukranafta, the Ukrainian state oil company.
"United States" means the United States of America.
"United States Holders" means CanArgo shareholders that are "United
States persons," as defined for United States federal income tax purposes, and
that hold CanArgo Common Shares and Exchangeable Shares as capital assets.
"US$" or "$" means United States dollars.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. GAAP" means GAAP in the United States.
"Voting Rights" means the rights of the holders of Exchangeable Shares
(other than Fountain and certain subsidiaries of Fountain) to provide directions
with respect to the votes attached to the shares of Fountain Special Voting
Stock in accordance with the Voting, Support and Exchange Trust Agreement.
"Voting, Support and Exchange Trust Agreement" means the voting, support
and exchange trust agreement to be entered into among CanArgo, Fountain and the
Trustee, substantially in the form of Annex G hereto.
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<PAGE> 27
RISK FACTORS
An investment in Fountain Common Stock involves a high degree of risk.
CanArgo shareholders should consider, in addition to the implications of all
other information and financial data set forth herein, the following factors
before voting in favor of or against the Arrangement Resolution or making an
investment in Fountain Common Stock. Fountain stockholders should consider, in
addition to the implications of all other information and financial data set
forth herein, the following risk factors before voting in favor of or against
the Fountain Stock Issuance Proposal or the Fountain Charter Changes. Some of
these risk factors relate directly to the Transaction, while others relate to
the business and properties of Fountain or CanArgo independent of the
Transaction.
The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward-looking statements. Such
forward-looking statements are based upon the current expectations of Fountain
or CanArgo and speak only as of the date made. These forward-looking statements
involve risks, uncertainties and other factors. The following factors are among
those factors that in some cases have affected Fountain's and CanArgo's
historical results and could cause actual results in the future to differ
significantly from the results anticipated in forward-looking statements made in
this Joint Proxy Statement/Prospectus, future filings by Fountain with the SEC,
in Fountain's or CanArgo's press releases and in oral statements made by
authorized officers of Fountain or CanArgo. When used in this Joint Proxy
Statement/Prospectus, 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.
RECENT NEGATIVE OPERATING RESULTS OF FOUNTAIN
Fountain's ownership interests in oil and gas properties have produced
minimal revenues. As a result, Fountain has experienced substantial losses
during each fiscal year since the shifting of its principal activities in early
1995 to the acquisition and development of interests in oil and gas properties.
For the year ended December 31, 1997, Fountain reported a net loss of
$27,683,000, including losses aggregating $15,736,000 from the impairment of oil
and gas ventures, losses aggregating $3,244,000 from the impairment of property
and equipment and losses aggregating $3,778,000, representing Fountain's equity
in the loss of unconsolidated ventures. Fountain's financial statements have
been prepared under the assumption of a going concern and do not give effect to
any adjustments, including additional impairments in the value of Fountain's
investments in oil and gas properties and ventures and in other long-lived
assets, that would be necessary if Fountain were unable to continue as a going
concern. See Fountain's Consolidated Financial Statements and the Notes thereto
and "FOUNTAIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "INFORMATION CONCERNING FOUNTAIN."
RECENT OPERATING RESULTS OF CANARGO; LIMITED OPERATING HISTORY OF CANARGO
CanArgo has a limited operating history. Prior to acquiring the shares
of NOC in July 1997, CanArgo did not conduct any substantial business
activities. CanArgo's operating losses for the six months ended December 31,
1997 were US$255,827. NOC actively began producing only from the Ninotsminda
Field in early 1996. In part due to increased depletion expense resulting from
an increase in the carrying value of NOC's oil and gas properties upon being
acquired by CanArgo, CanArgo has experienced operating losses. Depletion
expenses relating to the Ninotsminda Field and other CanArgo oil and gas
properties will increase as a result of the Transaction. In addition, CanArgo's
future operating results will depend, in part, on matters over which CanArgo has
no control, including, without limitation, the productivity of the Ninotsminda
Field, oil and gas prices and general economic conditions. Therefore, it is not
possible to estimate future operating results based upon historical operating
performance. See "--Volatility of Oil and Gas Prices," "--Exploration,
Development and Production Risks," "CANARGO MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of Operations" and
"INFORMATION REGARDING CANARGO."
POSSIBLE LIMITATION ON FOUNTAIN'S NET OPERATING LOSS CARRYOVERS
Fountain believes that substantially all of its net operating losses
("NOLs"), as computed for U.S. federal income tax purposes, could be subject to
limitation under Section 382 of the U.S. Code. The Transaction may also result
in an immediate or future ownership change of Fountain for purposes of Section
382 of the U.S. Code. In the
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<PAGE> 28
event that an ownership change (as defined in Section 382 of the U.S. Code) of
Fountain were to occur as a result of the Transaction or otherwise, Section 382
of the U.S. Code would impose a further annual limitation on the amount of
Fountain's taxable income that may be offset by its NOLs. See "TAX
CONSIDERATIONS -- United States Federal Tax Considerations -- Limitation on U.S.
Net Operating Loss Companies" and Note 13 of the Notes to Fountain's
Consolidated Financial Statements appearing elsewhere in this Joint Proxy
Statement/Prospectus.
FOUNTAIN LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, Fountain had remaining cash and cash equivalents of
approximately $12,500,000, which it considered inadequate to proceed with its
program of acquiring and developing oil and gas properties. Fountain's
preliminary development plan for the Stynawske Field contemplates a peak
negative cumulative cash flow in excess of US$30,000,000. In the fall of 1997,
following the announcement of the disappointing initial results from the
Lelyaky Field in Ukraine, Orkla, one of Fountain's financial advisors,
indicated that in its judgment, based on the information made available to
Orkla from the senior management of Fountain, it might be difficult for
Fountain to raise either equity and debt capital in the financial markets at
satisfactory terms at that point in time. Following those disappointing results,
Orkla, one of Fountain's financial advisors, indicated in the fall of 1997 that
in its judgment it would be extremely difficult for Fountain to raise either
equity and debt capital in the financial markets. Contemporaneously, Fountain
undertook a program to preserve its financial resources by limiting its
investments in and advances to oil and gas ventures in which it holds interests
and reducing its general and administrative expenses, which has resulted in the
termination or delivery of contractually required notices preceding termination
to three-quarters of Fountain's employees. If the Transaction or some other
transaction that might provide management personnel and facilitate access to the
capital markets or otherwise provide Fountain or its ventures with capital is
not consummated, Fountain, as a result of its sharp reduction of personnel and
questionable ability to raise capital, may be unable to continue as a going
concern. See "THE TRANSACTION -- Background of the Transaction" and "FOUNTAIN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity, Capital Resources and Changes in Financial Condition."
Development of the oil and gas properties and ventures in which Fountain
has interests involves multi-year efforts and substantial cash expenditures.
Development of these properties and ventures would require the availability of
substantial funds from external sources. Fountain believes that its ability to
access external financing is dependent upon the successful completion of a
business combination with, or the farm-out of a significant portion of its
interest in BOC and possibly other projects to, an entity that can provide or
attract such financing. Fountain generally has the principal responsibility for
arranging financing for the oil and gas properties and ventures in which it has
an interest. There can be no assurance, however, that Fountain or the entities
that are developing the oil and gas properties and ventures will be able to
arrange the financing necessary to develop the projects being undertaken or to
support the corporate and other activities of Fountain or that such financing as
is available will be on terms that are attractive or acceptable to or are deemed
to be in the best interests of Fountain, such entities and their respective
stockholders or participants. See "FOUNTAIN MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity, Capital Resources
and Changes in Financial Condition."
CANARGO LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 1997, CanArgo did not have sufficient working capital
on hand to finance its plan to develop its oil and gas properties in the
Independent Republic of Georgia. Although management of CanArgo believes that
the combined cash portion of CanArgo and Fountain would be sufficient to carry
out its current development plan, in the event the transaction is not approved
CanArgo will require additional equity financing in 1998. See "CANARGO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity, Capital Resources and Changes in Financial Condition."
LIQUIDITY AND CAPITAL RESOURCES OF THE COMBINED COMPANY
Each of Fountain and CanArgo believes that the combined company will be
sufficiently capitalized following the Transaction to support a reasonable
business plan that takes into account the anticipated capital needs of the
combined company under such a plan. The combined company, however, may decide to
accelerate development of current projects or to pursue interests in other oil
and gas projects that may necessitate significant additional expenditures, which
may require significant additional financing. There is no assurance that the
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<PAGE> 29
combined company will be able to secure additional financing or that any such
financing will be obtained on terms favorable to the combined company.
FIXED EXCHANGE RATE
The Combination Agreement establishes a fixed rate at which CanArgo
Common Shares would, through the utilization of Exchangeable Shares as an
intermediary, be exchangeable into shares of Fountain Common Stock. That rate is
1.6 (subject to adjustment for changes to the capitalization of Fountain prior
to the Effective Date) shares of Fountain Common Stock for each CanArgo Common
Share. The Exchange Ratio was established through negotiations between officers
of CanArgo and Fountain, which took place primarily during December 1997 and
January 1998, based upon, among other things, an evaluation of the respective
oil and gas reserves, other assets, market capitalization and prospects of the
two companies. The Exchange Ratio was finally approved as part of the approval
of the Combination Agreement by each of the Fountain Board and the CanArgo Board
on February 2, 1998.
The Combination Agreement does not provide for the possible adjustment
of the Exchange Ratio prior to the Effective Date, other than through an
amendment of the Combination Agreement to which both CanArgo and Fountain would
have to agree despite their conflicting interests. In the absence of such
amendment, changes in the oil and gas reserves, other assets, market
capitalization, prospects or other attributes of the respective companies
subsequent to February 2, 1998 will not be reflected in the proportions of the
equity of Fountain attributable to the stockholders of Fountain and the former
shareholders of CanArgo, respectively, on the Effective Date. The Combination
Agreement requires CanArgo and Fountain generally to conduct their business in
the ordinary course prior to the Effective Date and provides each of the
companies with the right to refuse to proceed with the Transaction if any events
occur that have or are likely to have a material adverse effect on the business,
properties, assets, financial condition or results of operations of the other
company. It is possible, however, that one of the companies would experience
positive changes or would suffer negative events that produce an adverse effect
that does not rise to the level of materiality or does not induce a refusal to
close but which, if known at the time the Exchange Ratio was negotiated and
approved, would likely have affected it. Should such an event occur and should
the CanArgo shareholders adopt the Continuance Resolution and the Arrangement
Resolution, the Fountain stockholders approve the Fountain Stock Issuance
Proposal and the Transaction be consummated, the Exchange Ratio would apply
without taking into account such changes or events.
LITIGATION AND CLAIMS
Fountain acquired its interests in the Lelyaky Field, Maykop Field and
Stynawske Field projects by purchasing rights and other assets related to or
shares of corporations holding rights and other assets related to such projects.
In relation to each of the projects, payment of substantially all or a
substantial portion of the maximum consideration payable by Fountain with
respect to such acquisition was conditioned on the achievement of certain
objectives, such as issuance of production licenses and reaching specified
levels of production, often within specified periods. In the case of the Lelyaky
Field and Maykop Field acquisitions, the contractual conditions to the payment
of contingent consideration can no longer be met. With respect to the Lelyaky
Field acquisition, the seller has filed claims against Fountain alleging
entitlement to a return of the shares sold and to the contingent consideration,
based on legal theories including breach of contract, breach of fiduciary duty,
fraud, negligent misrepresentation, unjust enrichment and rescission. In the
case of the Maykop Field acquisition, the seller has filed litigation against
Fountain seeking the return of all benefits conferred upon Fountain pursuant to
the acquisition contract, based on legal theories including breach of contract.
The seller of Stynawske Field project has indicated that it is considering an
action against Fountain seeking immediate payment of the contingent
consideration payable in that acquisition on the grounds that the Transaction or
other action by or inaction of Fountain has unreasonably delayed or will
unreasonably delay satisfaction of the condition precedent to the payment of the
contingent consideration.
As a result of the events associated with the impairment of Fountain's
investment in and advances to and other assets related to certain oil and gas
ventures, Fountain may be subject to contingent liabilities in the form of
claims from such ventures or from other participants therein. Fountain has been
advised that Intergas and another shareholder of Intergas are considering
asserting such claims. If one or more such claims were asserted and determined
to be valid, they could have a material adverse effect on Fountain's financial
position, results of
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<PAGE> 30
operations and cash flows. If asserted, such claims may be adjudicated in host
country forums under host country laws. See "INFORMATION CONCERNING FOUNTAIN --
Ventures in Eastern Europe" and "-- Legal Proceedings" and Notes 6 and 9 of
Notes to Fountain's Consolidated Financial Statements.
RELATIONSHIP BETWEEN NOC AND JKX
CanArgo holds 55.9% of the outstanding shares of NOC. The balance of the
shares of NOC is held by JKX. The relationship between CanArgo and JKX is
governed by a shareholders agreement which provides, among other matters, that
shares of NOC may only be issued after they have been offered to CanArgo and JKX
pro rata. To date, NOC's capital requirements have been satisfied by share
issuances to CanArgo and JKX. Although CanArgo believes that JKX will continue
to fund its pro rata share of NOC's capital requirements, there is no assurance
that it will continue to do so in the future. Accordingly, CanArgo may be
required to contribute capital to NOC in greater proportion than its current
share interest in NOC. Further, there can be no assurance that CanArgo will have
sufficient resources to fund its pro-rata share of NOC's capital requirement.
Moreover, the failure by either shareholder of NOC to contribute capital to NOC
could result in a dilution of that shareholder's interest in NOC. JKX has
previously contested in legal proceedings the validity of a share issuance to
shareholders of NOC (who subsequently transferred their shares of NOC to CanArgo
Ltd.). Such legal proceedings have since been withdrawn (without prejudice to
its rights in respect of future proceedings, if any). Had the share issuance
been invalid, CanArgo's interest in NOC would have been reduced to approximately
49%. There can be no assurances that such legal proceedings will not be
reinstituted, or if reinstituted, what the outcome would be. See "INFORMATION
CONCERNING CANARGO -- Legal Proceedings."
RISKS OF FOREIGN OPERATIONS
Concentration of Business in Eastern Europe
It is anticipated that most of the oil and gas production of the
combined company, CanArgo and, if it successfully develops the Stynawske Field,
Fountain, will be derived from operations in Eastern Europe. CanArgo's oil and
gas production is in the Republic of Georgia. If Fountain successfully develops
the Stynawske Field, Fountain's oil and gas production will be located in
Ukraine. In addition to the risks normally associated with oil and gas
development and production (See "-Exploration, Development and Production
Risk"), the success of operations in Eastern Europe will depend on, among other
things, the operator's ability to maintain its relationships with its local
development partners, political stability, export and transportation tariffs,
local and national tax requirements and exercises of foreign government
sovereignty over the exploration area. No assurance can be given that the
Eastern European operations of either CanArgo or Fountain, alone or combined,
will be successful. See "INFORMATION CONCERNING FOUNTAIN -- Ventures in Eastern
Europe", "INFORMATION CONCERNING CANARGO -- Business and Properties" and Note 6
of the Notes to Fountain's Consolidated Financial Statements.
Risk of Political Instability
The forms of government and the economic institutions in the countries
in which the principal projects of Fountain and CanArgo are located have been
established relatively recently and, accordingly, may be subject to a greater
risk of political instability or change than may be the case with respect to
governments and economies that have been in existence for longer periods of
time. Generally, the government is an important participant in the establishment
of the arrangements defining each project. These arrangements, therefore, may be
subject to changes in the event of changes in government institutions,
government personnel or political power and the development of new
administrative policies and practices. There can be no assurance that Fountain
or CanArgo will be able to take measures to provide adequate protection of their
respective interests against political instability or changes in government
institutions, personnel, policies or practices or shifts in political power. See
"INFORMATION CONCERNING FOUNTAIN -- Ventures in Eastern Europe -- Risks
Associated with Eastern European Ventures" and "INFORMATION CONCERNING CANARGO
- -- Business and Properties."
New Market Economy
The infrastructures, labor pools, sources of supply and legal and social
institutions in the Eastern European countries may not be equivalent to those
normally found in connection with projects in North America. Moreover,
19
<PAGE> 31
the regulatory regime governing oil and gas operations (including environmental
regulations) may have been recently promulgated and may be relatively untested,
so there may not be enforcement history or established practice that can aid
CanArgo and Fountain in evaluating how the regulatory regime will affect their
respective operations. More permits and approvals may be required for Eastern
European entities and projects than for North American entities and projects.
The procedures for obtaining such permits and approvals may be more cumbersome,
and officials may have more discretion in acting on application and requests.
Each of these factors may result in a lower level of predictability and a higher
risk of frustration of expectations. See "INFORMATION CONCERNING FOUNTAIN --
Ventures in Eastern Europe -- Risks Associated with Eastern European Ventures"
and "INFORMATION CONCERNING CANARGO -- Business and Properties."
Currency Risk
The combined company, as well as CanArgo or Fountain individually, may
be exposed to the risk of foreign currency exchange losses in connection with
its operations in Eastern Europe by holding cash and receivables denominated in
foreign currencies during periods in which a strengthening United States dollar
may be experienced or by having or incurring liabilities denominated in foreign
currencies during periods in which a weakening United States dollar may be
experienced. Generally, Fountain has paid for goods and services obtained
locally in the local currencies and has paid expatriate employees and
international contractors in United States dollars. The principal Eastern
European currencies in which Fountain has satisfied obligations are the
Ukrainian hryvna, Russian ruble and Albanian leke. Outside of Eastern Europe,
the principal currencies other than the United States dollar in which Fountain
has satisfied obligations are the Norwegian kroner and the Canadian dollar.
CanArgo has satisfied its obligations in Eastern Europe in the Georgian lari and
the United States dollar.
Fountain and CanArgo recognize that revenue generated from their Eastern
European operations may be received in local currencies in the countries in
which operations are conducted, which may include Georgia and Ukraine. While
such currencies are now generally freely convertible into United States dollars,
there is no assurance that such convertibility will continue. Fountain has not
reported any revenue from its Eastern European projects, since Fountain has
accounted for such projects on the equity basis. Kashtan, the entity operating
one such project, received the equivalent of approximately US$185,000 of revenue
during 1997 in Ukrainian hryvna. All of Fountain's 1997 revenue related to oil
production in Alberta, Canada, and was received in the form of Canadian dollars.
CanArgo received all its 1997 revenues in Eastern Europe in the United States
dollar.
Neither Fountain nor CanArgo speculates in foreign currencies, presently
maintains significant foreign currency cash balances, or currently engages in
any currency hedging transactions. Dividends or distributions from foreign oil
and gas ventures may be received in the currencies of the host countries, and
there is no assurance that Fountain, CanArgo or the combined company will be
able to convert such currencies into United States dollars. Even where
convertibility is available, applicable exchange rates may not reflect a parity
in purchasing power. Fluctuations of exchange rates could result in a
devaluation of foreign currencies being held. See "INFORMATION CONCERNING
FOUNTAIN -- Ventures in Eastern Europe -- Risks Associated with Eastern European
Ventures" and "INFORMATION CONCERNING CANARGO -- Business and Properties."
Foreign Jurisdiction
In the event of a dispute arising in connection with its foreign
operations, Fountain, CanArgo or the combined company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons to the jurisdiction of the courts of the United States or Canada
or enforcing U.S. or Canadian judgments in such other jurisdictions. Fountain,
CanArgo or the combined company may also be hindered or prevented from enforcing
their rights with respect to a governmental instrumentality because of the
doctrine of sovereign immunity.
Ukrainian Projects
Ukraine, where Fountain's Stynawske Field project is located, has not
yet achieved economic, political or social stability. Ukraine's heavy industry
has not been able to compete successfully with the technologically more advanced
enterprises in Western Europe and has floundered with the loss of government
subsidies and protected markets. Agricultural production has fallen, despite
excellent natural resources, as a result of shortages of equipment and
fertilizer, among other factors. Ukraine's political institutions have not been
able to address successfully these economic problems or other difficulties
facing the nation. No party or coalition has achieved a
20
<PAGE> 32
working majority in the legislature, and as a result it remains difficult for
political leaders to agree on policy or to adopt specific legislation. Recent
trends show influence migrating from the center towards the extremes, which will
make consensus even more difficult to reach. As a result of the economic and
political situation, the standard of living of the Ukrainian population has been
falling. Lower levels of nutrition and healthcare have led to a reduction in
life expectancy and an absolute decline in the population. Unless these mutually
reinforcing forces can be broken, Ukraine is likely to remain, perhaps to a
heightened extent, unstable, and instability represents a threat to the
successful implementation of Fountain's Stynawske Field project and any other
projects Fountain or CanArgo may undertake in Ukraine.
Georgian Projects
CanArgo or the combined company may be exposed to numerous political,
social and economic risks specifically associated with doing business in
Georgia. First, there is a risk of disputes between Georgia and its neighboring
countries. Although unlikely to occur, the resumption of violence in the
conflict between the Georgian authorities and the Georgian region of Abkhazia
could affect the operations of CanArgo or the combined company, as could the
destablilizing effects of further assassination attempts on the Georgian
President, Eduard Shevardnadze. Relations between Russia and Georgia are
currently good, but it is possible that problems in Russia or the actions of
certain factions in Russia may have a destabilizing effect on Georgia. While
Georgia currently has good relations with both Azerbaijan and Armenia, these
neighboring countries still have an unresolved conflict over the
Nagorno-Karabakh area, and there is a possibility that this problem may cause
instability in the area, which might have an indirect effect on Georgia.
Additionally, there are certain social problems (such as water and power cuts
and food shortages) which exist in Georgia as a result of the sharp decline in
the standard of living for a majority of the Georgian population due to the
adjustment to market economy and the disruption that followed independence;
however, the situation is improving. The United States Department of Commerce's
Business Information Service for the Newly Independent States has stated that
Georgian and foreign business people routinely cite corruption as a serious
impediment to the conduct of business in Georgia, where local officials have
been known to take bribes. While the Criminal Code of Georgia treats bribery as
a criminal act with severe penalties, few cases are successfully prosecuted, and
no high-level officials have been prosecuted for corruption. CanArgo believes
that the government of Georgia is very committed to reducing corruption and
CanArgo has not had significant exposure to this problem in its own operations.
Each of these risks could impact operations in the future.
VOLATILITY OF OIL AND GAS PRICES
The profitability of CanArgo and the combined company will be (and the
profitability of Fountain could be) significantly affected by changes in the
market price of oil and gas. Prices for oil and natural gas are subject to wide
fluctuations in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of Fountain, CanArgo or the combined company. These
factors include the level of consumer product demand, weather conditions,
domestic and foreign governmental regulations, the price and availability of
alternative fuels, political conditions in the Middle East and elsewhere and
overall economic conditions. It is impossible to predict future oil and natural
gas price movements with any certainty. Lower oil and natural gas prices may
materially adversely affect the financial condition, liquidity and results of
operations of Fountain, CanArgo or the combined company.
UNCERTAINTY OF RESERVE INFORMATION
There are numerous uncertainties inherent in estimating oil and natural
gas reserves and their values, including many factors beyond the control of
Fountain, CanArgo or the combined company. The process of estimating quantities
of "proved" and "proved developed" natural gas and crude oil reserves is very
complex, requiring significant subjective decisions in the evaluation of all
available geological, engineering and economic data for each reservoir. The data
for a given reservoir may also change substantially over time as a result of
numerous factors including, but not limited to, additional development activity,
evolving production history and continual reassessment of the viability of
production under varying economic conditions. For these reasons, estimates of
the economically recoverable quantities of oil and natural gas attributable to
any particular group of properties, classifications of such reserves based on
risk of recovery and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary
21
<PAGE> 33
substantially. Actual production, revenues and expenditures with respect to
Fountain's, CanArgo's or the combined company's reserves will likely vary from
estimates, and such variances may be material.
EXPLORATION, DEVELOPMENT AND PRODUCTION RISKS
In order to produce oil and gas in sufficient quantities and to market
such oil and gas at sufficient prices to provide positive cash flow to Fountain,
CanArgo or the combined company, the exploration and development efforts of the
oil and gas ventures and properties in which such entity has interests must be
successful. Oil and gas exploration and development involves a high degree of
risk, which even careful evaluation based upon a combination of experience and
knowledge greater than that possessed by Fountain and CanArgo may not be able to
avoid. There is no assurance that Fountain, CanArgo or the combined company will
identify additional commercial quantities of oil and gas. There is also no
assurance that, even if commercial quantities of oil and gas are identified, an
oil and gas project will be brought into commercial production. The development
of an oil and gas deposit once discovered is dependent upon a number of factors,
such as size of the deposit, proximity to infrastructure, oil prices and
government regulations, which are beyond the control of Fountain, CanArgo and
the combined company. See "INFORMATION CONCERNING FOUNTAIN" and "INFORMATION
CONCERNING CANARGO -- Business and Properties."
Additionally, the business of developing oil and gas properties and
producing oil and gas is generally subject to a number of hazards, including
labor disputes, unusual or unexpected geological conditions, slope failures,
natural phenomena such as inclement weather conditions, earthquakes, fire,
explosions, blow-outs, pipe failures, casing collapses, unusual or unexpected
formations and pressures and environmental hazards such as oil spills, gas
leaks, ruptures and discharges of toxic gases. Any one of these hazards may
result in environmental damage, personal injury or death, delays in development
or production and other harm that could result in substantial losses to third
parties and losses and liability to Fountain, CanArgo or the combined company.
The potential for such hazards is greater when the oil and gas development and
production activities involve the rehabilitation of fields where the practices
and technologies employed in the past have not embodied the highest standards
then in effect. These hazards can be minimized but not eliminated through use of
various engineering and other technological methods, and the combined company,
as well as Fountain and CanArgo individually, intends to employ such methods to
industry standards. See "INFORMATION CONCERNING FOUNTAIN" and "INFORMATION
CONCERNING CANARGO -- Business and Properties."
Each of Fountain and CanArgo (through NOC) maintains insurance customary
in the oil and gas industry for a company of its size and with its scope of
operations. The insurance that Fountain and CanArgo maintain does not cover all
of the risks involved in oil development, drilling and production and, if
coverage does exist, may not be sufficient to pay the full amount of the
liabilities incurred. Any uninsured loss could have a material and adverse
effect on Fountain, CanArgo and the combined company.
Ultimate realization of the carrying value of Fountain's, CanArgo's or
the combined company's oil and gas properties and ventures will require
production of oil and gas in sufficient quantities and the marketing of such oil
and gas at sufficient prices to provide positive cash flow, 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. If one or more of the above factors, or other factors, are different
than anticipated, these plans may not be realized, and such carrying value may
not be recovered.
EXTENSIVENESS OF LAWS AND REGULATIONS APPLICABLE TO OIL AND GAS OPERATIONS
The oil and gas activities of Fountain and CanArgo are subject to
extensive national, provincial, state and local laws and regulations governing
exploration, development, production, exports, taxes, labor standards,
occupational health and safety, environmental matters, such as spills, releases,
disposal and remissions of hazardous substances, and other matters. Many of
these laws and regulations have become more stringent in recent years, imposing
greater administrative requirements, such as the submission and approval of
environmental impact assessments, and greater liability on a larger number of
potentially responsible parties. Consequently, compliance with such laws and
regulations has resulted in increased costs of and delays in planning,
designing, drilling, developing, constructing, operating and closing oil wells
and other facilities. Moreover, it is possible that future
22
<PAGE> 34
changes in these laws and regulations could result in substantial increases in
costs and liabilities and delays in the future. Because the requirements imposed
by such laws and regulations are frequently changed, Fountain, CanArgo and the
combined company are unable to predict the ultimate cost of compliance with
these requirements or their effect on their operations. See "INFORMATION
CONCERNING FOUNTAIN -- Environmental Matters" and "INFORMATION CONCERNING
CANARGO --Business and Properties."
COMPETITION
The oil and gas industry is highly competitive. Fountain and CanArgo
encounter competition from other oil and gas companies in all areas of
operations, including the acquisition of producing properties. The companies'
competitors include integrated oil and natural gas companies, numerous
independent oil and gas companies, individuals and drilling and income programs.
Many of these competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than
Fountain and CanArgo and which, in many instances, have been engaged in the
energy business for a much longer time than Fountain and CanArgo. Such
competitors may be able to develop better information and provide better
analysis of available information, to pay more for productive oil and natural
gas properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than Fountain's, CanArgo's
or the combined company's financial or human resources permit. The combined
company's ability to acquire additional properties and to discover reserves in
the future will be dependent upon its ability to evaluate and select suitable
properties and to consummate transactions in a highly competitive environment.
MANAGEMENT AND PERSONNEL CHANGES
As a result of the Transaction, the composition of Fountain's management
will be changed. Three former directors of CanArgo and Peder Paus, who is a
shareholder of CanArgo, will become members of the Fountain Board. Specifically,
Fountain's Board will be comprised of six members, two of whom are current
Fountain directors and three of whom are current CanArgo directors. David Robson
and Michael Binnion, currently directors and executive officers of CanArgo, will
become Chairman of the Board and Chief Executive Officer and Vice-Chairman,
President and Chief Financial Officer, respectively, of Fountain. These
prospective directors and executive officers of Fountain who are currently
affiliated with CanArgo will have the ability to exercise significant control
over Fountain's affairs. Einar Bandlien, a director and Executive Vice President
of Fountain, is expected to continue to be employed as Executive Vice President
of Fountain after the completion of the Transaction. Fountain and CanArgo
believe that the success of the combined company will depend to a significant
degree on these key personnel and on the combined company's ability to attract
and retain highly-skilled personnel. The loss of key Fountain and CanArgo
personnel might adversely affect the combined company's future results if the
combined company can not attract suitable replacements. See "THE TRANSACTION --
Interests of Certain Persons in the Transaction" and "THE COMPANY AFTER THE
TRANSACTION -- Management."
CanArgo's management believes that operating efficiencies are derived
from contracting out the principal operating functions of various properties,
including those of the Ninotsminda Field, to a local service company. Although
representatives of CanArgo (through NOC) have representation on, and control of,
a coordinating committee responsible for the Ninotsminda Field, the day to day
operations and consequent personnel control and supervision rest with the local
service company. CanArgo's decentralized operating management approach will
represent a changed operating strategy for Fountain.
ACCOUNTING TREATMENT OF THE TRANSACTION
As a result of the accounting treatment of the Transaction, Fountain's
carrying value on a consolidated basis of CanArgo's oil and gas properties for
financial accounting purposes will be substantially higher than CanArgo's
historic carrying values for such properties. This will have two important
consequences. First, the higher carrying value will result in higher depletion
expense than otherwise would be recognized. Second, U.S. GAAP requires that oil
and gas properties be reviewed for impairment to determine whether the carrying
value may not be recoverable. As a result of the higher carrying value for oil
and gas properties will be more susceptible to write downs relating to their
impairment. While these two consequences will not have an impact on the combined
company's consolidated cash flow, they could adversely impact the combined
company's earnings and indirectly the price at which Fountain Common Stock will
trade. See "CANARGO MANAGEMENT'S DISCUSSION AND
23
<PAGE> 35
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations" and "INFORMATION REGARDING CANARGO."
CONTINUED LISTING ON NASDAQ; APPLICATION OF THE PENNY STOCK RULES
The Fountain Common Stock is listed on NASDAQ. Fountain currently meets
the continued listing criteria of NASDAQ, except that the market price has
recently been trading below the minimum bid price requirement of US$1.00 per
share. One purpose of the Reverse Split is to increase the per share value of
Fountain Common Stock to facilitate compliance with the continued listing
requirements of NASDAQ. If Fountain is unable to maintain the standards for
continued listing, the Fountain Common Stock would no longer be traded on
NASDAQ. Trading, if any, of the Fountain Common Stock might thereafter be
conducted on the NASDAQ Small Cap Market, if Fountain meets the applicable
requirements and applies for and is accepted for listing on such market, on an
electronic bulletin board established for securities that are not listed on any
United States national securities exchange or automated quotation system or in
what is commonly referred to as the "pink sheets." In such event, a Fountain
stockholder could find it more difficult to dispose of, or to obtain accurate
quotations as to the price of Fountain Common Stock. Were Fountain to lose its
NASDAQ listing, the OSE might consider delisting Fountain Common Stock from that
exchange.
In addition, if Fountain Common Stock were delisted, such shares could
be subject to the so-called "penny stock" rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally defined as
an investor with a net worth in excess of US$1,000,000 or annual income
exceeding US$200,000, or US$300,000 together with a spouse). For transactions
covered by this rule, the broker-dealer must make a special suitability
determination for the purchaser and must have received the purchaser's written
consent to the transaction prior to sale. Consequently, if the Fountain Common
Stock ceased trading on NASDAQ, the ability of broker-dealers to handle or their
interest in handling transactions in Fountain's securities and the ability of
Fountain stockholders to sell their Common Stock in the secondary market may be
adversely affected.
The SEC's regulations define a "penny stock" as, among other things, an
equity security that is not listed on a national securities exchange or quoted
on NASDAQ that has a market price of less than US$5.00 per share. For any
transaction involving a penny stock, unless exempt, the rules require the
delivery prior to the transaction of a disclosure schedule relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. As a result, if Fountain Common Stock is
determined to be "penny stock," a Fountain stockholder may find it more
difficult to dispose of his Fountain Common Stock.
DIVIDENDS
Neither Fountain nor CanArgo has paid cash dividends in the past.
Determinations about the payment of future dividends by the combined company and
the amount thereof will be made by the its Board of Directors and will depend on
the combined company's future earnings, financial condition and relevant
factors. For the foreseeable future following consummation of the Transaction,
it is expected that the earnings, if any, of the combined company will be
retained to support current operations, to fund oil and gas projects and to
acquire interests in oil and gas properties. Additionally, NOC has agreed with
certain consultants to pay such consultants an amount equal to 4.5% of any
dividends declared and paid on the common shares of NOC.
ANTI-TAKEOVER EFFECTS OF STOCK ISSUANCE
The Fountain Board is authorized at any time and from time to time,
without any further vote or action by Fountain's stockholders, to provide for
the issuance of shares of preferred stock of Fountain in one or more classes or
series and to fix for each such class or series voting powers, designations,
preferences, rights, qualifications, limitations or restrictions. The issuance
of preferred stock by Fountain could have an anti-takeover effect under certain
circumstances. Since the voting rights to be accorded to any series of preferred
stock of Fountain other than
24
<PAGE> 36
the Fountain Special Voting Stock remain to be fixed by the Fountain Board, the
holders of such stock may be granted the power to vote separately as a class in
connection with approval of certain extraordinary corporate transactions in
circumstances where the DGCL does not require a class vote, or might be given a
disproportionately large number of votes. Such preferred stock could also be
convertible into a large number of shares of Fountain Common Stock under certain
circumstances or have other terms which might render the acquisition of a
controlling interest in Fountain more difficult or more costly. Moreover, shares
of preferred stock of Fountain could be privately placed with purchasers who
might support Fountain management in opposing an unsolicited tender offer or
other attempt to obtain control. As a result, the issuance of preferred stock of
Fountain as an anti-takeover device might preclude stockholders from taking
advantage of a situation which might be favorable to their interests. See "THE
COMPANIES AFTER THE TRANSACTION -- Fountain Capital Stock -- Preferred Stock."
TAX UNCERTAINTIES OF THE TRANSACTION
In connection with the Transaction, CanArgo has received an opinion from
Lang Michener, CanArgo's Canadian counsel, with respect to Canadian federal
income tax considerations and Fountain has received an opinion from its United
States counsel with respect to United States federal tax considerations. See
"TAX CONSIDERATIONS." The tax opinions are not to be construed as advice to any
particular CanArgo shareholder. Moreover, the tax opinions are based on certain
assumptions.
Risk that Ancillary Rights May Be Deemed to Have Greater Than Nominal
Value
The opinion with respect to Canadian federal income tax considerations is
based on the assumption that, among other things, the Ancillary Rights have a
nominal value. Such assumptions are based on advice from CanArgo which is not
binding on Revenue Canada. Should Revenue Canada take a contrary position, the
holder of CanArgo Common Shares may realize a capital gain for the purposes of
the Canadian Tax Act. See "TAX CONSIDERATIONS -- Canadian Federal Income Tax
Considerations to CanArgo Shareholders -- Exchange of CanArgo Common Shares for
Exchangeable Shares."
Risk of Amendment to Canadian Tax Act
The disposition of CanArgo Common Shares to CanArgo for Exchangeable
Shares by a non-Canadian resident holder would require, under proposed
amendments to the Canadian Tax Act, such holder to obtain a Clearance
Certificate prior to consummation of the Transaction in order to avoid payment
of withholding tax. Lang Michener has been advised by Revenue Canada that when
the tax proposals become law, the law will not require that a Clearance
Certificate be obtained retroactively for dispositions made prior to the tax
proposals becoming law. If the tax proposals become law prior to the
consummation of the Transaction a non-Canadian resident holder will be required
to obtain a Clearance Certificate. There is no certainty that the tax proposals
will not become law prior to consummation of the Transaction or that Revenue
Canada will not change its administrative position. See "TAX CONSIDERATIONS -
Shareholders Not Resident in Canada."
Characterization of the Arrangement for United States Federal Income
Tax Purposes
There is no direct authority addressing the characterization of the
Arrangement for United States federal income tax purposes, and, accordingly, the
treatment of the Arrangement for United States federal income tax purposes is
subject to significant uncertainty. As a result of this uncertainty, it is
possible that the Arrangement could be treated as a taxable sale by United
States Shareholders of their CanArgo Common Shares, in which case such holders
would recognize gain for U.S. federal income tax purposes equal to the excess of
the fair market value of the Exchangeable Shares and Ancillary Rights over their
basis in the CanArgo Common Shares surrendered in exchange therefor. See "TAX
CONSIDERATIONS--United States Federal Income Tax
Considerations--Characterization of the Arrangement for United States Federal
Income Tax Purposes."
Possibility of Gain Recognition for United States Federal Income Tax
Purposes on Deemed Constructive Sale Under Section 1259.
It is also possible that the exchange of CanArgo Common Shares for
Exchangeable Shares, or the ownership of the Exchangeable Shares subject to the
Retraction, Redemption, and Call Rights could be treated as a "constructive
sale" of an "appreciated financial position," in which case a CanArgo
Shareholder would be required to recognize gain as if the CanArgo Common Shares
surrendered (or Exchangeable Shares received) had been sold for their fair
market value. See "TAX CONSIDERATIONS--United States Federal Income Tax
Considerations--Possibility of Gain Recognition on Constructive Sale."
Risk that CanArgo May Be Treated as a PFIC for United States Federal
Income Tax Purposes
If at any time during a particular United States Holder's holding period
for its CanArgo Common Shares or Exchangeable Shares, a specified percentage of
CanArgo's income were considered to be "passive income" or a specified
percentage of CanArgo's assets were considered to be held to produce passive
income, CanArgo would be considered to be PFIC, in which case, if a special
election had not been made, such United States Holder could be required to
recognize gain upon the exchange of its CanArgo Common Shares for Exchangeable
Shares, and such gain would be subject to a special tax under the PFIC
provisions. In addition, if CanArgo were treated as a PFIC, holders of
Exchangeable Shares could be subject to an additional tax and interest charge on
any gain realized on the disposition of such shares or on any "excess dividends"
with respect to such shares. See "TAX CONSIDERATIONS--United States Federal
Income Tax Considerations--Passive Foreign Investment Company Considerations."
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<PAGE> 37
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The financial statements and the pro forma financial statements of
Fountain and the summaries of historical and pro forma financial information
concerning Fountain contained in this Joint Proxy Statement/Prospectus are
reported in US$ and have been prepared in accordance with U.S. GAAP.
Unless otherwise indicated, the financial statements of and the
summaries of financial information concerning CanArgo contained in this Joint
Proxy Statement/Prospectus are reported in US$ and have been prepared in
accordance with Canadian GAAP, which as applied to CanArgo conforms in all
material respects with U.S. GAAP.
Unless otherwise indicated, the financial statements of and the
summaries of financial information concerning NOC contained in this Joint Proxy
Statement/Prospectus are reported in US$ and have been prepared in accordance
with international GAAP, which as applied to NOC conforms in all material
respects with U.S. GAAP.
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS
In this Joint Proxy Statement/Prospectus, dollar amounts are expressed
either in US$ or C$.
The following table sets forth, for each year indicated, the high and
low exchange rates for one C$ expressed in US$, the average of such exchange
rates on the last business day of each month during such year, and the exchange
rate at the end of such year, based upon the noon buying rate in New York City
for cable transfers in Canadian dollars, as certified for customs purposes by
the Federal Reserve Bank of New York (the "Noon Buying Rate"). Such rates quoted
are the number of U.S. dollars per C$1.00 and are the inverse of rates quoted by
the Federal Reserve Bank of New York for the number of Canadian dollars per
US$1.00.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
High ..... 0.8046 0.7632 0.7527 0.7513 0.7487
Low ...... 0.7439 0.7103 0.7023 0.7235 0.6945
Average .. 0.7729 0.7300 0.7305 0.7329 0.7198
Period End 0.7544 0.7128 0.7323 0.7301 0.6999
</TABLE>
On March 13, 1998, the exchange rate for one Canadian dollar expressed
in U.S. dollars based on the inverse of the Noon Buying Rate was US$0.7092.
26
<PAGE> 38
COMPARATIVE MARKET PRICE DATA
CanArgo Common Shares are traded under the symbol "CNAR" on the CDN, and
shares of Fountain Common Stock are traded under the symbol "GUSH" on NASDAQ and
under the symbol "FOU" on the OSE. The following table sets forth the high and
low sales prices of CanArgo Common Shares on the CDN and of shares of Fountain
Common Stock on NASDAQ and the OSE, as well as the average daily trading volume
of Fountain Common Stock on NASDAQ and the OSE, respectively. The quotations are
as reported in published financial sources. CDN quotations are expressed in C$;
NASDAQ and OSE quotations are expressed in US$.
CANARGO COMMON SHARES(1)
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
CALENDAR QUARTER ENDED
March 31, 1995 ............................... 8.00 2.00
June 30, 1995 ................................ 4.00 0.80
September 30, 1995 ........................... 4.00 0.80
December 31, 1995 ............................ 1.20 0.40
March 31, 1996 ............................... 2.00 0.40
June 30, 1996 ................................ 2.40 0.80
September 30, 1996 ........................... 1.60 0.40
December 31, 1996 ............................ 1.20 0.60
March 31, 1997 ............................... 5.20 0.60
June 30, 1997 ................................ 2.80 1.20
September 30, 1997 ........................... 2.80 2.20
December 31, 1997 ............................ 3.00 2.20
March 31, 1998 ............................... 3.00 1.95
</TABLE>
- ----------
(1) Quotations are restated to reflect a one-for-forty consolidation of
CanArgo Common Shares effected on July 2, 1997. Quotations for periods
prior to July 1, 1997 were for the corporate entity which operated under
the name Money Works Inc. before it was the subject of a reverse
takeover by CanArgo Ltd.
27
<PAGE> 39
FOUNTAIN COMMON STOCK
<TABLE>
<CAPTION>
NASDAQ OSE(2)
------------------------- ------------------------
AVERAGE AVERAGE
DAILY DAILY
HIGH LOW VOLUME HIGH LOW VOLUME
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL QUARTER ENDED
May 31, 1995(1) ............. 7.38 4.19 96,413 7.04 4.99 135,555
August 31, 1995 ............. 7.00 5.19 96,435 6.61 5.52 21,957
November 30, 1995 ........... 6.06 3.38 54,104 6.16 3.95 8,640
February 29, 1996 ........... 5.53 3.09 62,839 5.50 3.29 61,087
May 31, 1996 ................ 5.38 2.81 133,240 5.37 2.88 132,722
August 31, 1996 ............. 6.56 4.88 102,725 6.41 5.00 241,144
November 30, 1996 ........... 7.50 5.88 79,236 7.25 5.93 259,419
December 31, 1996 (1 month) . 7.38 6.50 36,737 7.38 6.68 238,327
March 31, 1997 .............. 7.12 4.38 49,338 7.11 4.48 210,918
June 30, 1997 ............... 5.06 3.91 21,109 4.76 3.96 103,931
September 30, 1997 .......... 4.56 2.42 23,603 4.43 2.48 157,173
December 31, 1997 ........... 3.50 0.59 62,684 3.23 0.83 284,036
March 31, 1998 .............. 1.31 0.72 27,015 1.19 0.80 153,177
</TABLE>
- ----------
(1) Includes trading on NASDAQ from April 5, 1995 and on the OSE from
May 15, 1995, the dates on which trading in Fountain Common Stock commenced in
such market.
(2) Sales prices on the OSE were converted from Norwegian kroner into
United States dollars on the basis of the daily 10:00 a.m. exchange rate for
buying United States dollars with Norwegian kroner announced by the Central Bank
of Norway.
On January 26, 1998, the last full trading day prior to the joint public
announcement by Fountain and CanArgo of a letter of intent with respect to the
Transaction, the closing price of Fountain Common Stock on NASDAQ was US$0.84
and the last reported sales price on the CDN of the CanArgo Common Shares was
C$2.30. On February 28, 1998, there were 22,447,489 shares of Fountain Common
Stock outstanding held of record by 4,177 stockholders.
COMPARATIVE PER SHARE DATA
Set forth below are loss from continuing operations, cash dividends
declared and book value per common share data of Fountain and CanArgo on both
historical and pro forma combined bases and on a per share equivalent pro forma
basis pursuant to the Transaction. Pro forma combined loss from continuing
operations per share and book value per share are derived from the pro forma
combined information presented elsewhere herein, which gives effect to the
Transaction under the purchase accounting method. No cash dividends were
declared by Fountain or CanArgo for the year ended December 31, 1997. The per
share data for the pro forma combined basis is calculated using the outstanding
shares of Fountain Common Stock adjusted to include the shares of CanArgo Common
shares outstanding as of the end of the periods presented. The information set
forth below should be read in conjunction with the respective audited
consolidated financial statements of Fountain and CanArgo included elsewhere in
this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Fountain - Historical
Loss from continuing operations $(1.24)
Cash dividends declared --
Book value 1.19
CanArgo - Historical
Loss from continuing operations $ (.03)
Cash dividends declared --
Book value .54
Pro Forma Combined
Loss from continuing operations (.66)
Cash dividends declared --
Book value 1.10
Equivalent Pro Forma Combined (1)
Loss from continuing operations (1.06)
Cash dividends declared --
Book value 1.76
</TABLE>
- ----------
(1) Equivalent pro forma combined data per share of CanArgo Common shares
equals the pro forma combined numbers of the shares of Fountain common
Stock, based on the Exchange Ratio of 1.6.
28
<PAGE> 40
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data of Fountain for each of the
periods presented below have been derived from the historical audited
consolidated financial statements. The following selected financial data of
CanArgo for the period from inception, July 1, 1997, to December 31, 1997 (which
consolidate the results of NOC) have been derived from the audited consolidated
financial statements of CanArgo. The selected financial data of NOC for the
period ended December 31, 1996 and the six months ended June 30, 1997 have been
derived from the historical financial statements of NOC. CanArgo Energy Inc. has
a 55.9% interest in NOC. The financial data should be read in conjunction with
the separate audited consolidated financial statements and the notes thereto of
Fountain and CanArgo, which are included elsewhere in this Joint Proxy
Statement/Prospectus. See "INDEX TO FINANCIAL STATEMENTS."
CanArgo's financial statements are prepared in accordance with Canadian
GAAP which, as applied to CanArgo, does not differ materially from U.S. GAAP
except as described in the Notes to CanArgo's Consolidated Financial Statements.
NOC's financial statements are prepared in accordance with International GAAP
which, as applied to NOC, does not differ materially from U.S. GAAP.
FOUNTAIN
The following table sets forth certain consolidated financial data of
Fountain for the respective periods presented and should be read in conjunction
with Fountain's consolidated financial statements and the related notes thereto
and Fountain Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
FOUNTAIN
(IN US$1,000 EXCEPT FOR PER SHARE AMOUNTS)
---------------------------------------------------------------------------
TWELVE TEN TWELVE TWELVE FOUR TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/93 8/31/94 8/31/95 8/31/96 12/31/96 12/31/97
-------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenue ........... 190 3 625 35 17 313
Operating loss .......... (1,547) (1,466) (7,882) (5,640) (2,983) (29,090)
Other income (expense) .. 252 (366) 312 (854) 361 1,202
Net loss ................ (1,295) (1,832) (7,600) (6,494) (2,604) (27,683)
Net loss per common
share - basic ......... (0.22) (0.45) (0.91) (0.52) (0.14) (1.24)
Net loss per common
share - diluted ....... (0.22) (0.45) (0.91) (0.52) (0.14) (1.24)
Working capital (deficit) (446) 1,145 4,188 16,925 30,381 13,971
Total assets ............ 4,528 4,944 10,710 32,089 55,375 37,434
Notes payable and
long-term debt ........ 158 163 -- 300 -- --
Stockholders' equity .... 3,707 4,181 9,608 30,505 53,245 26,779
Cash dividends per
common share .......... -- -- -- -- -- --
</TABLE>
CANARGO
The following table sets forth certain consolidated financial data of
CanArgo and certain financial data for NOC for the respective periods presented
under U.S. GAAP and should be read in conjunction with CanArgo's and NOC's
financial statements and the related notes thereto and CanArgo Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are included elsewhere in this Joint Proxy
29
<PAGE> 41
Statement/Prospectus. See "CANARGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
<TABLE>
<CAPTION>
CANARGO
(IN US$1,000 EXCEPT PER SHARE AMOUNTS)
--------------------------------------
SIX MONTHS ENDED DECEMBER 31, 1997
--------------------------------------
<S> <C>
Total revenue 1,347
Net loss (256)
Net loss per common share - basic (0.02)
Net loss per common share - diluted (0.02)
Working capital 1,403
Total assets 9,483
Long-term debt 896
Shareholders' equity 5,684
Cash dividends per common share --
</TABLE>
<TABLE>
<CAPTION>
NOC
(IN US$1,000)
------------------------------------------
PERIOD OCTOBER 24, SIX MONTHS ENDED
1995 TO DECEMBER 31, 1996 JUNE 30, 1997
------------------------- ----------------
<S> <C> <C>
Total revenue 3,075 1,517
Net income (loss) 1,368 (76)
Working capital 1,714 379
Total assets 4,059 5,373
Long-term debt 2,412 1,350
Shareholders' equity 1,372 3,111
</TABLE>
30
<PAGE> 42
PRO FORMA FINANCIAL INFORMATION
FOUNTAIN AND CANARGO
Effective March 4, 1997 various stockholders, who together owned 55.9%
of NOC, contributed their common stock in NOC for common stock of CanArgo Ltd.,
a newly formed corporation formed for the purpose of holding the NOC interests.
There was no change in the individual stockholders effective ownership of NOC as
a result of the formation of CanArgo Ltd. Effective July 1, 1997, the
shareholders of CanArgo Ltd. exchanged their shares for a controlling interest
in Money Works Inc., a company incorporated under the ABCA. Money Works Inc. had
no substantive operations at July 1, 1997. The exchange was accounted for as a
reorganization (a reverse takeover under Canadian GAAP) and not a business
combination. After the exchange with Money Works, Inc., the stockholder group
that formed CanArgo Ltd. owned 82% of the outstanding common stock of Money
Works Inc., and Money Works, Inc. changed its name to CanArgo Energy Inc. The
formation of CanArgo Ltd. and the Money Works, Inc. reorganization are
collectively referred to as the "reorganization" in the accompanying unaudited
condensed combined pro forma financial statements and notes and supplemental
disclosures thereto. See "INFORMATION CONCERNING CANARGO -- History."
The following unaudited pro forma condensed combined balance sheet as of
December 31, 1997 gives effect to the Transaction as if it had occurred on that
date. The following unaudited pro forma condensed combined statement of
operations gives effect to the Transaction as if it had occurred on January 1,
1997. In addition, the unaudited pro forma condensed combined statement of
operations reflects the effect of the reorganization on the CanArgo statement of
operations as if it had occurred on January 1, 1997. The unaudited pro forma
condensed combined financial statements have been derived from and should be
read in connection with the respective audited historical financial statements
of Fountain and CanArgo for the year and the six months, respectively, ended
December 31, 1997 and the financial statements of Ninotsminda for the six months
ended June 30, 1997 included elsewhere in this Joint Proxy Statement/Prospectus
and are presented in US$.
The pro forma adjustments and the resulting unaudited pro forma
condensed combined financial statements were prepared based on available
information and certain assumptions and estimates described in the notes to the
unaudited pro forma condensed combined financial statements. A final
determination of required purchase accounting adjustments including the
allocation of the purchase price to the assets acquired and liabilities assumed
has not been made, and the allocation reflected in the unaudited pro forma
condensed combined financial statements should be considered preliminary.
However, in the opinion of Fountain management, the final allocation will not
have a material impact on the unaudited condensed combined pro forma financial
statements.
The unaudited pro forma condensed combined financial statements do not
purport to represent (i) what Fountain's financial position or results of
operations would have been had the Transaction occurred on the dates indicated
or to project Fountain's financial position or results of operations for any
future period or (ii) what CanArgo's results of operations would have been had
the reorganization occurred on the date indicated or to project CanArgo's
results of operations for any future period. Furthermore, the unaudited pro
forma condensed combined financial statements do not reflect changes which may
occur as the result of activities after the consummation of the Transaction and
the reorganization.
31
<PAGE> 43
FOUNTAIN AND CANARGO
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
ASSETS FOUNTAIN CANARGO ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 14,164,177 $ 1,833,448 $ (1,000,000)(2) $ 14,997,625
Accounts receivable, net -- 514,513 -- 514,513
Restricted cash 9,700,000 -- -- 9,700,000
Other current assets 761,904 74,073 -- 835,977
------------ ------------ ------------ ------------
Total current assets 24,626,081 2,422,034 $ (1,000,000) $ 26,048,115
Property and equipment, net 5,942,273 -- -- 5,942,273
Oil and gas properties, net, full
cost method 1,478,974 7,061,457 15,016,085(2) 23,556,516
Investments in and advances to
oil and gas ventures - net 5,386,707 -- -- 5,386,707
------------ ------------ ------------ ------------
TOTAL ASSETS $ 37,434,035 $ 9,483,491 $ 14,016,085 $ 60,933,611
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and accrued $ 10,654,779 $ 1,018,725 -- $ 11,673,504
liabilities ------------ ------------ ------------ ------------
Total current liabilities 10,654,779 1,018,725 -- 11,673,504
Long-term debt -- 895,500 -- 895,500
Minority interest in subsidiaries -- 1,885,351 -- 1,885,351
------------ ------------ ------------ ------------
TOTAL LIABILITIES 10,654,779 3,799,576 -- 14,454,355
------------ ------------ ------------ ------------
Stockholders' equity:
Preferred Stock
Common Stock 2,244,749 -- 1,994,184(2) 4,238,933
Capital in excess of par value 82,040,156 5,939,742 (5,939,742)(3) --
-- -- 17,705,816(2) 99,745,972
Accumulated deficit (57,505,649) (255,827) 255,827(3) (57,505,649)
------------ ------------ ------------ ------------
Total stockholders' equity 26,779,256 5,683,915 14,016,085 46,479,256
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,434,035 $ 9,483,491 $ 14,016,085 $ 60,933,611
============ ============ ============ ============
</TABLE>
32
<PAGE> 44
FOUNTAIN AND CANARGO
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS
---------------------------- -------------------------------
FOUNTAIN CANARGO REORGANIZATION TRANSACTION PRO FORMA
------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 313,301 $ 1,324,114 $ 1,500,000(1) $ -- $ 3,137,415
------------ ------------ -------------- ------------ ------------
Operating expenses
Lease operating expenses 200,321 790,287 638,200(1) -- 1,628,808
Direct project costs 1,753,166 -- -- -- 1,753,166
General and administrative 3,903,446 386,397 216,400(1) -- 4,506,243
Depreciation and amortization 344,666 555,960 663,000(1) 89,000(4) 1,652,626
Loss from investment in unconsolidated
subsidiaries 3,778,287 -- -- -- 3,778,287
Impairment of oil and gas
ventures 15,735,592 -- -- -- 15,735,592
Impairment of property and
equipment 3,243,997 -- -- -- 3,243,997
Impairment of other assets 444,018 -- -- -- 444,018
------------ ------------ -------------- ------------ ------------
Total operating expenses 29,403,493 1,732,644 1,517,600 89,000 32,742,737
------------ ------------ -------------- ------------ ------------
OPERATING LOSS (29,090,192) (408,530) (17,600) (89,000) (29,605,322)
Other income (expense), net 1,201,861 (11,729) (58,600)(1) -- 1,131,532
Net loss before income tax (27,888,331) (420,259) (76,200) (89,000) (28,473,790)
Net loss before minority
interest (27,888,331) (420,259) (76,200) (89,000) (28,473,790)
Minority interest in loss of sub 205,380 164,432 32,842(1) -- 402,654
------------ ------------ -------------- ------------ ------------
Net loss $(27,682,951) $ (255,827) $ (43,358) $ (89,000) $(28,071,136)
------------ ------------ -------------- ------------ ------------
Net loss per common
share-basic $ (1.24) $ (0.66)(5)
------------ ------------
Net loss per common
share-diluted $ (1.24) $ (0.66)(5)
------------ ------------
Weighted average number of
common shares outstanding 22,413,013 19,941,837(2) 42,354,850(5)
------------ -------------- ------------
Pro forma adjusted(6) $ (2.47) $ (1.33)
------------ ------------
Net loss per share - basic
Net loss per share - diluted $ (2.47) $ (1.33)
------------ ------------
Weighted average number of
common shares outstanding 11,206,507 9,970,918 21,177,425
------------ ------------ ------------
</TABLE>
33
<PAGE> 45
FOUNTAIN AND CANARGO
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AND UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
1. To adjust the historical financial statements of CanArgo to reflect the
operations of NOC for the period from January 1, 1997 to June 30, 1997,
the date the reorganization was completed, as if the reorganization
occurred on January 1, 1997.
2. To reflect the issuance of 19,941,837 shares of Fountain Common Stock
and the assumption of the obligation to issue up to 4,507,023 shares of
Fountain Common Stock pursuant to outstanding CanArgo Options and upon
the exchange of Exchangeable Shares issuable upon the exercise of
CanArgo Purchase Warrants, Compensation Warrants and 1998 Warrants to
effect the business combination, valued at $19,700,000. Total
consideration was determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair market value of common shares issued $18,700,000
Fair market value of options and warrants 1,000,000
Estimated combination expenses 1,000,000
-----------
Total estimated consideration $20,700,000
===========
</TABLE>
The consideration was allocated to the assets acquired and liabilities
assumed as follows:
<TABLE>
<S> <C>
Current assets $2,422,034
Accounts payable and accrued liabilities (1,018,725)
Oil and gas properties 22,077,542(a)
Other liabilities (895,500)
Minority interest (1,885,351)
-----------
Total estimated consideration $20,700,000
===========
</TABLE>
(a)Includes $11,077,542 of properties included in the full cost pool
and $11,000,000 of unevaluated properties.
3. To reflect the elimination of the historical capital accounts of
CanArgo.
4. To reflect additional estimated depreciation, depletion and amortization
of oil and gas properties as a result of the allocation of the purchase
price thereto as if the purchase of such oil and gas properties had
occurred on January 1, 1997. The additional depreciation, depletion and
amortization amounts were calculated on the units-of-production method
based on pro forma capitalized costs and estimates of pro forma proved
developed and undeveloped reserves. For the year ended December 31,
1997, the actual depreciation, depletion and amortization for Fountain
and CanArgo was $13.15 and $4.98 per barrel produced, respectively. The
pro forma depreciation, depletion and amortization was approximately
$11.86 per barrel produced for the year ended December 31, 1997.
5. To reflect pro forma basic and diluted loss per share. Pro forma
earnings per share do not reflect 4,507,023 shares of Fountain Common
Stock issuable after the consummation of the Transaction upon exercise
of options to purchase shares of Fountain Common Stock pursuant to
outstanding CanArgo Options and the exchange of Exchangeable Shares
issuable upon the exercise of CanArgo Purchase Warrants, Compensation
Warrants and 1998 Warrants, because they are antidilutive.
6. To reflect retroactively the 1 for 2 reverse stock split to occur upon
consummation of the Transaction and approval of the stockholders of
Fountain.
34
<PAGE> 46
SUPPLEMENTARY UNAUDITED PRO FORMA
COMBINED OIL AND GAS DISCLOSURES
The following supplementary unaudited pro forma combined oil reserve
quantity information and standardized measure of discounted future cash flows
and changes therein gives effect to the Transaction and the reorganization as if
each had occurred on January 1, 1997. The supplemental unaudited pro forma
combined oil information was derived from and should be read in connection with
the separate supplementary disclosures of oil information of Fountain and
CanArgo included elsewhere in this Joint Proxy Statement/Prospectus.
Users of this information should be aware that the process of estimating
quantities of proved and proved developed crude oil reserves is very complex,
requiring significant subjective decisions in the evaluation of all available
geological, engineering and economic data for each reservoir. The data for a
given reservoir may also change substantially over time as a result of numerous
factors including, but not limited to, additional development activity, evolving
production history and continual reassessment of the viability of production
under varying economic conditions. Consequently, material revisions to existing
reserve estimates occur from time to time. Although every reasonable effort is
made to ensure that reserve estimates reported represent the most accurate
assessments possible, the significance of the subjective decisions required and
variances in available data for various reservoirs make these estimates
generally less precise than other estimates presented in connection with
financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs with existing
equipment and under existing economic and operating conditions.
Proved developed reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and under existing
economic and operating conditions.
Proved undeveloped reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
No major discovery or other favorable or adverse event subsequent to
December 31, 1997 is believed to have caused a material change in the estimates
of proved or proved developed reserves as of that date.
The supplementary unaudited pro forma combined oil and gas information
does not purport to represent what such information would have been had the
Transaction and the reorganization actually occurred on January 1, 1997.
35
<PAGE> 47
FOUNTAIN AND CANARGO
SUPPLEMENTARY PRO FORMA COMBINED RESERVE QUANTITY INFORMATION
DECEMBER 31, 1997
(Oil in Mbls)
<TABLE>
<CAPTION>
Proved developed and undeveloped REPUBLIC OF
reserves: CANADA GEORGIA TOTAL PRO FORMA
--- -------- ------
<S> <C> <C> <C>
Beginning of year -- -- --
Revision of estimates (33) -- (33)
Improved recovery -- -- --
Purchase of minerals in place 116 5,675 5,791
Extensions and discoveries 267 5,452 5,719
Production (16) (112) (128)
--- -------- ------
End of year 334 11,015(1) 11,349
=== ======== ======
Proved developed reserves
Beginning of year -- -- --
End of year 155 1,929(1) 2,084
=== ======== ======
</TABLE>
(1) 44.1% of these reserves are attributable to the minority interest in
NOC.
36
<PAGE> 48
FOUNTAIN AND CANARGO
SUPPLEMENTARY PRO FORMA COMBINED STANDARDIZED MEASURE
OF DISCOUNTED FUTURE CASH FLOWS AND CHANGES THEREIN
RELATED TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
(in thousands of US$) REPUBLIC PRO FORMA
CANADA OF GEORGIA TOTAL
------ -------- --------
<S> <C> <C> <C>
Future cash $5,469 $113,567 $119,036
Future production and development costs 2,930 73,664 76,594
Future income tax expenses(1) -- -- --
------ -------- --------
Future net cash flows 2,539 39,903 42,442
10% annual discount for estimated
timing of cash flows 1,296 14,255 15,551
------ -------- --------
Standardized measure of discounted
future net cash flows $1,243 $25,648 $26,891
====== ======== ========
</TABLE>
(1) No future income tax expense was provided as such taxes will be offset
with net operating loss carryforwards on a historical and pro forma
basis.
The following are the principal sources of change in the pro forma
standardized measure of discounted future net cash flows for the period from
January 1, 1997 to December 31, 1997:
(in thousands of US$)
<TABLE>
<CAPTION>
REPUBLIC PRO FORMA
CANADA OF GEORGIA TOTAL
-------- -------- --------
<S> <C> <C> <C>
January 1, 1997 -- $ 13,279 $ 13,279
Purchase of oil in place $ 551 -- 551
Sales of oil and gas net of production
costs net changes in prices and costs (113) (862) (975)
Extensions and discoveries and
improved recovery, net of related costs 745 18,775 19,520
Development costs incurred -- (5,544) (5,544)
Revision of previous estimates (141) -- (141)
Accretion of discount 55 -- 55
Timing and other 146 -- 146
-------- -------- --------
December 31, 1997 $ 1,243 $ 25,648 $ 26,891
======== ======== ========
</TABLE>
37
<PAGE> 49
THE MEETINGS--GENERAL PROXY INFORMATION
FOUNTAIN
The accompanying Fountain proxy is solicited by the Fountain Board for
use in connection with the Fountain Stockholders Meeting to be held on ________,
1998, and at any and all adjournments or postponements thereof.
The accompanying proxy, if properly executed and returned, will be voted
as specified by the stockholder. If no vote is indicated, the proxy, if properly
executed and returned, will be voted at the Fountain Stockholders Meeting:
(i) for the approval of the Fountain Stock Issuance Proposal; and
(ii) for the approval of each of the Fountain Charter Changes.
A Fountain stockholder may revoke his proxy at any time prior to the
voting of shares by voting in person at the Fountain Stockholders Meeting or by
filing with the Secretary of Fountain a duly executed proxy bearing a later date
or an instrument revoking the proxy.
Fountain will pay the costs of solicitation of proxies from its
stockholders. In addition to soliciting proxies by mail, Fountain's officers,
directors and other regular employees may solicit proxies personally by
telephone or by other appropriate means without additional compensation.
Fountain will reimburse customary and reasonable out-of-pocket expenses incurred
by banks, brokers, fiduciaries and other custodians and nominees in forwarding
proxy soliciting material to their principals. Fountain has appointed Orkla on a
best efforts basis to assist in communication with certain Norwegian
shareholders regarding solicitation of proxies. Fountain will pay the cost of
such solicitation.
Only stockholders of record of Fountain Common Stock as of the close of
business on the Fountain Record Date, May 22, 1998, will be entitled to vote at
the Fountain Stockholders Meeting. On the Fountain Record Date, there were
outstanding _____________ shares of Fountain Common Stock, which constituted all
of the outstanding voting securities of Fountain, each of which is entitled to
one vote per share. A majority of the outstanding shares, present in person or
by proxy, constitutes a quorum at the Fountain Stockholders Meeting. Shares
represented by proxies which reflect abstentions on particular proposals and
shares referred to as "broker non-votes" (i.e., shares represented by proxies
given by brokers or nominees as to which instructions have not been received
from the beneficial owner and which the broker or nominee does not have the
discretionary power to vote or elects not to vote on a particular proposal) will
be counted as present for purposes of determining the existence of a quorum but
will not be counted as entitled to vote.
The approval of the Fountain Stock Issuance Proposal requires the
affirmative vote of a majority of the shares of Fountain Common Stock present in
person or by proxy at the Fountain Stockholders Meeting and entitled to vote.
Abstentions will have the effect of a vote against this proposal, and broker
non-votes will have no effect on the outcome of the vote.
The approval of each of the Fountain Charter Changes requires the
affirmative vote of the holders of a majority of the shares of Fountain Common
Stock outstanding on the Fountain Record Date. Abstentions and broker non-votes,
as well as failures to vote, will have the effect of a vote against such
proposals.
CANARGO
This Joint Proxy Statement/Prospectus accompanies the Notice of the
CanArgo Shareholders Meeting to be held on __________________, and IS FURNISHED
IN CONNECTION WITH THE SOLICITATION BY THE MANAGEMENT OF CANARGO OF PROXIES FOR
USE AT THE MEETING. The solicitation will be primarily by mail but proxies may
also be solicited by regular employees of CanArgo. CanArgo will provide proxy
materials to brokers, custodians, nominees and fiduciaries and request that such
materials be promptly forwarded to the beneficial owners of CanArgo Common
Shares registered in the names of such brokers, custodians, nominees and
fiduciaries. CanArgo will pay the cost of such solicitation. In accordance with
the CanArgo Bylaws, two shareholders of CanArgo present in person or by proxy at
the CanArgo Shareholders Meeting will constitute a quorum for such meeting.
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The persons named in the form of proxy mailed to CanArgo shareholders
are officers of CanArgo. Shares represented by properly executed CanArgo proxies
in the enclosed form deposited with Montreal Trust Company of Canada not less
than 48 hours prior to the time of the CanArgo Shareholders Meeting or any
adjournment thereof, or received by the Chair or the Secretary of CanArgo on the
day of the CanArgo Shareholders Meeting will be voted for or against or withheld
from voting in accordance with the instructions of the shareholder on the proxy
on any ballot that may be called for. In the absence of any instructions on the
proxy, such shares will be voted at the CanArgo Shareholders Meeting:
(i) FOR THE PASSAGE OF THE CONTINUANCE RESOLUTION;
(ii) FOR THE PASSAGE OF THE ARRANGEMENT RESOLUTION;
(iii) FOR THE ELECTION AS DIRECTORS OF CANARGO OF THE FIVE PERSONS
LISTED UNDER THE HEADING "ADDITIONAL MATTERS FOR CONSIDERATION
OF CANARGO SHAREHOLDERS--ELECTION OF DIRECTORS"; AND
(iv) FOR THE APPOINTMENT OF ERNST & YOUNG AS INDEPENDENT AUDITORS OF
CANARGO AND TO AUTHORIZE THE DIRECTORS TO FIX THEIR
REMUNERATION.
The CanArgo form of proxy confers discretionary authority with respect
to amendments or variations to the matters identified in the Notice of the
CanArgo Shareholders Meeting and other matters that may properly come before the
CanArgo Shareholders Meeting.
A CanArgo shareholder who has given a proxy may revoke it by an
instrument in writing, including another proxy, executed by the shareholder or
by the shareholder's attorney authorized in writing and deposited at the
principal executive office of CanArgo at 1580 Guinness House, 727 7th Avenue
S.W., Calgary, Alberta T2P 0Z5, prior to the day of the CanArgo Shareholders
Meeting, or with the Chairman of the meeting.
At _____________, 1998 there were ______________ outstanding CanArgo
Common Shares entitled to be voted at the CanArgo Shareholders Meeting. Each
shareholder is entitled to one vote on all matters to come before the CanArgo
Shareholders Meeting for each CanArgo Common Share registered in the
shareholder's name in the list of holders of CanArgo Common Shares prepared as
of the CanArgo Record Date, unless a person has transferred shares after such
date and the new holder of such shares establishes proper ownership and makes a
request not later than ten days before the CanArgo Shareholders Meeting to the
Corporate Secretary of CanArgo to be included in the list of holders of CanArgo
Common Shares eligible to vote at the CanArgo Shareholders Meeting.
Each person who, to the knowledge of the directors or officers of
CanArgo, beneficially owns or exercises control or direction over more than 10%
of the outstanding CanArgo Common Shares, is described under "Information
Concerning CanArgo -- Principal Shareholders."
The Continuance Resolution and the Arrangement Resolution must be
approved by the affirmative vote of not less than two-thirds of the votes cast
in respect of that resolution at the CanArgo Shareholders Meeting. The directors
of CanArgo must be elected by a majority of the votes cast thereon at the
CanArgo Shareholders Meeting. The appointment of Ernst & Young as independent
auditors of CanArgo at a remuneration to be fixed by the CanArgo Board must be
approved by the affirmative vote of a majority of the votes cast thereon at the
CanArgo Shareholders Meeting. Abstentions and broker non-votes will have no
effect on the outcome of any of the matters as they will not count for the
purposes of votes cast for any matters to be voted upon at the CanArgo
Shareholders Meeting.
THE TRANSACTION
GENERAL
The terms of the Transaction are set forth in the Combination Agreement
and in the Plan of Arrangement which is to be submitted for approval by the
Court. The following descriptions of the Combination Agreement and the Plan of
Arrangement are qualified by reference to the complete text of such documents,
which are attached hereto as Annex C and Annex F, respectively, and which are
incorporated by reference herein.
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The Fountain Board and the CanArgo Board believe that the Transaction is
in the best interest of their respective companies because the combination of
the two companies will allow them to combine their individual resources, assets
and expertise, to allocate their resources more effectively among a broader
portfolio of projects and to realize economies through the centralization of
certain functions. As part of the Transaction, CanArgo will become a subsidiary
of Fountain (and will be renamed CanArgo Oil and Gas Inc.), and Fountain,
subject to the approval of Fountain stockholders, will be renamed CanArgo Energy
Corporation.
In the Transaction, each CanArgo Common Share will be exchanged for 1.6
shares (subject to adjustment for changes in the capitalization of Fountain) of
a new class of Exchangeable Share of CanArgo. The Exchangeable Shares will be
exchangeable at any time for Fountain Common Stock on a one-for-one basis at the
option of the holder, and the Exchangeable Shares will also carry associated
rights to direct votes at meetings of stockholders of Fountain commensurate with
the voting rights of the shares of Fountain Common Stock for which they may be
exchanged. Immediately after the Transaction, the shareholders of CanArgo will
have the right to acquire approximately 47% of the shares of Fountain Common
Stock after giving effect to the exchange of all Exchangeable Shares. The
Exchangeable Share structure is designed to provide an opportunity for Canadian
shareholders of CanArgo to achieve tax deferral in certain circumstances. This
structure also requires that CanArgo be continued under the OBCA and that the
Plan of Arrangement be approved by the Court.
Pursuant to the Combination Agreement, the Transaction cannot be
completed unless, among other things,
(i) the Fountain stockholders approve the Fountain Stock Issuance
Proposal, and
(ii) the CanArgo shareholders approve the Continuance Resolution and
the Arrangement Resolution.
In addition, to facilitate the Transaction as contemplated by the Combination
Agreement, Fountain is seeking stockholder approval of the Fountain Charter
Changes. Such approval, however, is not a condition to the consummation of the
Transaction.
BACKGROUND OF THE TRANSACTION
In the summer of 1997, Fountain began to consider a variety of
transactions that might assist Fountain in financing and operating its oil and
gas ventures in 1998 and beyond. Among the transactions being considered at that
time were farm-outs of portions of Fountain's interests in various oil and gas
ventures and direct equity investments in Fountain. In order to advance such a
transaction or transactions, Fountain sought the assistance of investment
bankers, and on October 12, 1997, Fountain formally engaged Orkla and CIBC
Oppenheimer to assist Fountain in exploring and ultimately implementing one or
more strategic alternatives.
The disappointing results from the initial development activities at the
Lelyaky Field in the Ukraine, which were recognized in October 1997, combined
with a sharp decline in the market price of Fountain Common Stock, caused
Fountain and its advisors to conclude that substantial transactions with
Farm-Out Partners or sales of Fountain equity securities were unlikely to occur
and that the form of the strategic alternative on which they should concentrate
efforts was a merger, acquisition or other form of business combination that
would provide Fountain, should it be the surviving entity, with new or
additional senior management. In their roles as financial advisors to Fountain,
CIBC Oppenheimer and Orkla identified and then contacted approximately 60
companies to ascertain their potential interest in Fountain. In general, those
that expressed an interest were provided with an information package regarding
Fountain that included an executive summary of a confidential memorandum that
had been prepared on Fountain's behalf, recent public filings and a
confidentiality agreement. Those that executed the confidentiality agreement
were provided with the confidential memorandum and access to detailed
information regarding Fountain's projects. Ultimately, five companies, including
CanArgo, engaged in a two-step process in which they first submitted an
indication of interest and then, after engaging in direct discussions with
Fountain officers, submitted a final transaction proposal to be considered by
the Fountain Board. Two other companies also submitted proposals outside of the
two-step process.
On November 7, 1997, after reading an article in a Norwegian newspaper
about Fountain seeking a strategic alternative, Peder Paus, a Norwegian
shareholder of CanArgo, approached representatives of Orkla and raised with them
the possibility of a combination involving CanArgo. He made this approach
without the authorization or prior knowledge of CanArgo management. Mr. Paus met
in Oslo, Norway, on November 7, 1997
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with Messrs. Inge Hansen and Thor Andre Talhaug of Orkla, and the meeting
resulted in an understanding that the possibility of a Fountain-CanArgo
combination was interesting and should be pursued. At a second meeting on
November 11, 1997, representatives of Orkla provided to Mr. Paus information
with respect to Fountain, and Mr. Paus provided information with respect to
CanArgo. At this meeting the representatives of Orkla and Mr. Paus concluded
that Nils Trulsvik, Fountain's Chief Executive Officer, who was to be in
Calgary, should meet with Michael Binnion, CanArgo's Chief Financial Officer, on
November 19, 1997 in Calgary. CanArgo was first mentioned to the Fountain Board
at a meeting held on November 17, 1997, where it was reported that Orkla had
held discussions with CanArgo regarding a possible business combination
involving CanArgo and Fountain. On November 19, 1997, preliminary discussions
were held in Calgary among Mr. Trulsvik, Mr. Binnion and John McLeod, Technical
Director and a director of CanArgo. They exchanged information regarding the two
companies. On November 24 and 25, 1997, a meeting was held in London, England
among David Robson, Chairman and Chief Executive Officer of CanArgo, Mr.
Binnion, Russell Hammond, a director of CanArgo, Mr. Paus, Mr. Trulsvik, Einar
Bandlien, Fountain's Executive Vice President for Business Development, Rune
Falstad, Fountain's Vice President and Acting Chief Financial Officer, and Mr.
Talhaug of Orkla. The officers of CanArgo and Fountain presented information
regarding the operations and financial condition of their respective companies,
and preliminary discussions were held regarding the basis on which CanArgo and
Fountain might be combined. Confidentiality agreements regarding information to
be exchanged by Fountain and CanArgo were executed. The results of this meeting
between Fountain and CanArgo were reported to the Fountain Board at a meeting
held on December 1, 1997.
During the period from December 3 through December 5, 1997, Messrs.
Robson, Binnion and McLeod met in Oslo and Asker, Norway with representatives of
Fountain, including Messrs. Trulsvik, Bandlien and Falstad, as well as Mr.
Talhaug. During this visit, the CanArgo representatives reviewed detailed
information regarding the principal projects in which Fountain was involved.
Discussions of a possible business combination during these meetings produced a
general understanding that, should the condition of both companies be generally
as represented and a combination of Fountain and CanArgo occur, approximately
half of the equity in a combined company would be attributed to each of the
constituent companies. At the conclusion of the meeting, it was decided that a
representative of Fountain should accompany CanArgo officials to inspect the
Ninotsminda Field in Georgia. The results of this series of meetings were
reported to the Fountain Board at a meeting held on December 8, 1997.
Mr. Trulsvik of Fountain and Mr. Talhaug of Orkla accompanied Dr. Robson
and Tamara Smales, a Vice President of CanArgo, on a visit to Georgia from
December 12 through December 18, 1997. During that visit, Mr. Trulsvik inspected
the Ninotsminda Field, discussed operations there with officials responsible for
such operations including Niko Tevzadze, the General Director of GBOC, and met
with officials of the government of Georgia to assess CanArgo's standing in that
country. During this trip, Dr. Robson and Mr. Trulsvik had an opportunity to
discuss various aspects of the proposed business combination and the proposed
operation of a combined company after consummation of a transaction. Upon his
return from Georgia, Mr. Trulsvik reported to the Fountain Board on his
impressions from this visit at a meeting held on December 18, 1997.
Further discussions between Dr. Robson and Mr. Trulsvik were held by
telephone between December 20 and December 24, 1997. On or about December 24,
1997, Fountain provided to CanArgo a draft of a letter of intent regarding a
business combination involving the two companies. In that draft, Fountain
proposed an exchange ratio of 1.48 shares of Fountain Common Stock for each
CanArgo Common Share. At that time, CanArgo was seeking a significantly higher
ratio of shares of Fountain Common Stock per CanArgo Common Share.
Contemporaneously, Fountain presented a draft letter of intent to another
potential partner and advised both CanArgo and that other potential partner that
Fountain was not prepared at that time to execute a letter of intent. The
Fountain Board met on December 30, 1997 to discuss the status of negotiations
with CanArgo and other potential partners.
At the suggestion of CIBC Oppenheimer, Fountain's counsel prepared a
form of business combination agreement in early January 1998 that could be used
as a basis for an agreement with any of various potential partners with which
discussions were then being held. A copy of this form of agreement was provided
to CanArgo on or about January 6, 1998 and to CanArgo's counsel on or about
January 9, 1998.
During the first two weeks of January 1998, a series of telephone
discussions took place among Messrs. Trulsvik, Bandlien, Falstad, Robson,
Binnion, McLeod and Talhaug regarding the transaction structure, including the
exchange ratio of shares of Fountain Common Stock for CanArgo Common Shares, and
issues relating to the
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anticipated operations of a combined entity, including organizational matters
and project prioritization. On or about January 13, 1998, CanArgo submitted to
Fountain through Orkla a proposal for a business combination which included an
Exchange Ratio of 1.6:1 (subject to adjustment for changes in the capitalization
of Fountain) (the "Offer").
The Fountain Board met on January 15, 1998 with representatives of CIBC
Oppenheimer and Orkla to consider various proposals regarding business
combinations involving Fountain. CIBC Oppenheimer and Orkla provided the
Fountain Board with both written and oral presentations regarding the proposals.
The Fountain Board authorized management on January 15, 1998 to negotiate a
definitive agreement, which would be subject to the approval of the Fountain
Board, with CanArgo on the basis of the proposal from CanArgo that had been
presented to the Fountain Board. Fountain management was also authorized to
enter into a non-binding letter of intent with CanArgo if a mutually acceptable
draft of a definitive agreement was developed.
On or about January 17, 1998, CanArgo's counsel provided to Fountain's
counsel the first draft of the Combination Agreement. Mr. Trulsvik and
Fountain's counsel then met in Toronto, Ontario on January 20 through January
22, 1998 with Messrs. Robson, Binnion and McLeod, as well as CanArgo's counsel,
to negotiate the terms of the Combination Agreement and ancillary documents and
to develop a business plan for Fountain and CanArgo for the period leading up to
a consummation of the Transaction and for the initial period of combined
operations.
Counsel continued to work on the documents between January 23 and
January 27, 1998. Messrs. Robson, Binnion and McLeod traveled to Asker, Norway
on January 26, 1998 to meet with Messrs. Trulsvik, Bandlien and Falstad and
other Fountain representatives. On January 27, 1998, the managements of CanArgo
and Fountain reviewed the draft Combination Agreement, and then Dr. Robson, on
behalf of CanArgo, and Mr. Trulsvik, on behalf of Fountain, signed a non-binding
letter of intent pursuant to which CanArgo and Fountain expressed their intent
to execute and deliver the Combination Agreement, subject to the approval of the
companies' respective Boards of Directors. Fountain and CanArgo publicly
announced the execution of the letter of intent on January 27, 1998.
On February 2, 1998, the Fountain Board met in London, England, and the
CanArgo Board held a telephonic meeting to consider the Combination Agreement
and the transactions it contemplates. Both the Fountain Board and the CanArgo
Board authorized the execution and delivery of the Combination Agreement and
resolved to recommend to the shareholders of the respective corporations the
approval of the transactions contemplated by the Combination Agreement. The
Combination Agreement in its original form was then executed by Fountain and
CanArgo on February 2, 1998. The Combination Agreement was amended and restated
on March 16, 1998 to revise the Combination Agreement in ways that do not
materially alter the Transaction.
REASONS FOR THE TRANSACTION
Fountain's Reasons for the Transaction
At a special meeting held on February 2, 1998, the Fountain Board
unanimously determined that the Combination Agreement and the transactions
contemplated thereby, including the proposed amendments to the Fountain
Certificate, are fair to, and in the best interest of, the stockholders of
Fountain. At that meeting, the Fountain Board also decided unanimously to
recommend to the holders of Fountain Common Stock that such holders approve the
Fountain Stock Issuance Proposal and the Fountain Charter Changes.
In making its determination to approve the Combination Agreement and
recommend stockholder approval of the Fountain Stock Issuance Proposal and the
Fountain Charter Changes, the Fountain Board considered over the course of
several meetings a number of factors relating to the Transaction. These factors
were considered both on an absolute basis and on a comparative basis in relation
to the proposals from six other companies that presented proposals regarding a
transaction with Fountain and indications from various other companies that
expressed an interest in such a transaction but ultimately did not present a
proposal. The six other companies presenting proposals included four oil and gas
companies with international production, one company with an international oil
and gas concession where production had not yet begun, and one company not
directly involved with oil and gas production that expressed interest in making
a substantial equity investment in Fountain. The factors considered included,
without limitation, the following:
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1. CanArgo appeared to be significantly further advanced in its analysis
of Fountain than any other company submitting a proposal. Indeed, CanArgo was
the only company submitting a proposal that did not appear to have a substantial
contingency attached to the proposal relating to a review or further review of
Fountain and its oil and gas properties and ventures. As a result, the Fountain
Board did not consider any of the other offers to be as firm as the CanArgo
offer, in terms of either the consideration being proposed or the commitment to
proceed with the transaction being proposed. The Fountain Board believed that it
was then important to proceed with a transaction in an expeditious fashion.
CanArgo's apparent readiness, willingness and ability to move expeditiously
towards a, definitive commitment and the consummation of the Transaction it was
proposing placed its proposal in a favorable competitive position.
2. The proposed business combination with CanArgo appeared likely to
produce at least as much immediate shareholder value as any other transaction
proposed to the Fountain Board. In this regard, the Fountain Board considered
the analyses presented to the Fountain Board by CIBC Oppenheimer and Orkla at
its meeting held on January 15, 1998. These analyses included an evaluation of
the strengths and weaknesses of the various proposals, including CanArgo's
proposal to engage in the Transaction, on the basis of various criteria, such as
liquidity, reserve estimates, quality of reserve reports, existing production
and cash flow, management and financing requirements.
At that meeting, Orkla advised the Fountain Board orally that, based
upon and subject to certain factors and assumptions made available to Orkla on
both companies at that point in time, it was Orkla's preliminary conclusion that
the Exchange Ratio proposed by CanArgo seemed fair to Fountain as of such date
from a financial point of view. At the same meeting, CIBC Oppenheimer advised
the Fountain Board that further inquiries and examinations regarding CanArgo
were required before it would be in a position to render an opinion regarding
the fairness of the Exchange Ratio to Fountain from a financial point of view.
CIBC Oppenheimer and Orkla subsequently provided to the Fountain Board their
respective written opinions, dated March 13, 1998 and March 26, 1998,
respectively, to the effect that, based upon and subject to certain factors and
assumptions stated therein, the Exchange Ratio, together with certain other
aspects of the Transaction, was fair to Fountain as of the respective dates of
such opinions from a financial point of view. The full texts of the CIBC
Oppenheimer and Orkla written opinions, which set forth the assumptions made,
factors considered and limitations on the reviews undertaken, are attached as
Annex H and Annex I, respectively. Holders of Fountain Common Stock are urged to
read the opinions of CIBC Oppenheimer and Orkla carefully in their entirety. See
"-- Opinions of Financial Advisors -- Opinion of CIBC Oppenheimer," "-- Opinions
of Financial Advisors -- Opinion of Orkla," and "-- Background of the
Transaction."
3. CanArgo had established commercial production and positive operating
cash flow from its Ninotsminda Field. The Fountain Board considered these to be
two very important achievements in terms of restoring financial community
support for Fountain, and Fountain had thus far been unable to achieve either in
regard to its significant projects. Four of the other companies submitting
proposals had also established commercial production, and most of them had
positive cash flow from operations. A fifth suitor had not yet begun production,
and the sixth was proposing an equity investment in Fountain.
4. Based on discussions with its financial advisors, the Fountain Board
believed that implementation of the proposals presented by CanArgo and by one
other company would produce surviving entities that would have reasonably good
prospects for obtaining financing in the capital markets not available to
Fountain alone. Such discussions did not produce a similar confidence level with
respect to financing prospects following implementation of any of the other five
proposals that were submitted.
5. The resources of a combined CanArgo and Fountain appeared sufficient
to enable the combined company to proceed with a reasonable business plan for a
considerable period of time in the absence of additional financing. A similar
situation appeared to obtain with respect to only one of the six other
proposals.
6. CanArgo's chief executive had extensive experience working in the
Eastern European oil and gas industry. CanArgo's experience in successfully
managing a project in the same general geographical region and subject to
similar political and economic influences as the principal projects Fountain has
considered and pursued suggested that CanArgo's management would be in a
position to evaluate effectively and, to the extent deemed
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appropriate, develop projects remaining in Fountain's portfolio. The management
of no other company submitting a proposal seemed to present comparable Eastern
European experience, although the management of other suitors had demonstrated
capability in the international oil and gas industry. The Fountain Board did
consider that members of CanArgo's senior management had been associated with
companies that had well publicized problems, although the problems may not have
been attributable to or even have occurred during the tenure of those managers.
7. The business strategies of CanArgo and Fountain appeared to be quite
similar, suggesting a high potential for the successful integration of the two
companies. No other company presenting a proposal appeared to offer such
compatibility.
8. The Transaction also appeared to offer a higher degree of volatility
for those stockholders who choose to retain their shares of Fountain Common
Stock than the most attractive of the other transactions potentially available
to Fountain. The Fountain Board viewed a heightened potential for appreciation
or depreciation in value as consistent with its perception, and that of
Fountain's executive officers and some of Fountain's advisors, that a
substantial group of Fountain's stockholders would favor a surviving entity that
would provide Fountain stockholders with the potential for regaining some or all
of the market value lost during 1997, even if retention of Fountain Common Stock
in an effort to regain lost value also entailed a heightened risk of additional
loss.
9. In evaluating the oil and gas reserves claimed by the various
companies presenting proposals, the Fountain Board considered the fact that some
of the companies submitting proposals presented reserve reports from large,
internationally respected petroleum engineering firms, while the reports on the
reserves of others, including CanArgo, were prepared by smaller firms whose
reputations were less widespread. It also took into consideration the extent to
which the reserves claimed by the various companies were proved, as opposed to
probable or possible. Some of the other companies presenting proposals had a
greater shares of total reserves, as presented on a discounted basis, in the
form of proved reserves than did CanArgo.
Although the Fountain Board did not assign relative weights to the above
factors, the Fountain Board did place paramount importance on the generation of
value to Fountain's stockholders. The Fountain Board viewed its position and
recommendations as being based on the totality of the information presented to
and considered by it.
It is presently expected that, if the Arrangement and the Transaction
are not consummated, the Fountain Board will consider at least the following
options: (i) seek to enter into another transaction involving a business
combination; (ii) seek to employ senior management personnel having the support
of the financial community and the ability to raise equity or debt financing;
(iii) proceed with a business plan to develop assets, such as the Sylvan Lake
project, indicating the potential for positive cash flow, seek a Farm-Out
Partner for the Stynawske Field project or other properties and, when and if
successful in associating a Farm-Out Partner, implement the initial phase of the
Stynawske Field project; and (iv) the liquidation of Fountain. No assurance can
be given that Fountain would be successful in implementing any of the options
other than liquidation.
CanArgo's Reasons for the Transaction
At a special meeting held on February 2, 1998, the CanArgo Board
unanimously determined that the Combination Agreement and the transactions
contemplated thereby, including the Continuance and the Arrangement, are fair to
and in the best interests of the shareholders of CanArgo. At that meeting, the
CanArgo Board determined to recommend to the shareholders of CanArgo that such
shareholders approve the Continuance Resolution and the Arrangement Resolution.
In reaching its conclusion to approve the Combination Agreement and
recommend shareholder approval of the Transaction, the CanArgo Board considered
a number of factors including, without limitation, the following:
1. CanArgo has acquired proven expertise in the development of projects
in the Commonwealth of Independent States (the "CIS") and will be in a position
to add value to certain of Fountain's projects.
2. The similarities in the business strategies of CanArgo and Fountain
suggest a high potential for the successful integration of the two companies.
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3. The human, cash and other resources available to the combined
operations of CanArgo and Fountain will facilitate the development of both
companies' projects thereby making the proposed business combination a better
alternative for CanArgo than proceeding alone and attempting to access the
capital markets.
4. The shares of Fountain have historically had more liquidity than the
shares of CanArgo.
5. The following disadvantages were considered by the CanArgo Board:
(a) The interests of shareholders of CanArgo in CanArgo's
projects will be subject to substantial dilution upon completion of the
Transaction.
(b) Fountain is subject to certain contingent liabilities,
including legal proceedings, which could have a material adverse effect on the
assets of Fountain.
(c) Fountain has significant operating expenses that do not
generate substantial revenue.
(d) Significant management efforts will be required to ensure
that Fountain's expenditures are reduced and to review the priorities for the
development of Fountain's current projects in a way that is more consistent with
its current resources.
The CanArgo Board did not assign relative weights to the above factors.
Rather, the CanArgo Board based its recommendation on the totality of the
information presented to and considered by it.
It is presently expected that, if the Arrangement and the Transaction
are not consummated, the CanArgo Board will consider alternate sources of
funding and the possible acquisition of additional exploration properties in the
CIS.
BOARD RECOMMENDATIONS
THE FOUNTAIN BOARD BELIEVES THAT THE TRANSACTION IS FAIR TO AND IN THE
BEST INTERESTS OF FOUNTAIN AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY
RECOMMENDS THAT FOUNTAIN STOCKHOLDERS VOTE IN FAVOR OF APPROVAL OF THE FOUNTAIN
STOCK ISSUANCE PROPOSAL AND THE FOUNTAIN CHARTER CHANGES.
THE CANARGO BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS FAIR TO
AND IN THE BEST INTERESTS OF CANARGO AND ITS SHAREHOLDERS AND THEREFORE
UNANIMOUSLY RECOMMENDS THAT CANARGO SHAREHOLDERS VOTE IN FAVOR OF PASSAGE OF THE
CONTINUANCE RESOLUTION AND THE ARRANGEMENT RESOLUTION.
OPINIONS OF FINANCIAL ADVISORS
Opinion of CIBC Oppenheimer
CIBC Oppenheimer was retained by Fountain to act as financial advisor in
connection with the Transaction. In connection with such engagement, Fountain
requested that CIBC Oppenheimer render its opinion as to the fairness, from a
financial point of view, to Fountain of the Offer (as defined in CIBC
Oppenheimer's opinion which is attached to this Joint Proxy Statement/Prospectus
as Annex H).
On March 13, 1998, a meeting of the Fountain Board was reconvened to
receive and consider an oral opinion delivered by CIBC Oppenheimer via
telephonic conference call (subsequently confirmed by delivery of a written
opinion dated as of such date) (the "CIBC Oppenheimer Opinion") to the Fountain
Board to the effect that, as of the date of such opinion, and subject to certain
assumptions, factors and limitations set forth in such written opinion, the
Offer was fair, from a financial point of view, to Fountain.
THE FULL TEXT OF THE CIBC OPPENHEIMER OPINION IS ATTACHED AS ANNEX H TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
FOUNTAIN STOCKHOLDERS ARE URGED TO READ THE CIBC OPPENHEIMER OPINION CAREFULLY
AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS
CONSIDERED, THE ASSUMPTIONS AND QUALIFICATIONS MADE BY CIBC OPPENHEIMER IN
RENDERING ITS OPINION AND OTHER FACTORS RELATING TO CIBC OPPENHEIMER'S
ENGAGEMENT BY THE FOUNTAIN BOARD. THE CIBC OPPENHEIMER OPINION, WHICH WAS
DIRECTED TO THE FOUNTAIN BOARD, RELATES ONLY TO THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, OF THE OFFER TO FOUNTAIN, DOES NOT ADDRESS ANY OTHER ASPECT OF
THE TRANSACTION OR
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RELATED TRANSACTIONS, DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DOCUMENTS
PURSUANT TO WHICH FOUNTAIN WILL ENGAGE IN THE TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF FOUNTAIN AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE ON THE APPROVAL OF THE FOUNTAIN STOCK ISSUANCE PROPOSAL
OR THE FOUNTAIN CHARTER CHANGES. THE SUMMARY OF THE CIBC OPPENHEIMER OPINION SET
FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The CIBC Oppenheimer Opinion is for the use and benefit of the Fountain
Board and was rendered to the Fountain Board in connection with its
consideration of the Transaction. The CIBC Oppenheimer Opinion was only one of
many factors considered by the Fountain Board in its evaluation of the Offer and
the Transaction and should not be viewed as determinative of the views of the
Fountain Board or Fountain management with respect to the Offer or the
Transaction. CIBC Oppenheimer was not requested to and did not make any
recommendation to the Fountain Board as to the form or size of the Offer to
Fountain reflected in the Plan of Arrangement and the Combination Agreement,
which was determined through arm's-length negotiations between Fountain and
CanArgo. In arriving at its opinion, CIBC Oppenheimer did not ascribe a specific
range of value to Fountain, but made its determination as to fairness, from a
financial point of view, to Fountain of the Offer on the basis of financial and
comparative analyses summarized below.
The CIBC Oppenheimer Opinion contemplates economic, market, financial
and other facts and conditions existing as of March 6, 1998, many of which are
beyond the control of CIBC Oppenheimer, Fountain or CanArgo. The CIBC
Oppenheimer Opinion is based on the information made available to CIBC
Oppenheimer as of such date and on the review and analyses conducted by CIBC
Oppenheimer as of such date. Events and conditions subsequent to such date have
not been considered and may materially alter the assumptions relied upon and the
conclusions stated by CIBC Oppenheimer in the CIBC Oppenheimer Opinion. CIBC
Oppenheimer has no obligation to update, revise or reaffirm the fairness opinion
rendered in the CIBC Oppenheimer Opinion, and Fountain does not intend to seek
any such updating, revisions or reaffirmation by CIBC Oppenheimer. Any estimates
contained in the analyses performed by CIBC Oppenheimer are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses. Additionally, estimates of
the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which such businesses or securities might actually be
sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty.
In arriving at the CIBC Oppenheimer Opinion, CIBC Oppenheimer, among
other things, reviewed the latest available draft of the Plan of Arrangement and
the definitive Combination Agreement and held discussions with certain senior
officers, directors and other representatives and advisors of Fountain and
CanArgo concerning their respective operations, historic financial performance
and prospects. CIBC Oppenheimer examined certain publicly available business and
financial information relating to Fountain and CanArgo as well as certain
financial forecasts, reserve reports and other data which were provided to CIBC
Oppenheimer by senior management of Fountain and CanArgo and their respective
advisors. CIBC Oppenheimer reviewed the Offer and related financial terms set
forth in the Plan of Arrangement and the Combination Agreement in relation to,
among other things, the current and historic market prices and related trading
volumes of the Fountain Common Stock and the CanArgo Common Shares, the historic
and projected earnings and cash flow of Fountain and CanArgo, and the
capitalization and financial condition of Fountain and CanArgo. CIBC Oppenheimer
also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which CIBC Oppenheimer
considered comparable to the transaction set forth in the Plan of Arrangement
and the Combination Agreement and CIBC Oppenheimer analyzed certain financial,
stock market and other publicly available information relating to businesses of
other companies whose operations CIBC Oppenheimer considered relevant to
CanArgo. With respect to CanArgo's reserve estimates, predicted production
profiles, estimated exploration and development drilling success and related
information furnished to CIBC Oppenheimer by and discussed with CIBC Oppenheimer
by CanArgo, CIBC Oppenheimer assumed that this information has been reasonably
prepared and reflects the best currently available judgment of CanArgo's
management as to CanArgo's reserve estimates, predicted production profiles and
exploration and drilling success and related information, as the case may be,
and CIBC Oppenheimer has relied upon the foregoing in preparing the CIBC
Oppenheimer Opinion. In addition to the foregoing, CIBC Oppenheimer conducted
such other analyses and examinations and considered such other financial,
economic, market and other criteria as CIBC Oppenheimer deemed necessary to
arrive at the CIBC Oppenheimer Opinion.
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In rendering the CIBC Oppenheimer Opinion, CIBC Oppenheimer has relied
upon and assumed, without independent verification or investigation, the
accuracy and completeness of all financial and other information available to
CIBC Oppenheimer from public sources and provided to CIBC Oppenheimer by
Fountain, CanArgo and their representatives. With respect to financial forecasts
and other information so provided or otherwise discussed with CIBC Oppenheimer
by Fountain and CanArgo, CIBC Oppenheimer assumed with the consent of the
Fountain Board, that such forecasts and other information were reasonably
prepared to reflect the best currently available estimates and good faith
judgments of Fountain's management and CanArgo's management as to their
respective company's expected future financial performance, and CIBC Oppenheimer
relied upon the foregoing in preparing the CIBC Oppenheimer Opinion. Other than
the AMH Report, CIBC Oppenheimer has not been provided with, nor has CIBC
Oppenheimer made any, independent evaluations or appraisals of Fountain's or
CanArgo's assets or liabilities (contingent or otherwise). With respect to such
reserve information, CIBC Oppenheimer is not an expert in the evaluation of oil
and gas properties and, with Fountain's consent, has relied without independent
verification solely upon the reserve reports and internal estimates prepared by
AMH and senior management of CanArgo. In addition, CIBC Oppenheimer did not
assume any obligation to conduct any physical inspection of the properties,
facilities or other assets of Fountain or CanArgo. CIBC Oppenheimer did not
conduct any physical inspection of the properties, facilities or other assets of
Fountain and CIBC Oppenheimer conducted only a limited physical inspection of
the properties, facilities or other assets of CanArgo. In addition, CIBC
Oppenheimer assumed the final form of the Plan of Arrangement will be
substantially similar to the last draft that was reviewed by CIBC Oppenheimer
and that the definitive Combination Agreement will not be amended.
The following is a brief summary of the material factors considered and
principal financial analyses performed by CIBC Oppenheimer to arrive at the CIBC
Oppenheimer Opinion. CIBC Oppenheimer performed certain procedures, including
each of the financial analyses described below, and reviewed with the management
of CanArgo and Fountain the assumptions on which such analyses were based and
other factors, including the historical financial results and the estimated
financial results for CanArgo and Fountain.
Analysis of Certain Publicly Traded Companies. Using publicly available
information, CIBC Oppenheimer compared selected projected operating and
financial data and ratios of CanArgo to the corresponding data and ratios of
certain publicly traded oil and natural gas companies considered by CIBC
Oppenheimer to be reasonably comparable to CanArgo due to their focus primarily
on exploring and developing oil and gas reserves outside of North America and
their similar business strategies, operations and market capabilities (the
"Selected Companies"). The Selected Companies consist of Abacan Resource
Corporation, Benton Oil & Gas Co., FXEnergy, Inc., Harken Energy Corporation,
Hondo Oil & Gas Co., Hurricane Hydrocarbons Ltd., Rutherford Moran Oil Corp.,
Saba Petroleum Company and Triton Energy Ltd.
CIBC Oppenheimer's analysis included, among other things, the
consideration of a company's market capitalization plus total debt and preferred
stock, less cash and cash equivalents (the "Aggregate Value") as a multiple of
projected earnings before interest, taxes and depreciation, depletion and
amortization ("EBITDA") for fiscal year 1998 and PV-10 Value as of the most
recent reported date. CIBC Oppenheimer did not consider the Aggregate Value as a
multiple of the latest 12-month ("LTM") period due to the fact that CanArgo's
operations commenced on July 1, 1997, and CanArgo's financial data is limited to
a six-month period ending December 31, 1997. CanArgo's market capitalization is
based on the Exchange Ratio, applying a $0.97 per share price of Fountain Common
Stock as of March 6, 1998 on each Exchangeable Share that will be issued (the
"Acquisition Price"). CanArgo's Aggregate Value is based on the Acquisition
Price plus total debt and preferred stock, less cash and cash equivalents (the
"Aggregate Transaction Value"), which CIBC Oppenheimer calculated to be
$21,900,000. Projected EBITDA for CanArgo was provided by CanArgo management
based on base case estimates (the "Base Case") and higher case estimates (the
"High Case"). Projected EBITDA for the Selected Companies were based on
estimates compiled by Institutional Brokers Estimate Service and published
estimates of selected investment banking firms, including CIBC Oppenheimer.
Given the difficulty of identifying truly comparable companies to
CanArgo which are at the same stage of reserve exploration and development and
have similar financial and technical resources, none of the Selected Companies
are identical to CanArgo. In addition, early stage exploration and development
companies are inherently difficult to analyze given the significant impact which
future operations could have relative to existing operations. CIBC Oppenheimer's
analysis indicated that the average value, excluding highest and lowest values
(the "Adjusted Average Value"), of Aggregate Value as a multiple of the
estimated fiscal year 1998 EBITDA for the
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Selected Companies was 8.8x, as compared with CanArgo's implied multiple of
35.2x and 7.3x for the Base Case and High Case, respectively, based on the
Aggregate Transaction Value to estimated fiscal year 1998 EBITDA. Based on an
Aggregate Value as a multiple of the estimated fiscal year 1998 EBITDA of 8.8x,
CanArgo's implied Aggregate Value is $5,500,000 and $26,400,000, based on the
Base Case and High Case, respectively. The Adjusted Average Values of Aggregate
Value as a multiple of PV-10 Value was 2.1x for the Selected Companies, as
compared to CanArgo's implied multiples of 1.5x and 0.8x based on the Aggregate
Transaction Value to PV-10 Value of CanArgo's proved reserves and PV-10 Value of
proved and probable reserves, respectively. Based on an Aggregate Value as a
multiple of PV-10 Value of 2.1x, CanArgo's implied Aggregate Value is
$29,800,000 and $60,000,000, based on proved reserves and proved and probable
reserves, respectively.
Analysis of Certain Comparable Company Acquisitions. CIBC Oppenheimer
reviewed publicly available information relating to certain acquisitions of
United States and international oil and natural gas companies that closed
between January 1995 and February 1998 and had Total Transaction Values (defined
below) between $50,000,000 and $200,000,000. These transactions, consisted of 10
transactions in the United States and 17 transactions outside of the United
States. Transactions outside the United States included, among others, the
following: Jordan Petroleum and Transwest Energy Inc.; Rio Alto Exploration Ltd.
and Seagull Energy Corp.; Sands Petroleum AB and Neste Corp.; and Morgan
Hydrocarbons and International Colin Energy. Transactions in the United States
included, among others, the following: Forcenergy, Inc. and Convest Energy Corp.
and Edisto Resources Corp.; Monterey Resources, Inc. and McFarland Energy, Inc.;
Columbia Natural Resources and Alamco, Inc.; Alliance Resources plc and LaTex
Resources; and Hunt Petroleum Corporation and Columbia Gas System Inc. These
selected transactions were not intended to represent the complete list of oil
and natural gas transactions which have occurred or been announced during this
period; rather, such transactions represent recent transactions involving
publicly traded oil and natural gas companies engaged in oil and gas exploration
and production activities that were deemed by CIBC Oppenheimer to operate in
comparable producing basins or have comparable financial and operating
characteristics to CanArgo.
CIBC Oppenheimer reviewed the consideration paid in such transactions in
terms of the price paid for the common stock ("Equity Purchase Price") plus
total debt, preferred stock and transaction costs less cash and cash equivalents
("Total Transaction Value") of such transactions as a multiple of PV-10 Value
and total proved reserves on a BOE basis ("Proved Reserves"). The analysis of
Total Transaction Value as a multiple of PV-10 Value and total Proved Reserves
indicated the following: (i) on a PV-10 Value basis, an Adjusted Average Value
of 0.9x for United States acquisitions and an Adjusted Average Value of 1.4x for
international acquisitions representing an implied Aggregate Value of
$12,600,000 and $20,700,000, respectively; and (ii) on a Proved Reserve basis,
an Adjusted Average Value of $5.06 per BOE for United States acquisitions and an
Adjusted Average Value of $6.20 per BOE for international acquisitions
representing an implied Aggregate Value of $31,200,000 and $38,200,000,
respectively. This compares to the implied values for CanArgo based on the
Aggregate Transaction Value of 1.5x the PV-10 Value of CanArgo's Proved Reserves
using "normalized pricing" and $3.55 per BOE using CanArgo's share of
entitlement reserve volumes. The PV-10 Value of CanArgo's Proved Reserves as of
January 1, 1998 under "normalized pricing" is calculated based upon a per barrel
oil price of $10.31, which the independent reserve engineers estimated according
to the PSC. This per-barrel price is calculated using 95% of the average per
barrel price of oil determined by Brent during 1997, less a transportation
charge of $5.39 per barrel.
No company or transaction used in the analysis described above was
directly comparable to CanArgo or the proposed transaction. Accordingly,
analysis of the results of the foregoing was not simply mathematical nor
necessarily precise; rather, it involved complex consideration and judgments
concerning differences in financial and operating characteristics of companies
and other factors that could affect public trading values.
Analysis of Certain Comparable Reserve Acquisitions. CIBC Oppenheimer
also reviewed selected acquisitions of oil and gas reserves from January 1, 1995
to February 15, 1998 with aggregate purchase prices under $200,000,000. This
analysis relies primarily on information obtained from John S. Herold, Inc. and
may not represent the complete list of oil and natural gas transactions within
the given search parameters that have occurred or been announced. CIBC
Oppenheimer reviewed transactions involving the purchase of properties both in
the United States (the "Domestic Properties") and outside the United States (the
"International Properties").
CIBC Oppenheimer reviewed the consideration paid in such transactions in
terms of the aggregate purchase price paid as a multiple of the reported total
Proved Reserves. The analyses of aggregate purchase price as
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a multiple of Proved Reserves indicated an Adjusted Average Value of $5.28 per
BOE for Domestic Properties and $4.49 per BOE for International Properties
representing an implied Aggregate Value of $32,500,000 and $27,600,000,
respectively. This compares to the implied value of $3.55 per BOE for CanArgo
based upon the Aggregate Transaction Value to CanArgo's share of entitlement
reserves.
Analysis of Net Asset Value. CIBC Oppenheimer evaluated CanArgo's net
asset value by measuring the value of both its oil and gas and non oil and gas
assets and subtracting outstanding noncurrent liabilities such as long-term debt
as estimated at the time of the Transaction. CanArgo's asset value was computed
based on the PV-10 Value of its proved reserves using normalized pricing and the
net working capital estimate at the time of the Transaction. As a result, CIBC
Oppenheimer calculated a net asset value for CanArgo of $14,800,000 under
normalized pricing. CIBC Oppenheimer calculated Fountain's net asset value of
$16,600,000 based upon discussions with Fountain management and an assumed net
working capital position of approximately $12,000,000 as of March 6, 1998
(Fountain reported a net working capital position of US$14,000,000 as of
December 31, 1997). CIBC Oppenheimer also estimated that Fountain would have a
net asset value of approximately $10,000,000, which amount would be available
for distribution to its shareholders if Fountain were liquidated. CIBC
Oppenheimer considered Fountain's net asset value under a liquidation scenario
given the time that could be required to arrange and execute an alternative to
the Transaction.
The summary set forth above does not purport to be a complete
description of the analyses performed by CIBC Oppenheimer. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. The preparation of a fairness opinion does
not involve a mathematical evaluation or weighing of the results of the
individual analyses performed, but requires CIBC Oppenheimer to exercise its
professional judgment based on its experience and expertise in considering a
wide variety of analyses taken as a whole. Each of the analyses conducted by
CIBC Oppenheimer was carried out in order to provide a different perspective on
the transaction and add to the total mix of information available. CIBC
Oppenheimer did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an opinion as to
fairness. Rather, in reaching its conclusion, CIBC Oppenheimer considered the
results of the analyses in light of each other and ultimately reached its
opinion based on the results of all analyses taken as a whole. If considered in
isolation, certain of the individual analyses may not have supported CIBC
Oppenheimer's opinion as to fairness. CIBC Oppenheimer did not place particular
reliance or weight on any individual analysis, but instead concluded that its
analyses, taken as whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, CIBC Oppenheimer believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and the factors considered by it, without considering all analyses
and factors, may create an incomplete view of the evaluation process underlying
its opinion. In performing its analyses, CIBC Oppenheimer made numerous
assumptions with respect to industry performances, business and economic
conditions and other matters. The analyses performed by CIBC Oppenheimer are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
CIBC Oppenheimer Financial Advisor Fee. Pursuant to the Letter
Agreement, Fountain has agreed to pay CIBC Oppenheimer: (i) an advisory fee
equal to 1.5% of the consideration up to $16,670,000 paid pursuant to an
Acquisition (as defined in the Letter Agreement), plus 0.75% of the
consideration in excess of $16,670,000, subject to a minimum advisory fee of
$250,000; (ii) an expense retainer fee of $25,000 upon execution of the Letter
Agreement and $25,000 ninety days thereafter; and (iii) a fairness opinion fee
of $300,000 in connection with CIBC Oppenheimer's delivery of an opinion to the
Fountain Board regarding the fairness, from a financial point of view, of the
consideration to be paid in any transaction, which fee will be credited against
any fees paid under clause (i) above. Fountain has also agreed to reimburse CIBC
Oppenheimer for its reasonable out-of-pocket fees, expenses and costs, including
reasonable fees and disbursements of its legal counsel. If the market price of
Fountain Common Stock on the Effective Date is not significantly greater than
the market prices prevailing during the week ended March 13, 1998, the total fee
payable by Fountain to CIBC Oppenheimer should not be significantly greater than
the $300,000 fairness opinion fee.
CIBC Oppenheimer is a nationally recognized investment banking firm and
was selected by the Fountain Board to serve with Orkla as Fountain's financial
co-advisor, based on CIBC Oppenheimer's substantial experience in transactions
similar to the Transaction and familiarity with Fountain and its operations and
the oil and natural gas
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industry generally. CIBC Oppenheimer regularly engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements, and valuations for corporate and
other purposes.
In the ordinary course of its business, CIBC Oppenheimer and its
affiliates may actively trade the securities of Fountain for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
Opinion of Orkla
Orkla was retained by Fountain to act as financial advisor in connection
with the Transaction. In connection with such engagement, Fountain requested
Orkla to render an opinion as to the fairness to Fountain, from a financial
point of view, of the Offer (as defined in Orkla's opinion which is attached to
this Joint Proxy Statement/Prospectus as Annex I).
On March 26, 1998, Orkla delivered a written opinion dated as of March
26, 1998 (the "Orkla Opinion") to the Fountain Board to the effect that, as of
the date of such opinion, and subject to certain assumptions, factors and
limitations set forth in such written opinion, the Offer was fair, from a
financial point of view, to Fountain.
THE FULL TEXT OF THE ORKLA OPINION IS ATTACHED AS ANNEX I TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. FOUNTAIN
STOCKHOLDERS ARE URGED TO READ THE ORKLA OPINION CAREFULLY AND IN ITS ENTIRETY
FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED, THE
ASSUMPTIONS AND QUALIFICATIONS MADE BY ORKLA IN RENDERING ITS OPINION AND OTHER
FACTORS RELATING TO ORKLA'S ENGAGEMENT BY THE FOUNTAIN BOARD. THE ORKLA OPINION,
WHICH WAS DIRECTED TO THE FOUNTAIN BOARD, RELATES ONLY TO THE FAIRNESS FROM A
FINANCIAL POINT OF VIEW OF THE OFFER TO FOUNTAIN, DOES NOT ADDRESS ANY OTHER
ASPECT OF THE TRANSACTION OR RELATED TRANSACTIONS, DOES NOT ADDRESS THE MERITS
OF THE UNDERLYING DOCUMENTS PURSUANT TO WHICH FOUNTAIN WILL ENGAGE IN THE
TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF
FOUNTAIN AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE APPROVAL OF THE FOUNTAIN
STOCK ISSUANCE PROPOSAL OR THE FOUNTAIN CHARTER CHANGES. THE SUMMARY OF THE
ORKLA OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The Orkla opinion is primarily based on the following information:
1. Publicly available information pertaining to CanArgo and
Fountain such as annual reports, interim reports, reserve reports and other
data, which were provided to Orkla by senior management of Fountain and CanArgo
and their respective advisors;
2. The Plan of Arrangement and the Combination Agreement;
3. Discussions with CanArgo's and Fountain's management and
directors regarding related topics such as the operations of the company, cash
flow development, budgets, financial standing, strategy and business prospects;
4. Information regarding historic price development in the
CanArgo Common Shares and the Fountain Common Stock; and
5. Discussions with representatives of Fountain's management and
directors and other advisors participating in the due diligence process
regarding CanArgo's balance sheet, business outlook and financial standing, as
well as possible synergies related to the business combination.
Orkla also considered, to the extent publicly available, the financial
terms of certain other similar transactions recently effected which Orkla
considered comparable to the Transaction, and Orkla analyzed certain financial,
stock market and other publicly available information relating to the business
of other companies whose operations Orkla considered comparable to those of
Fountain and CanArgo. With respect to CanArgo's reserve estimates, predicted
production profiles, estimated exploration and development drilling success and
related information furnished to Orkla by, and discussed with Orkla by CanArgo,
Orkla assumed that this information had been reasonably prepared and reflected
the best judgment then available of CanArgo's management as to CanArgo's reserve
estimates, predicted production profiles and exploration and drilling success
and related information, as the case may be, and Orkla relied, with Fountain's
consent, upon the foregoing in preparing the Orkla Opinion. In
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addition to the foregoing, Orkla conducted such other analyses and examinations
and considered such other financial, economic, market and other criteria as
Orkla deemed necessary to arrive at the Orkla Opinion.
Orkla assumed that all information regarding Fountain and CanArgo
presented to Orkla from the senior management of Fountain and CanArgo and their
respective advisors is complete and accurate, without having verified this
through independent investigations or having the information verified or
confirmed by any independent third party. As of the date of the Orkla Opinion,
Orkla had no access to any legal or financial accounting due diligence reports
of Fountain and CanArgo. Orkla had only limited discussions with the management
of CanArgo. Furthermore, Orkla has assumed the accuracy of all representations
and warranties made by Fountain and CanArgo in the Combination Agreement.
The Orkla Opinion is based upon financial, economic, stock market and
other conditions and circumstances existing and disclosed to Orkla as of the
date of the Orkla Opinion and changes in such conditions and circumstances would
require the re-evaluation of the Orkla Opinion. Orkla disclaims any obligations
to update, revise or reaffirm the Orkla Opinion, and Fountain does not intend to
seek any such updating, revisions or reaffirmation by Orkla. Orkla assumed that
in the course of obtaining the necessary regulatory and other consents or
approvals (contractual or otherwise) for the consummation of the Transaction, no
restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on the
contemplated benefits of the Transaction.
Pursuant to the Letter Agreement and a supplemental oral agreement
pursuant to which Fountain is to pay Orkla a fairness opinion fee on the same
basis upon which it is paying a fairness opinion fee to CIBC Oppenheimer,
Fountain has agreed to pay CIBC Oppenheimer: (i) an advisory fee equal to 1.5%
of the consideration up to $16,670,000 paid pursuant to an Acquisition (as
defined in the Letter Agreement), plus 0.75% of the consideration in excess of
$16,670,000, subject to a minimum advisory fee of $250,000; and (ii) a fairness
opinion fee of $300,000 in connection with CIBC Oppenheimer's delivery of an
opinion to the Fountain Board regarding the fairness, from a financial point of
view, of the consideration to be paid in any transaction, which fee will be
credited against any fees paid under clause (i) above. Fountain has also agreed
to reimburse CIBC Oppenheimer for its reasonable out-of-pocket fees, expenses
and costs, including reasonable fees and disbursements of its legal counsel. If
the market price of Fountain Common Stock on the Effective Date is not
significantly greater than the market prices prevailing during the week ended
May 1, 1998, the total fee payable by Fountain to CIBC Oppenheimer should not be
significantly greater than the $300,000 fairness opinion fee.
In the ordinary courses of Orkla's business, Orkla and its affiliates
may actively trade the Fountain Common Stock for Orkla's own account or for the
accounts of Orkla's customers and, accordingly, may at any time hold a long or
short position in Fountain Common Stock.
Opinion of Roche Securities
CanArgo retained Roche Securities to prepare a fairness opinion (the
"Roche Securities Opinion") as to whether the Exchange Ratio contemplated by the
Arrangement is fair and reasonable, from a financial point of view, to the
shareholders of CanArgo. Based upon the analysis, Roche Securities advised the
senior management of CanArgo on February 27, 1998 that the Exchange Ratio
contemplated by the Arrangement is fair to the shareholders of CanArgo from a
financial point of view. CanArgo shareholders are urged to read the full text of
the Roche Securities Opinion dated February 27, 1998, a copy of which is
attached as Annex J to this Joint Proxy Statement/Prospectus, for a complete
description of the factors considered, the assumptions made and the limitations
on the analysis undertaken by Roche Securities in rendering its opinion.
The Roche Securities Opinion addresses only the fairness of the
Transaction from a financial point of view and does not constitute a
recommendation to any CanArgo shareholder as to how to vote at the CanArgo
Shareholders Meeting. The summary of the Roche Securities Opinion set forth in
this Joint Proxy Statement/Prospectus is qualified in its entirety by reference
to the full text of such opinion.
In connection with rendering the Roche Securities Opinion, Roche
Securities reviewed and relied upon, among other things, the Combination
Agreement; certain available and confidential financial, operational and other
information relating to CanArgo and Fountain; information derived from
discussions with members of the management and the independent auditors and
engineering consultants of CanArgo and Fountain, including their views as to the
nature of CanArgo's and Fountain's respective exploration, development,
exploitation and
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acquisition programs; publicly available information relating to the business
operations, financial performance and stock trading history of CanArgo, Fountain
and other selected public companies; and information with respect to other
transactions of a comparable nature. Roche Securities also relied upon or
carried out such other information, investigations and analyses as it considered
necessary or appropriate in the circumstances.
Roche Securities relied upon and assumed the completeness, accuracy and
fair representation of the foregoing information and has not attempted to
independently verify the accuracy or completeness of any such information, data,
advice, material, representations or opinions. The Roche Securities Opinion is
rendered on the basis of securities markets, economic and general business and
financial conditions prevailing as of February 27, 1998 and the conditions and
prospects, financial and otherwise, of CanArgo and Fountain as they were
reflected in the information and documents reviewed and as they were represented
to Roche Securities in discussions with their respective managements.
In connection with rendering its opinion, Roche Securities considered,
among other things, the following quantitative and qualitative assessments:
1. Net asset value considerations: An assessment of each major class of
assets and liabilities in the manner deemed most appropriate to the nature of
the particular asset or liability. This included, as appropriate and available:
an analysis of financial assets and liabilities, an examination of the
evaluations of the oil and gas reserves of CanArgo and Fountain (and the
commodity price, interest rate and exchange rate forecasts applied in such
evaluations); an analysis of undeveloped land holdings; a comparison of cash
flows projected in the reserve report with recent production performance; an
assessment of the potential marketability and trading value of major properties;
an analysis of the concentration of values in major properties; and further
consideration of additional material factors such as operatorship, the size of
working interests, the geographic focus of properties, general and
administrative expenses necessary to produce reserves, the capital expenditures
required to deplete reserves, and future reclamation and site restoration costs.
2. Market trading price analysis: An analysis of the stock market
trading prices and trading volumes of the CanArgo Common Shares and the Fountain
Common Stock at different points in time.
3. Cash flow considerations: An analysis of current and projected cash
flows for CanArgo and Fountain. Roche Securities also analyzed the
sustainability of these cash flow multiples, given a variety of factors
characterizing CanArgo and Fountain, such as historical and projected production
growth, financial leverage, market capitalization, reserve life indices, royalty
rates, production costs, general and administrative costs and other factors.
Roche Securities applied market multiples, based on a comparison of cash flow
multiples with those of an industry peer group, to the cash flows of CanArgo and
Fountain.
4. Other qualitative factors: In addition to the above, Roche Securities
is of the opinion that the combination of the businesses of CanArgo and Fountain
through the Plan of Arrangement will result in the CanArgo shareholders
participating in an entity that will have:
(a) a larger market capitalization and market float than CanArgo
alone;
(b) a larger and more liquid public market for its shares;
(c) a potentially larger asset and cash flow base with greater
financial resources, which would be strategically, financially and operationally
advantageous and would enable CanArgo to undertake more significant oil and gas
exploration and development programs and to compete in the business of exploring
for, developing and producing oil and natural gas primarily in Albania, Georgia
and Ukraine and other east European countries and in North America;
(d) an ability to realize certain administrative efficiencies and
overhead savings from the completion of the integration of CanArgo and Fountain;
(e) a greater ability to readily capture international
concessions and access financings of such than CanArgo alone; and
(f) other business alternatives than CanArgo alone would have.
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Although, in arriving at its opinion, Roche Securities reviewed
financial and other data and performed financial tests, calculations and
estimates as were considered appropriate and necessary in the circumstances,
Roche Securities has not been engaged to perform a formal valuation of CanArgo
or Fountain or any of their assets, liabilities or securities and its opinion
should not be construed as such. Roche Securities did not determine absolute
ranges or values when determining whether the Exchange Ratio is fair, from a
financial point of view, to the shareholders of CanArgo.
Roche Securities is not an insider, associate or affiliate of either
CanArgo or Fountain and has not previously provided financial advisory services
or participated in any financings for either CanArgo and Fountain. The fee
payable to Roche Securities with respect to the provision of the Roche
Securities Opinion is a fixed amount and is not contingent on any event. There
are no understandings or agreements between Roche Securities and either CanArgo
and Fountain with respect to any future business dealings.
Roche Securities acts as trader and dealer, both as principal and as
agent, in all major North American financial markets and as such has had, or may
have, positions in the securities of such corporations for which it receives
compensation. In addition, as an investment dealer, Roche Securities conducts
research on securities and may, in the ordinary course of its business, be
expected to provide research reports and investment advice to its clients on
investment matters, including the securities of CanArgo and Fountain. Pursuant
to a letter agreement dated February 27, 1998 between CanArgo and Roche
Securities, CanArgo has agreed to pay a fee of C$25,000 to Roche Securities in
connection with the preparation of the Roche Securities Opinion.
The Roche Securities Opinion states that it "may not be used or relied
upon by any other person without our express prior written consent." The Roche
Securities Opinion was delivered to the CanArgo Board and included in the Joint
Proxy Statement/Prospectus with the consent of Roche Securities. Such consent
expressly permits CanArgo to rely on the Roche Securities Opinion in any claim
by CanArgo. However, Roche Securities would not be precluded, in defense to an
action by a shareholder, from claiming that any such consent was not intended to
permit reliance on the Roche Securities Opinion by shareholders. Any claim by a
shareholder against Roche Securities would be governed by the laws of Alberta,
Canada. The inclusion of the limitation provision in the Roche Securities
Opinion will have no effect on the rights and responsibilities by the CanArgo
Board under the laws of Canada.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the respective recommendations of the Fountain Board and
the CanArgo Board with respect to the Transaction, the stockholders of the two
companies should be aware that certain executive officers and directors of
Fountain and CanArgo have interests in the Transaction that are different from,
or in addition to, the interests of the stockholders of the two companies
generally.
Einar H. Bandlien, Executive Vice President of Fountain, Robert A.
Halpin, Vice Chairman of the Fountain Board, and Nils N. Trulsvik, President and
Chief Executive Officer of Fountain, were members of the Fountain Board when it
approved the Transaction. The Combination Agreement provides that Messrs. Halpin
and Trulsvik will be the only current directors of Fountain who will remain
directors of Fountain after consummation of the Transaction. Mr. Bandlien will
not remain as a director, but is expected to continue to be employed by Fountain
as Executive Vice President-Business Development. Two other current or former
executive officers of Fountain, Alfred Kjemperud and Rune Falstad, are also
expected to be employed by Fountain in management positions.
David Robson, Chairman and Chief Executive Officer of CanArgo, Michael
Binnion, Vice President Finance of CanArgo, and Russell Hammond were members of
the CanArgo Board when it approved the Transaction. Pursuant to the Combination
Agreement, after the Transaction is consummated, Messrs. Robson, Binnion and
Hammond will become members of the Fountain Board. In addition, Messrs. Robson
and Binnion will become Chairman of the Board and Chief Executive Officer, and
President and Chief Financial Officer, respectively, of Fountain.
Individuals who become non-employee directors of Fountain after
consummation of the Transaction may receive compensation, including option
grants, as described under "INFORMATION CONCERNING FOUNTAIN -- Directors'
Compensation." No executive officer or director of either Fountain or CanArgo
will receive as a result of the Transaction any increase in benefits or any
separation or similar payments. In addition, no executive officer or director of
either Fountain or CanArgo will enter into an employment contract with Fountain
in connection with the Transaction.
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As provided in the Combination Agreement, since February 2, 1998, Einar
Bandlien, Michael Binnion, John McLeod, David Robson and Nils Trulsvik have been
members of the Steering Committee, which is responsible for coordinating the
activities of Fountain and CanArgo prior to consummation of the Transaction,
facilitating communication between the companies and planning the integration of
the companies after the Effective Date.
Michael Binnion, John McLeod and Bob Moffatt, directors and officers of
CanArgo, and Einar Bandlien, Rune Falstad, Robert A. Halpin, Stanley D. Heckman,
Eugene J. Meyers, Oistein Nyberg and Nils Trulsvik, directors and officers of
Fountain, have entered into agreements to support the Transaction as described
under "--Other Agreements -- Shareholder Agreements."
CanArgo has agreed to pay a fee to Peder Paus in respect of financial
services rendered to CanArgo in connection with the Transaction. See "--
Background of the Transaction." Such fee will be satisfied by the issuance of up
to 225,000 CanArgo Common Shares following the approval of the Transaction at
the CanArgo Shareholders Meeting and the Fountain Stockholders Meeting. Mr. Paus
will become a member of the Fountain Board after the consummation of the
Transaction.
The Combination Agreement provides that Fountain will indemnify the
officers and directors of Fountain and CanArgo to the fullest extent permitted
or required under applicable law, any indemnification agreements with such
persons, the Fountain Certificate and the Fountain Bylaws. Fountain has also
agreed to maintain officers and directors liability insurance coverage on no
less favorable terms than that currently maintained by Fountain and CanArgo for
at least four years after the Effective Date and to include the present and
former officers and directors of Fountain and CanArgo within the coverage
thereof.
TRANSACTION STEPS AND DESCRIPTION OF EXCHANGEABLE SHARES
The Continuance
Promptly upon approval of the Continuance Resolution, CanArgo will be
continued under the OBCA by filing articles of continuance under the OBCA.
Approval of the Arrangement Resolution is conditional upon approval of the
Continuance Resolution.
The Arrangement
Pursuant to the terms of the Plan of Arrangement, at the Effective Time,
CanArgo will undergo a reorganization of capital pursuant to which:
(a) CanArgo will amend the CanArgo Articles to, among other things, (i)
replace the rights, privileges, restrictions and conditions attaching to the
CanArgo Common Shares with those set forth in Appendix A to the Plan of
Arrangement, (ii) authorize the issuance of 22,472,860 Exchangeable Shares and
(iii) change its name to CanArgo Oil & Gas Inc.;
(b) CanArgo will issue 100 CanArgo Common Shares to Fountain in
consideration for US$160; and
(c) Each existing CanArgo Common Share (other than CanArgo Common Shares
held by Fountain or by holders who have properly exercised their rights of
dissent and are ultimately entitled to be paid fair value for their shares) will
be exchanged for 1.6 (subject to adjustment for changes to the capitalization of
Fountain) fully paid and non-assessable Exchangeable Shares. In the event
Fountain subdivides or combines shares of Fountain Common Stock, changes the
outstanding shares of Common Stock into shares of other classes, or declares a
stock dividend on its outstanding shares of Fountain Common Stock prior to the
Effective Time, the Combination Agreement provides that the Exchange Ratio by
which each CanArgo Common Share is exchangeable for 1.6 shares of Fountain
Common Stock would be adjusted appropriately to maintain the relative
proportionate interests of the holders of CanArgo Common Shares and Fountain
Common Stock. Pursuant to the Combination Agreement, Fountain agrees that prior
to the Effective Date it will not, among other things, split, combine,
recapitalize, exchange or reclassify outstanding shares of Fountain Common Stock
or declare any dividend in cash, stock or property thereon, except in connection
with the Reverse Split if the Reverse Split is approved by the stockholders of
Fountain. Thus, Fountain and CanArgo anticipate that the only event that would
give rise to an adjustment in the Exchange Ratio is the Reverse Split. If the
Reverse Split is effected on or prior to the Effective Time, then each CanArgo
Common Share (other than the CanArgo Common Shares held by Fountain or by
holders who have
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exercised their rights of dissent and are ultimately entitled to be paid fair
value for their CanArgo Common Shares) shall be exchanged for 0.8 Exchangeable
Shares. See "-- Procedures for Exchange of Share Certificates by CanArgo
Shareholders" for procedures to be followed in order to obtain certificates
representing the Exchangeable Shares issuable in the Arrangement.
As a result of the foregoing, immediately following the Effective Time,
CanArgo's outstanding capital stock will consist of 100 CanArgo Common Shares
held by Fountain and the Exchangeable Shares held by the former holders of
CanArgo Common Shares.
No fractional Exchangeable Shares will be delivered in exchange for
CanArgo Common Shares pursuant to the Arrangement. In lieu of such fractional
Exchangeable Shares, each former holder of CanArgo Common Shares who otherwise
would be entitled to receive a fraction of an Exchangeable Share will receive an
amount of cash (rounded to the nearest whole cent), without interest, equal to
the product derived by multiplying such fraction by the Canadian Dollar
Equivalent of the Current Market Price of Fountain Common Stock on the Effective
Date.
The rights associated with the Exchangeable Shares are intended to have
characteristics essentially equivalent in economic effect to rights associated
with the Fountain Common Stock. See "THE COMPANIES AFTER THE TRANSACTION --
CanArgo Share Capital" and "-- Voting, Support and Exchange Trust Agreement."
Retraction, Redemption and Call Rights
Holders of the Exchangeable Shares will be entitled at any time
following the Effective Time to retract (i.e., require CanArgo to redeem) any or
all such Exchangeable Shares owned by them and to receive an equivalent number
of shares of Fountain Common Stock, plus an additional amount equivalent to the
full amount of all declared and unpaid dividends on such Exchangeable Shares,
subject to the Retraction Call Rights of Fountain described below. Holders of
the Exchangeable Shares may effect such retraction by presenting certificates to
CanArgo or its transfer agent representing the number of Exchangeable Shares the
holder desires to retract, together with a Retraction Request specifying the
number of Exchangeable Shares the holder wishes to retract and such other
documents as may be required by CanArgo to effect the retraction of the
Exchangeable Shares. Former holders of CanArgo Common Shares who desire to
obtain Fountain Common Stock following the consummation of the Transaction
without receiving the Exchangeable Share certificates issuable to such holder
under the Arrangement may do so in connection with the exchange of certificates
representing CanArgo Common Shares for certificates representing Exchangeable
Shares that will occur after the consummation of the Transaction. See "--
Procedures for Exchange of Share Certificates by CanArgo Shareholders." The
retraction will become effective on the Retraction Date.
Upon receipt of a certificate for Exchangeable Shares, a Retraction
Request and other required documentation, CanArgo is required immediately to
notify Fountain of such Retraction Request. Fountain then has two business days
to exercise its Retraction Call Right to purchase all of the Exchangeable Shares
submitted by the delivery of an equivalent number of shares of Fountain Common
Stock, plus an additional amount equivalent to the full amount of all declared
and unpaid dividends on the Exchangeable Shares, to the transfer agent for
delivery to the holder on the Retraction Date. If Fountain determines not to
exercise its Retraction Call Right in respect of such shares and the Retraction
Request is not revoked in accordance with the Exchangeable Share Provisions,
CanArgo is obligated to deliver to the holder the number of shares of Fountain
Common Stock equal to the number of Exchangeable Shares submitted by the holder
for retraction, plus an additional amount equivalent to the full amount of all
declared and unpaid dividends on such Exchangeable Shares.
Subject to applicable law and the Redemption Call Right of Fountain
described below, on any Optional Redemption Date, CanArgo may redeem all of the
then outstanding Exchangeable Shares in exchange for an equal number of shares
of Fountain Common Stock, plus an additional amount equivalent to the full
amount of all declared and unpaid dividends on such Exchangeable Shares.
Notwithstanding any proposed redemption of the Exchangeable Shares by CanArgo,
Fountain will have the overriding right to purchase on the Optional Redemption
Date all of the outstanding Exchangeable Shares in exchange for one share of
Fountain Common Stock for each such Exchangeable Share, plus an additional
amount equivalent to the full amount of all declared and unpaid dividends on
such Exchangeable Share. In exercising the Redemption Call Right, Fountain will
not be required to purchase Exchangeable Shares from itself. If Fountain
exercises such Redemption Call Right, CanArgo's right to
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redeem the Exchangeable Shares on such Optional Redemption Date will terminate.
CanArgo will, at least 120 days before any Optional Redemption Date, provide the
registered holders of Exchangeable Shares with written notice of the proposed
redemption of the Exchangeable Shares by CanArgo. If the Redemption Call Right
is exercised, CanArgo may elect to redeem all then outstanding Exchangeable
Shares on a subsequent Optional Redemption Date. For a more detailed description
of the Call Rights in connection with the Exchangeable Shares, see "THE
COMPANIES AFTER THE TRANSACTION -- CanArgo Share Capital -- Exchangeable Shares
of CanArgo."
Exchange, Voting, Dividend and Liquidation Rights of Holders of Exchangeable
Shares
On the Effective Date, Fountain, CanArgo and the Trustee will enter into
the Voting, Support and Exchange Trust Agreement. Pursuant to the terms of the
Voting, Support and Exchange Trust Agreement, the holders of Exchangeable Shares
have the right to exchange their Exchangeable Shares on a one-for-one basis for
shares of Fountain Common Stock upon delivery to the Trustee of a duly endorsed
certificate representing the Exchangeable Shares together with a Notice of
Exercise. As a result of the submission by a holder of Exchangeable Shares of a
Notice of Exercise or Retraction Request, that holder of Exchangeable Shares
will receive shares of Fountain Common Stock on a one-for-one basis. For
Canadian federal income tax purposes, the principal differences to the holder of
Exchangeable Shares between the submission of a Notice of Exercise or Retraction
Request are as follows:
1. The submission of a Notice of Exercise will result in a gain or loss
for Canadian federal income tax purposes by a holder of Exchangeable Shares who
is a resident of Canada; and
2. The submission of a Retraction Request will result in a deemed
dividend which is taxable as described under the heading "-- Dividends --
Exchangeable Shares," unless Fountain exercises its Retraction Call Right, in
which case the transfer to Fountain would result in a gain or loss by a holder
of Exchangeable Shares who is a resident of Canada.
The preferability of a receipt of a capital gain to a receipt of a
dividend depends upon the circumstances of the particular holder of Exchangeable
Shares. This determination depends upon a number of factors including the
adjusted cost base and the paid-up capital of the shares, whether the holder is
an individual or a corporation, and such holder's effective tax rate and other
tax attributes.
Fountain will on the Effective Date deposit with the Trustee the 100
shares of Fountain Special Voting Stock, each of which will entitle the Trustee
to a number of votes equal to the quotient (rounded down to the nearest whole
number) obtained by dividing the number of Exchangeable Shares outstanding from
time to time that are not held by Fountain or certain subsidiaries of Fountain
by the number of shares of Fountain Special Voting Stock outstanding as of the
applicable record date. With respect to any matter as to which holders of shares
of Fountain Common Stock are entitled to vote, the holder of each outstanding
Exchangeable Share will have the right to provide directions to the Trustee with
respect to one vote for each Exchangeable Share owned on the applicable record
date. The Trustee will tally the directions received from holders of
Exchangeable Shares with respect to each such matter and calculate for each
possible direction choice (i.e., in favor of, against or abstain) the percentage
(rounded down to the nearest whole number) of the aggregate number of
outstanding Exchangeable Shares specifying that particular direction. The
trustee will vote the Fountain Special Voting Stock in accordance with such
percentages. All votes attached to a particular share of Fountain Special Voting
Stock must be voted by the Trustee in the same manner with respect to any
matter.
In the event of the liquidation, dissolution or winding up of CanArgo or
any other proposed distribution of the assets of CanArgo among its shareholders
for the purpose of winding up its affairs, holders of the Exchangeable Shares
will have preferential rights to receive from CanArgo one share of Fountain
Common Stock for each Exchangeable Share they hold, plus an additional amount
equivalent to the full amount of any declared and unpaid dividends on each such
Exchangeable Share. Additionally, Fountain will have the right to purchase all
of the outstanding Exchangeable Shares on the effective date of any liquidation,
dissolution or winding up in exchange for one share of Fountain Common Stock for
each such Exchangeable Share, plus an additional amount equivalent to the full
amount of all declared and unpaid dividends on such Exchangeable Share.
In order for the holders of the Exchangeable Shares to participate on a
pro rata basis with the holders of Fountain Common Stock in the event of the
liquidation, dissolution
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or winding up of Fountain, Fountain must purchase all Exchangeable Shares on the
fifth business day prior to the effective date of the liquidation, dissolution
or winding up of Fountain in exchange for an equivalent number of shares of
Fountain Common Stock, plus an additional amount equivalent to the full amount
of all declared and unpaid dividends on such Exchangeable Shares. For a more
detailed description of the Exchange Rights in connection with the Exchangeable
Shares, see "THE COMPANIES AFTER THE TRANSACTION -- CanArgo Share Capital --
Exchangeable Shares of CanArgo" and "-- Voting, Support and Exchange Trust
Agreement."
Fountain Support Obligation
Pursuant to the Voting, Support and Exchange Trust Agreement, Fountain
will: (i) not declare or pay dividends on the Fountain Common Stock unless
CanArgo is able to declare and pay and simultaneously declares and pays
equivalent dividends on the Exchangeable Shares; (ii) advise CanArgo in advance
of the declaration of any dividend on the Fountain Common Stock and ensure that
the declaration date, record date and payment date for dividends on the
Exchangeable Shares are the same as that for the Fountain Common Stock and that
such dates will correspond with any requirement of any stock exchange on which
the Exchangeable Shares are then listed; (iii) ensure that the record date for
any dividend declared on the Fountain Common Stock is not less than ten business
days after the declaration date of such dividend or such shorter period within
which applicable law may be complied with; (iv) take all actions and do all
things necessary to ensure that CanArgo is able to pay to the holders of the
Exchangeable Shares the equivalent number of shares of Fountain Common Stock,
plus an additional amount equivalent to the full amount of all declared and
unpaid dividends on the Exchangeable Shares, in the event of a liquidation,
dissolution or winding up of CanArgo, a Retraction Request made by a holder of
Exchangeable Shares or a redemption of Exchangeable Shares by CanArgo; and (v)
not vote or otherwise take any action or omit to take any action causing the
liquidation, dissolution or winding up of CanArgo.
CanArgo is required to notify Fountain of the occurrence of certain
events, such as the liquidation, dissolution or winding up of CanArgo and
CanArgo's receipt of a Retraction Request or Notice of Exercise from a holder of
Exchangeable Shares. See "THE COMPANIES AFTER THE TRANSACTION -- Voting, Support
and Exchange Trust Agreement."
Certificate of Designation Creating Fountain Special Voting Stock
A certificate of designation to be filed by Fountain with the Secretary
of State of the State of Delaware on the Effective Date will create a series of
preferred stock of Fountain consisting of 100 shares of Fountain Special Voting
Stock. See "THE COMPANIES AFTER THE TRANSACTION -- Fountain Share Capital --
Special Voting Stock."
CanArgo Options
At the Effective Time, each CanArgo Option will be converted to a
Fountain Option exercisable for a number of whole shares of Fountain Common
Stock equal to the number of CanArgo Common Shares subject to the CanArgo Option
at the Effective Time multiplied by the Exchange Ratio, rounded down to the
nearest whole number of shares. The exercise price per share of Fountain Common
Stock will be equal to the exercise price per share of such CanArgo Option
immediately prior to the Effective Time divided by the Exchange Ratio. Fountain
will cause the Fountain Common Stock issuable upon exercise of the Fountain
Options to be registered on Form S-8 pursuant to the Securities Act and will use
its best efforts to maintain the effectiveness of such registration statement
for so long as such options remain outstanding.
THE COMBINATION AGREEMENT
Representations and Covenants
The Combination Agreement contains certain customary representations and
warranties of CanArgo and Fountain relating to, among other things, their
respective organization, good standing, qualification, capital structure,
securities filings, operations, taxes, oil and gas properties, liabilities,
employee benefit plans, cash and cash equivalents, title to assets, litigation,
environmental matters, compliance with necessary regulatory or governmental
authorities and other matters, including their authority to enter into the
Combination Agreement and to consummate the Transaction. Pursuant to the
Combination Agreement, Fountain and CanArgo have agreed that until the Effective
Time each will carry on business in accordance with the Business Plan and, to
the extent not inconsistent with the Business Plan, conduct business in the
ordinary course; not make certain changes to its capital
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structure or distributions with respect to its capital stock; not issue or allow
its subsidiaries to issue securities except as contemplated by the Combination
Agreement; not enter into certain employee arrangements; not acquire certain
assets or businesses; not make certain investments; and use commercially
reasonable efforts to satisfy the conditions precedent to the Transaction.
Upon execution of the Combination Agreement, Fountain and CanArgo
appointed the Steering Committee. The Steering Committee will coordinate the
activities of Fountain and CanArgo prior to the Effective Date, facilitate
communications between them and plan for the integration of their activities
following the Effective Date. Fountain and CanArgo have agreed to advise the
other of material changes and to allow the other access to its information and
properties. Further, Fountain and CanArgo have agreed to apply for and use
commercially reasonable efforts to obtain all regulatory and other consents and
approvals; to use commercially reasonable efforts to effect the transactions
contemplated by the Combination Agreement, including the preparation and mailing
of this Joint Proxy Statement/Prospectus; to provide promptly such information
as is necessary for inclusion in this Joint Proxy Statement/Prospectus; and, as
applicable, to hold the CanArgo Shareholders Meeting and the Fountain
Stockholders Meeting recommending the approval of the Combination Agreement, the
Transaction and related matters.
Fountain has agreed to indemnify the officers, directors and employees
of Fountain and CanArgo against losses, expenses, claims, damages or liabilities
arising out of the transactions contemplated by the Combination Agreement or
otherwise arising prior to the Effective Date to the fullest extent permitted or
required under applicable law, any indemnification agreements between either
company and any such indemnified person, or under the respective charters and
bylaws of Fountain and CanArgo. In addition, Fountain has agreed to maintain in
effect for at least four years following the Effective Date directors' and
officers' liability insurance providing coverage with respect to matters
occurring prior to the Effective Date no less favorable than the policies
currently maintained by Fountain and CanArgo and to include within the coverage
of such insurance the present and former officers and directors of CanArgo and
Fountain.
The Combination Agreement also provides that immediately after the
Effective Time, the Fountain Board will consist of the following six persons:
David Robson who will be Chairman and Chief Executive Officer, Michael Binnion
who will be President and Chief Financial Officer, Robert Halpin, Russell
Hammond, Peder Paus and Nils N. Trulsvik. See "-- Interests of Certain Persons
in the Transaction."
Non-Solicitation Covenant
The Combination Agreement also provides that Fountain and CanArgo will
not (and will not permit their respective subsidiaries, officers, directors,
employees, investment bankers, representatives or other agents or affiliates to)
directly or indirectly: (i) encourage, solicit or initiate the submission of any
proposal for a merger, consolidation, substantial asset transfer, substantial
stock issuance or similar transaction involving Fountain or CanArgo (an
"Acquisition Proposal"); (ii) enter into any agreement with respect to any
Acquisition Proposal; or (iii) participate in discussions or negotiations with,
or furnish any information to, any person in connection with, or take any other
action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.
Each of Fountain and CanArgo will promptly communicate to the other that such a
solicitation has been received, or that any such information has been requested
from it or that such negotiations or discussions have been sought to be
initiated with it. If the Fountain Board or the CanArgo Board receives a
communication with respect to an Acquisition Proposal, which it determines,
after consultation with its financial advisors, may be reasonably likely to
result in a transaction that is more favorable to its shareholders than the
Transaction, such board of directors may engage in any negotiations concerning
or provide any confidential information or data to, or have any discussions
with, any person related to such transaction, or otherwise facilitate any effort
or attempt to make or implement such a transaction. Upon engaging in such
negotiations or discussions, providing such information or otherwise
facilitating any effort or attempt to make or implement such a transaction, such
party must give notice to the other party of such party's engagement in such
activities.
Conditions to Closing
The Combination Agreement provides that the respective obligations of
Fountain and CanArgo to complete the Transaction are subject to a number of
conditions, including the following: (i) the approval of the Continuance and the
Arrangement by the required vote of the holders of CanArgo Common Shares; (ii)
the receipt by CanArgo of notice from no more than 10% of the holders of CanArgo
Common Shares of their intention to
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exercise their rights of dissent; (iii) the approval of the Fountain Stock
Issuance Proposal by the holders of Fountain Common Stock; (iv) the filing or
obtaining of all orders, including the Final Order and orders from the Ontario
Securities Commission and other relevant Canadian securities regulatory
authorities, that are legally required for the consummation of the transactions
contemplated by the Combination Agreement, without material conditions or costs
(in the case of the Final Order); (v) the receipt of all material permits and
authorizations required to consummate the Arrangement; (vi) the absence of any
temporary restraining order, preliminary injunction, permanent injunction or
other order preventing or rendering illegal the consummation of the Transaction
or any proceeding that is reasonably likely to succeed seeking any of the
foregoing; (vii) the accuracy of the representations and warranties of Fountain
and CanArgo as of the Effective Date except to the extent the failure of such
representations and warranties to be true and accurate has not and would not be
reasonably likely to have a Fountain Material Adverse Effect or a CanArgo
Material Adverse Effect, as the case may be; (viii) the performance by Fountain
and CanArgo in all material respects of all agreements and covenants to be
performed by them under the Combination Agreement; (ix) the absence of events or
changes that have had or would be reasonably likely to have a Fountain Material
Adverse Effect or a CanArgo Material Adverse Effect; (x) the restructuring of
the Fountain Board and management as contemplated by the Combination Agreement;
(xi) the receipt of tax opinions as to certain Canadian tax consequences of the
Transaction; (xii) the effectiveness of any registration statement required to
be filed under the Securities Act; (xiii) the receipt of legal opinions; (xiv)
the receipt of letters from Coopers & Lybrand L.L.P., Fountain's independent
auditors, and Ernst & Young, CanArgo's independent auditors, dated a date within
two business days before the Effective Date with respect to the financial
information relating to Fountain and CanArgo contained in the Joint Proxy
Statement/Prospectus, respectively; and (xv) the receipt by Fountain of advice
from one or both of CIBC Oppenheimer and Orkla, that the Arrangement is fair
from a financial point of view to Fountain and its stockholders. Any one or more
of the conditions enumerated above may be waived by the party whose performance
is conditional thereon. If either Fountain or CanArgo waives any condition that
would materially affect the stockholders of Fountain or the shareholders of
CanArgo or materially alter the pro forma financial information presented in
this Joint Proxy Statement/Prospectus under the captions "PRO FORMA FINANCIAL
INFORMATION," then Fountain and CanArgo will revise this Joint Proxy
Statement/Prospectus and resolicit proxies from the affected stockholders or
shareholders. If CanArgo waives the condition requiring the receipt of tax
opinions as to certain Canadian tax consequences of the Transaction and the tax
consequences are materially different from those described in this Joint Proxy
Statement/Prospectus, then Fountain and CanArgo will revise this Joint Proxy
Statement/Prospectus and CanArgo will resolicit proxies from its shareholders.
Termination and Termination Fees
The Combination Agreement may be terminated by mutual consent of the
Fountain Board and the CanArgo Board at any time prior to the Effective Date.
Either Fountain or CanArgo may terminate the Combination Agreement prior to the
Effective Date if: (i) the Arrangement shall not have been consummated on or
before September 30, 1998, so long as the terminating party is not in material
breach under the Combination Agreement; (ii) any requirements or conditions are
imposed, or proposed, upon either Fountain or CanArgo or any of their respective
affiliates, by any governmental entity in connection with the authorization,
consent or approval of such governmental entity (or the expiration or
termination of any waiting period applicable to such government entity's review
of the transactions contemplated by the Combination Agreement), or by any
domestic or foreign court or similar tribunal in any suit challenging the
Transactions which, in the reasonable opinion of Fountain or CanArgo, would
require Fountain to take any action that would have a Fountain Material Adverse
Effect or a CanArgo Material Adverse Effect; (iii) the CanArgo Board determines
to withdraw its recommendation to the CanArgo shareholders that they vote for
the Arrangement and recommends instead they approve an alternative transaction;
(iv) the Fountain Board determines to withdraw its recommendation to the
Fountain stockholders that they vote for approval of the Fountain Stock Issuance
Proposal and recommends instead that they approve an alternative transaction; or
(v) a condition to such company's obligation to close the Transaction (including
the continued accuracy of representations and warranties) has not been met or
waived and is no longer capable of satisfaction.
CanArgo must pay a fee of US$3,000,000 to Fountain if the Combination
Agreement is terminated due to (i) the CanArgo Board withdrawing its
recommendation to the CanArgo shareholders that they vote for the Continuance
Resolution and the Arrangement Resolution and instead recommending that they
approve an alternative transaction, (ii) CanArgo's willful breach of its
obligations under the Combination Agreement to
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consummate the Arrangement, (iii) the failure by CanArgo's shareholders to
approve the Continuance Resolution and the Arrangement Resolution, or (iv) the
receipt by CanArgo on or prior to the Effective Time of notices from holders of
more than 10% of the CanArgo Common Shares of their intention to exercise their
rights of dissent, provided that at the time of such termination Fountain is not
in material breach of a representation, warranty or covenant of the Combination
Agreement.
Fountain must pay a fee of US$3,000,000 to CanArgo if the Combination
Agreement is terminated due to (i) the Fountain Board withdrawing its
recommendation to the Fountain stockholders that they vote for the Fountain
Stock Issuance Proposal and recommending instead that they approve an
alternative transaction, (ii) Fountain's willful breach of its obligations under
the Combination Agreement to consummate the Transaction, or (iii) the failure of
the Fountain stockholders to approve the Fountain Stock Issuance Proposal, so
long as CanArgo is not in material breach of the Combination Agreement at the
time of such termination.
SHAREHOLDER AGREEMENTS
Certain shareholders of CanArgo, including certain directors and
officers of CanArgo, who hold approximately 42.9% of the CanArgo Common Shares
presently outstanding and entitled to vote have agreed, subject to the
performance of any fiduciary duties they may have, (i) to vote their CanArgo
Common Shares in favor of the Continuance Resolution and the Arrangement
Resolution, (ii) not to solicit or encourage any proposal or offer from any
person concerning the possible acquisition of all or substantially all of
CanArgo's business, assets or capital stock by merger or other means, and (iii)
not to sell any of their CanArgo Common Shares prior to the Effective Date of
the Transaction, unless in each case the CanArgo Board withdraws its
recommendation that the CanArgo shareholders approve the Continuance Resolution
and the Arrangement Resolution and instead recommends to such shareholders that
they approve an alternate transaction. These shareholders are Provincial
Securities Ltd., Terrenex Acquisition Corporation, John McLeod and Michael
Binnion. The CanArgo Shareholder Agreements terminate in the event the CanArgo
Board withdraws the recommendation that the CanArgo shareholders approve the
Transaction and instead recommends that they approve an alternative transaction.
Certain stockholders of Fountain, including all of the directors of
Fountain, who hold approximately 5.8% of the outstanding shares of Fountain
Common Stock have agreed, subject to the performance of any fiduciary duties
they may have, (i) to vote their shares of Fountain Common Stock in favor of the
Fountain Stock Issuance Proposal and the Fountain Charter Changes, (ii) not to
solicit any offer from any person concerning the possible transfer of all or
substantially all of Fountain's business, assets or capital stock by merger or
other means, and (iii) not to sell any of their Fountain Common Stock prior to
the Effective Date of the Transaction, unless in each case the Fountain Board
withdraws its recommendation that the Fountain stockholders approve the Fountain
Stock Issuance Proposal and the Fountain Charter Changes and instead recommends
to such stockholders that they approve an alternative transaction. These
stockholders are Nils Trulsvik, Einar Bandlien, Stanley Heckman, Eugene Meyers,
0istein Nyberg, Robert Halpin, Svein Johansen and Rune Falstad. The Fountain
Stockholder Agreements terminate in the event the Fountain Board withdraws its
recommendation that the Fountain stockholders approve the Transaction and
instead recommends that they approve an alternative transaction.
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE TRANSACTION
An arrangement of a corporation under the OBCA requires approval by both
the Court and the shareholders of the subject corporation. CanArgo has obtained
the Interim Order providing for the calling and holding of the CanArgo
Shareholders Meeting and other procedural matters. CanArgo will also submit to
the Court this Joint Proxy Statement/Prospectus before mailing it to the holders
of CanArgo Common Shares entitled to receipt thereof.
Subject to the approval of the Arrangement by the CanArgo shareholders
at the CanArgo Shareholders Meeting, the hearing in respect of the Final Order
is scheduled to take place on __________ __, 1998 at _______ (Toronto time) in
the Court at 145 Queen Street West, Toronto, Ontario. All CanArgo shareholders
who wish to participate or be represented or to present evidence or arguments at
that hearing must serve and file a notice of appearance as set out in the Notice
of Motion for the Final Order and satisfy any other requirements. At the hearing
of the motion in respect of the Final Order, the Court will consider, among
other things, the fairness and
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reasonableness of the Arrangement. The Court may approve the Arrangement as
proposed or as amended in any manner the Court may direct, subject to compliance
with such terms and conditions, if any, as the Court deems fit.
Assuming the Final Order is granted and the other conditions to the
Combination Agreement are satisfied or waived, it is anticipated that
simultaneously Articles of Arrangement will be filed with the Director under the
OBCA to give effect to the Arrangement, the Voting, Support and Exchange Trust
Agreement will be executed and delivered and the various other documents
necessary to consummate the Transaction will be executed and delivered.
Assuming that the requisite shareholder and other approvals are
obtained, it is presently anticipated that the Effective Date will occur on or
about ____________ __, 1998.
ANTICIPATED ACCOUNTING TREATMENT
The Transaction is expected to be accounted for as a purchase of CanArgo
by Fountain, with the purchase price being allocated among CanArgo's assets, in
accordance with U.S. GAAP. After the consummation of the Transaction, the
results of operations of CanArgo will be included in the consolidated financial
statements of Fountain.
PROCEDURES FOR EXCHANGE OF SHARE CERTIFICATES BY CANARGO SHAREHOLDERS
As soon as practicable after the Effective Time, a Letter of Transmittal
will be delivered to the registered holders of CanArgo Common Shares. The Letter
of Transmittal, when duly completed and returned together with a certificate for
CanArgo Common Shares, will enable each CanArgo shareholder to obtain a
certificate for that number of Exchangeable Shares equal to the number of
CanArgo Common Shares submitted with such Letter of Transmittal multiplied by
the Exchange Ratio (subject to adjustment for fractional shares, as discussed
below). Incorporated into the Letter of Transmittal will be a form of a Notice
of Exercise, which when duly completed and returned with a Letter of Transmittal
and a certificate for CanArgo Common Shares, will enable holders of CanArgo
Common Shares to exchange any or all of the Exchangeable Shares that they are
entitled to receive pursuant to the Arrangement for an equivalent number of
shares of Fountain Common Stock. See "-- Transaction Steps and Description of
Exchangeable Shares."
No certificates representing fractional Exchangeable Shares will be
issued. In lieu of fractional Exchangeable Shares, each holder of CanArgo Common
Shares who would otherwise be entitled to receive a fraction of an Exchangeable
Share will be paid by CanArgo upon the exchange of CanArgo Common Shares for
Exchangeable Shares an amount of cash (rounded to the nearest whole cent) equal
to the Canadian Dollar Equivalent of the product of (i) such fraction,
multiplied by (ii) the Current Market Price of Fountain Common Stock on the
Effective Date.
Any use of the mails to transmit a certificate for CanArgo Common Shares
and a related Letter of Transmittal is at the risk of the CanArgo shareholder.
If these documents are mailed, it is recommended that registered mail, with
return receipt requested, properly insured, be used.
Certificates representing the appropriate number of Exchangeable Shares
issuable to a former holder of CanArgo Common Shares who has complied with the
procedures set out above, together with a check in the amount, if any, payable
in lieu of fractional Exchangeable Shares will, as soon as practicable after the
date of receipt of a certificate for CanArgo Common Shares and a related Letter
of Transmittal, be (a) forwarded to the holder at the address specified in the
Letter of Transmittal by first class mail or (b) made available at the offices
of Montreal Trust Company of Canada for pick up by the holder, if requested by
the holder in the Letter of Transmittal.
Where a certificate for CanArgo Common Shares has been destroyed, lost
or mislaid, the registered holder of that certificate should immediately contact
Montreal Trust Company of Canada regarding the issuance of a replacement
certificate upon the holder satisfying such requirements as may be imposed by
CanArgo in connection with issuance of the replacement certificate.
SHAREHOLDERS SHOULD NOT SEND THEIR CERTIFICATES TO CANARGO UNTIL THEY
RECEIVE A LETTER OF TRANSMITTAL.
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STOCK EXCHANGE LISTINGS
Exchangeable Shares; CanArgo Common Shares
There is no current intention to list the Exchangeable Shares on any
stock exchange in Canada or the United States. However, the Exchangeable Shares
are transferable. Following consummation of the Transaction, the CanArgo Common
Shares will no longer be quoted on the CDN.
Fountain Common Stock
The Fountain Common Stock is listed on NASDAQ and the OSE. Fountain has
agreed to use its best efforts to cause the shares of Fountain Common Stock
issuable from time to time in exchange for the Exchangeable Shares to be listed
on NASDAQ. There is no current intention to list the Fountain Common Stock on
any other stock exchange in Canada or the United States.
ELIGIBILITY FOR INVESTMENT IN CANADA
The Exchangeable Shares and Fountain Common Stock will be foreign
property under the Canadian Tax Act for trusts governed by registered pension
plans, registered retirement savings plans, registered retirement income funds
and deferred profit sharing plans or for certain other tax-exempt persons.
REGULATORY MATTERS
HSR Act and Competition Act (Canada)
This transaction is not subject to the notification and other
requirements of the HSR Act or the Competition Act (Canada).
Investment Canada Act
The Investment Canada Act is Canada's statute of general application
governing the acquisition of control of Canadian businesses by non-Canadians.
The combination of Fountain and CanArgo is not subject to review under the
Investment Canada Act. Notification of the combination of Fountain and CanArgo
is required to be given under the Investment Canada Act within 30 days after the
Effective Date.
RESALE OF EXCHANGEABLE SHARES AND FOUNTAIN COMMON STOCK RECEIVED IN THE
TRANSACTION
United States
The issuance of Exchangeable Shares to holders of CanArgo Common Shares
will not be registered under the Securities Act. Such shares will instead be
issued in reliance upon the exemption provided by Section 3(a)(10) of the
Securities Act. Section 3(a)(10) exempts securities issued in exchange for one
or more outstanding securities from the general requirement of registration
where the terms and conditions of the issuance and exchange of such securities
have been approved by a court of competent jurisdiction, after a hearing upon
the fairness of the terms and conditions of the issuance and exchange at which
all persons to whom such securities will be issued have the right to appear. The
Court is authorized to conduct a hearing to determine the fairness of the terms
and conditions of the Arrangement, including the proposed issuance of
Exchangeable Shares in exchange for CanArgo Common Shares. Application to the
Court for the Interim Order is expected to be made shortly after the CanArgo
Record Date, and subject to the approval of the Arrangement by the CanArgo
shareholders, a hearing by the Court on the fairness of the Arrangement will be
held within two business days after the CanArgo Shareholders Meeting. See "--
Court Approval of the Arrangement and Completion of the Transaction."
The Exchangeable Shares received in exchange for CanArgo Common Shares
(except Exchangeable Shares held by CanArgo Affiliates) in the Arrangement will
be freely transferable under United States federal securities laws. Persons who
may be deemed to be affiliates of an issuer generally include individuals or
entities that control, are controlled by or are under common control with such
issuer and may include certain officers, directors and principal shareholders of
such issuer.
The offer and issuance of shares of Fountain Common Stock from time to
time in exchange for the Exchangeable Shares is being registered under the
Securities Act, and this Joint Proxy Statement/Prospectus serves
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as the prospectus for such offering. Fountain has undertaken to use its best
efforts to keep a current prospectus available so long as Exchangeable Shares
are outstanding.
Canada
Fountain and CanArgo will apply for rulings or orders of certain
provincial securities regulatory authorities in Canada to permit the issuance to
CanArgo shareholders of the Exchangeable Shares. Application will also been made
to permit resale of those shares in such provinces without restriction by a
shareholder other than a "control person," provided that no unusual effort is
made to prepare the market for any such resale or to create a demand for the
securities which are the subject of any such resale and no extraordinary
commission or consideration is paid in respect thereof. Applicable Canadian
securities legislation provides a rebuttable presumption that a person or
company is a control person in relation to an issuer where the person or company
alone or in combination with others holds more than 20% of the outstanding
voting securities of the issuer.
Fountain and CanArgo will also apply for rulings or orders of certain
provincial securities regulatory authorities in Canada to permit the issuance of
Fountain Common Stock to holders of Exchangeable Shares and to permit the resale
of Fountain Common Stock by such holders on the same terms as set out above with
respect to the Exchangeable Shares.
ONGOING CANADIAN REPORTING OBLIGATIONS
Upon completion of the Arrangement, CanArgo, under its new name, CanArgo
Oil & Gas Inc., will continue to be a reporting issuer in certain Canadian
provinces. Application will be made for certain exemptions from statutory
financial and other reporting requirements, including exempting insiders of
CanArgo from the requirement of filing reports with respect to trades of CanArgo
securities, in those Canadian provinces on the condition that Fountain files
with the relevant provincial securities regulatory authorities copies of certain
of its reports filed with the SEC and that holders of Exchangeable Shares
receive certain materials that are sent to holders of Fountain Common Stock.
THE COMPANIES AFTER THE TRANSACTION
GENERAL
Upon completion of the Transaction, the parent company will be Fountain,
which will continue to be a corporation governed by the DGCL. Its principal
executive office will be located at 1580 Guinness House, 727-7th Avenue S.W.,
Calgary, Alberta, T2P 0Z5 (telephone number 403-777-1185). If the Fountain
Charter Changes are approved at the Fountain Stockholders Meeting, Fountain's
name will become CanArgo Energy Corporation and the Reverse Split will be
effective upon completion of the Transaction. After the Effective Time, Fountain
will own all of the common equity of CanArgo, which under its new name, CanArgo
Oil & Gas Inc., will be a corporation governed by the OBCA. CanArgo's registered
office will be located at 1580 Guinness House, 727-7th Avenue S.W., Calgary,
Alberta, T2P 0Z5 (telephone number 403-777-1185).
MANAGEMENT
Directors
The following persons are expected to be elected as directors of
Fountain after the Effective Time, to serve until the next annual meeting of
Fountain stockholders and until their successors are elected:
Michael Binnion. Mr. Binnion (37) has been the Chief Financial Officer,
Secretary and a director of CanArgo since March 1997. Mr. Binnion is also
President and a director of Terrenex Acquisition Corp., an Alberta Stock
Exchange listed investment company. Prior to April 1997, Mr. Binnion was Chief
Financial Officer and a Director of Trans-Dominion Energy Company, a Toronto
Stock Exchange listed exploration and production company.
Robert A. Halpin. Mr. Halpin (62) has been a director of Fountain since
1995 and served as Chairman of the Board of Fountain from November 14, 1995
until February 4, 1997 when he was elected Vice Chairman of the Board. Mr.
Halpin has many years of experience in the oil and gas industry. From 1989 to
his retirement in
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September 1993, he served as Vice President for International Exploration and
Production with Petro-Canada. In October 1993, Mr. Halpin became President of
Halpin Energy Resources Ltd., a firm he formed to provide advisory services to
energy companies with emphasis on international petroleum projects.
J.F. Russell Hammond. Mr. Hammond (56) has been a director of CanArgo
since June 1997. For over five years, Mr. Hammond has been an investment advisor
to Provincial Securities Ltd., a private investment company. Additionally, Mr.
Hammond has been Chairman of Terrenex Acquisition Company since 1992.
Peder Paus. Mr. Paus (52) is an independent businessman based in Oslo,
Norway and has been, since 1995, a consultant on investor relations for various
companies. From 1981 to 1995, Mr. Paus was Chief Executive Officer of North
Venture Ltd., a shipping and offshore consulting firm based in London, England.
David Robson. Dr. Robson (40) has been the Chairman, Chief Executive
Officer and a director of CanArgo since June 1997. From April 1992 until March
1997, Dr. Robson was Managing Director and Chief Executive Officer of JKX Oil &
Gas plc. He holds a B.Sc. (Hon) in Geology and a Ph.D. in Geochemical Computer
Simulation from the University of Newcastle upon Tyne, and an MBA from the
University of Strathclyde. He is the energy sector representative on the East
European Trade Council.
Nils N. Trulsvik. Mr. Trulsvik (49) has served as President and Chief
Executive Officer of Fountain since February 4, 1997, and he has been a director
of Fountain since 1994. He served as Fountain's Executive Vice President from
September 8, 1994 until November 21, 1994; as President and Chief Executive
Officer from November 21, 1994 to March 9, 1995; and as Executive Vice President
from March 9, 1995 to February 4, 1997. Prior to joining Fountain in 1994, he
held various positions with Nopec a.s., a Norwegian petroleum consulting
company, including Managing Director from 1987 to 1993 and Special Advisor from
1993 to August 1994.
The Fountain Board held 11 meetings during the fiscal year ended
December 31, 1997. The Audit Committee of the Fountain Board, which is composed
of Robert Halpin and Stanley Heckman and is responsible for reviewing Fountain's
financial statements, audit results, internal controls and accounting
principles, policies and practices, held eight meetings during 1997. The
Compensation Committee of the Fountain Board, which is composed of Messrs.
Halpin and Heckman and is responsible for approving the compensation of
Fountain's executive officers, overseeing the compensation scheme for other
Fountain employees, and administering Fountain's stock option and other employee
benefit plans, held eight meetings during fiscal 1997.
In the year ended December 31, 1997, each director of Fountain attended
over 75% of the Fountain Board meetings and meetings of the Fountain Board's
committees of which such director is or was a member.
It is anticipated that after the Effective Time, the new Fountain Board
will appoint new members of the Audit Committee and the Compensation Committee,
both of which are expected to be comprised solely of non-employee directors. The
Fountain Board has not appointed a nominating committee, and it is not expected
that the new Fountain Board will appoint such a committee.
Executive Officers
After the Effective Time, David Robson and Michael Binnion, currently
directors and executive officers of CanArgo, will become Chairman of the Board
and Chief Executive Officer, and President and Chief Financial Officer,
respectively, of Fountain. Einar Bandlien, currently a director and Executive
Vice President of Fountain, is expected to continue to be employed as Executive
Vice President - Business Development of Fountain. Prior to joining Fountain in
1994, Mr. Bandlien (50) held various positions with Nopec a.s., a Norwegian
petroleum consulting company, including Director of International Activities
from 1987 to 1991 and Chairman from 1990 to 1993. Mr. Bandlien also served as
Executive Secretary of the Norwegian Petroleum Resource Management Alliance from
1991 to 1993.
See "INFORMATION CONCERNING FOUNTAIN -- Executive Compensation; --
Director's Compensation" for information concerning compensation paid to Messrs.
Trulsvik and Halpin in 1997, and compensation to be paid to Fountain's
non-employee directors after the Effective Date.
See "INFORMATION CONCERNING CANARGO -- Executive Compensation" for
information concerning the compensation being paid to Messrs. Robson and Binnion
and John McLeod, which compensation arrangements, except for that of Mr. McLeod,
will continue with Fountain after the Effective Time.
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PRINCIPAL HOLDERS OF SECURITIES
To the knowledge of Fountain, there are no persons who would
beneficially own in excess of 5% of the outstanding shares of Fountain Common
Stock after giving effect to the Transaction as of the Fountain Record Date,
other than Terrenex Acquisition Corporation, Provincial Securities Limited and
Caldwell Associates. See "INFORMATION CONCERNING FOUNTAIN -- Security
Ownership."
See "INFORMATION CONCERNING CANARGO -- Directors and Officers" and
"INFORMATION CONCERNING FOUNTAIN -- Security Ownership" for information with
respect to securities of CanArgo and Fountain beneficially owned by certain
directors and officers of such companies.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires Fountain's directors and
executive officers and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities ("10% Stockholders") to file
with the SEC initial reports of ownership and reports of changes in ownership of
Fountain Common Stock and other equity securities of Fountain. Officers,
directors and 10% Stockholders are required by the SEC's regulations to furnish
Fountain with copies of all Section 16(a) forms they file.
To Fountain's knowledge (based solely upon a review of the copies of
such Section 16(a) reports furnished to Fountain and written representations
that no other reports were required), during the year ended December 31, 1997,
the Company's officers, directors and 10% Stockholders have complied with all
applicable Section 16(a) filing requirements.
FOUNTAIN CAPITAL STOCK
Authorized Capital Stock
The Fountain Certificate currently authorizes Fountain to issue
50,000,000 shares of Fountain Common Stock, and 5,000,000 shares of Fountain
Preferred Stock. If approved, the Reverse Split will have no effect on the
number of authorized shares or the par value thereof. See "ADDITIONAL MATTERS
FOR CONSIDERATION OF FOUNTAIN STOCKHOLDERS -- Proposal to Approve Reverse
Split."
Common Stock
Holders of Fountain Common Stock have no preferences or preemptive,
conversion, or exchange rights. Subject to any preferential rights of any shares
of Fountain Preferred Stock that may be outstanding, holders of shares of
Fountain Common Stock are entitled to receive dividends on such stock out of
assets legally available for distribution when, as and if authorized and
declared by the Fountain Board and to share ratably in the assets of Fountain
legally available for distribution to its stockholders in the event of its
liquidation, dissolution or winding-up. Pursuant to the Voting, Support and
Exchange Trust Agreement, Fountain has agreed not to declare or pay dividends on
the Fountain Common Stock unless CanArgo is able to declare and pay and
simultaneously declares and pays an equivalent dividend on the Exchangeable
Shares. See "THE TRANSACTION -- Transaction Steps and Description of
Exchangeable Shares."
Holders of Fountain Common Stock are entitled to one vote per share on
all matters voted on generally by the stockholders, including the election of
directors, and except as otherwise required by law or except as provided with
respect to any series of Preferred Stock, the holders of such shares will
possess all voting power. The Fountain Certificate does not provide for
cumulative voting for the election of directors.
The shares of Fountain Common Stock to be issued from time to time in
exchange for the Exchangeable Shares will be validly issued, fully paid and
non-assessable.
Preferred Stock
The Fountain Board is authorized at any time and from time to time,
without any further vote or action by Fountain's stockholders, to provide for
the issuance of all or any shares of Fountain Preferred Stock in one or more
classes or series, and to fix for each such class or series such voting powers,
full or limited, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as are permitted by the
DGCL, including, but not limited to,
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provisions regarding redemption, conversion and the right to receive dividends,
all as the Fountain Board determines by resolution. See "RISK FACTORS --
Anti-Takeover Effects of Stock Issuance."
Special Voting Stock
In connection with the consummation of the Transaction, the Fountain
Board has adopted appropriate resolutions and Fountain will file a certificate
of designation with the Secretary of State of the State of Delaware for the
purpose of designating a series of Fountain Preferred Stock as Series Voting
Preferred Stock, which is referred to herein as Fountain Special Voting Stock.
One hundred shares of Fountain Special Voting Stock will be issued to the
Trustee in accordance with the terms of the Combination Agreement. Except as
otherwise required by the DGCL or the Fountain Certificate, each share of
Fountain Special Voting Stock will be entitled to a number of votes which may be
voted in the election of directors and on all other matters submitted to a vote
of holders of Fountain Common Stock equal to the quotient (rounded down to the
nearest whole number) obtained by dividing the number of outstanding
Exchangeable Shares from time to time not owned by Fountain or certain
subsidiaries of Fountain by the number of shares of Fountain Special Voting
Stock outstanding as of the applicable record date. The holders of Fountain
Common Stock and the holder of the Fountain Special Voting Stock will vote
together as a single class on all matters, except to the extent voting as a
separate class is required by applicable law or the Fountain Certificate. In the
event of any liquidation, dissolution or winding up of Fountain, the holder of
the Fountain Special Voting Stock will be entitled to receive from any assets of
Fountain available for distribution to its stockholders the sum of US$1.00 per
share. The holder of the Fountain Special Voting Stock will not be entitled to
receive dividends. Pursuant to the Combination Agreement, the Fountain Special
Voting Stock will be issued to the Trustee appointed under the Voting, Support
and Exchange Trust Agreement. At such time as the Fountain Special Voting Stock
has no votes attached to it because there are no Exchangeable Shares outstanding
not owned by Fountain or certain subsidiaries of Fountain, and there are no
shares of stock, debt, options or other agreements of CanArgo that could give
rise to the issuance of any Exchangeable Shares to any person (other than
Fountain or certain subsidiaries of Fountain), the Fountain Special Voting Stock
may be redeemed by Fountain for a redemption price of US$1.00 per share. See "--
Voting, Support and Exchange Trust Agreement."
CANARGO SHARE CAPITAL
In the event of the consummation of the Transaction, the share capital
of CanArgo after the Effective Time will have the rights and preferences
summarized below. Such summary is qualified in its entirety by reference to the
Plan of Arrangement.
CanArgo Common Shares
The holders of CanArgo Common Shares are entitled to receive notice of
and to attend all meetings of the shareholders of CanArgo and are entitled to
one vote for each share held of record on all matters submitted to a vote of
holders of CanArgo Common Shares. Subject to the prior rights of the holders of
the Exchangeable Shares and any other shares ranking senior to the Common Shares
with respect to priority in the payment of dividends, the holders of CanArgo
Common Shares are entitled to receive such dividends as may be declared by the
CanArgo Board out of legally available funds. Holders of CanArgo Common Shares
are entitled upon any liquidation, dissolution or winding up of CanArgo to
receive the remaining property and assets of CanArgo, subject to the prior
rights of the holders of the Exchangeable Shares and to any other shares ranking
senior to the CanArgo Common Shares.
Fountain will be the sole owner of CanArgo Common Shares after the
Effective Time.
First Preferred Shares
The first preferred shares may at any time be issued in one or more
series at the discretion of the CanArgo Board. The CanArgo Board may fix the
designation, rights, privileges, restrictions, conditions and limitations
attaching to the first preferred shares of such series, including the issue
price, the rate or the amount or method of calculation of dividends, the terms
and conditions of any purchase for cancellation or redemption and conversion, if
any. The first preferred shares of each series shall rank equally with the
shares of every other series in respect to priority in payment of dividends and
distribution of assets in the event of liquidation, dissolution or winding up or
any other distribution of assets. When any dividends or amounts payable on a
repayment of capital are not paid in full, the first preferred shares of all
series shall participate ratably in respect of such dividends.
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The first preferred shares are entitled to a preference over the CanArgo
Common Shares and any other shares ranking junior to the first preferred shares
with respect to payment of dividends and the distribution of assets in the event
of liquidation, dissolution or winding up or any other distribution of the
assets of CanArgo. The holders of first preferred shares are not entitled to
vote at any meetings of shareholders of CanArgo, except as required by law.
Second Preferred Shares
The second preferred shares may at any time be issued in one or more
series, at the discretion of the CanArgo Board. The CanArgo Board may fix the
designation, rights, privileges, restrictions, conditions and limitations
attaching to the first preferred shares of such series, including the issue
price, the rate or the amount or method of calculation of dividends, the terms
and conditions of any purchase for cancellation or redemption and conversion (if
any). The second preferred shares of each series shall rank equally with the
shares of every other series in respect to priority in payment of dividends and
distribution of assets in the event of liquidation, dissolution or winding up or
any other distribution of assets. When any dividends or amounts payable on a
repayment of capital are not paid in full, the second preferred shares of all
series shall participate ratably in respect of such dividends. The second
preferred shares are entitled to a preference over the CanArgo Common Shares and
other any other shares ranking junior to the second preferred shares (but are
subordinate to the first preferred shares) with respect to payment of dividends
and the distribution of assets in the event of liquidation, dissolution or
winding up or any other distribution of the assets of CanArgo. The holders of
second preferred shares are not entitled to vote at any meetings of shareholders
of CanArgo, except as required by law.
CanArgo Exchangeable Shares
Ranking. The Exchangeable Shares will rank prior to the CanArgo Common
Shares with respect to the payment of dividends and the distribution of assets
in the event of liquidation, dissolution or winding up of CanArgo.
Dividends. Holders of Exchangeable Shares will be entitled to receive
dividends equivalent to dividends paid from time to time by Fountain on shares
of Fountain Common Stock. The declaration date, record date and payment date for
dividends on the Exchangeable Shares will be the same as that for the
corresponding dividends on the Fountain Common Stock.
Certain Restrictions. Without the approval of the holders of the
Exchangeable Shares, CanArgo will not be permitted to pay any dividend on the
CanArgo Common Shares or any other shares ranking junior to the Exchangeable
Shares (other than stock dividends payable in CanArgo Common Shares or such
other shares, as the case may be), redeem, purchase or make any capital
distribution in respect of CanArgo Common Shares or any other shares ranking
junior to the Exchangeable Shares or redeem or purchase any other shares of
CanArgo ranking equally with the Exchangeable Shares with respect to the payment
of dividends or on any liquidation distribution, unless dividends have been
declared and paid in full on the outstanding Exchangeable Shares corresponding
to dividends declared on the Fountain Common Stock. CanArgo will not be
permitted to issue any shares other than Exchangeable Shares, CanArgo Common
Shares and any other shares not ranking superior to the Exchangeable Shares
without the approval of the holders of the Exchangeable Shares.
Liquidation of CanArgo. In the event of the liquidation, dissolution or
winding up of CanArgo or any other proposed distribution of the assets of
CanArgo among its shareholders for the purpose of winding up its affairs, a
holder of Exchangeable Shares will be entitled to receive for each Exchangeable
Share on the Liquidation Date the Liquidation Amount.
On or after the Liquidation Date, a holder of Exchangeable Shares may
surrender certificates representing such Exchangeable Shares, together with such
other documents as may be required by CanArgo, at CanArgo's registered office or
the office of its transfer agent for Exchangeable Shares. Upon receipt of the
certificates and other documents and subject to the exercise by Fountain of its
Liquidation Call Right, CanArgo will deliver the Liquidation Amount to such
holder at the address recorded in the securities register or by holding the
Liquidation Amount for pick up by the holder at CanArgo's registered office or
the office of its transfer agent, as specified by CanArgo in a notice to such
holders.
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Upon the occurrence of a liquidation, dissolution or winding up of
CanArgo, Fountain will have the Liquidation Call Right and, upon the exercise of
the Liquidation Call Right, the holders of such Exchangeable Shares will be
obligated to sell such shares to Fountain. The purchase by Fountain of all of
the outstanding Exchangeable Shares upon the exercise of the Liquidation Call
Right will occur on the Liquidation Date.
Upon the occurrence of a CanArgo Insolvency Event, the Trustee will have
the right to require Fountain to purchase any or all of the Exchangeable Shares
then outstanding (other than Exchangeable Shares held by Fountain and certain of
its subsidiaries) for the Liquidation Amount. See "-- Voting, Support and
Exchange Trust Agreement - Optional Exchange Right."
Automatic Exchange on Liquidation of Fountain. If a Fountain Liquidation
Event occurs, CanArgo will be required to purchase each outstanding Exchangeable
Share (other than Exchangeable Shares held by Fountain and certain of its
subsidiaries) and holders of Exchangeable Shares will be required to sell the
Exchangeable Shares held by them at that time, by exchanging for each such
Exchangeable Share one share of Fountain Common Stock, plus an additional amount
equivalent to the full amount of all declared and unpaid dividends on the
Exchangeable Share. Upon a holder's request and surrender of Exchangeable Share
certificates, duly endorsed in blank and accompanied by such instrument of
transfer as Fountain may reasonably require, Fountain will deliver to such
holder certificates representing an equivalent number of shares of Fountain
Common Stock and a check in the amount equivalent to the full amount of all
declared and unpaid dividends on such Exchangeable Shares.
Retraction of Exchangeable Shares by Holders. A holder of Exchangeable
Shares will be entitled at any time to require CanArgo to redeem any or all of
the Exchangeable Shares held by such holder for the Redemption Price, subject to
the Retraction Right. Holders of the Exchangeable Shares may effect such
retraction by presenting certificates to CanArgo or its transfer agent
representing the number of Exchangeable Shares the holder desires to retract,
together with a Retraction Request specifying the number of Exchangeable Shares
the holder wishes to retract and such other documents as may be required to
effect the transaction of the Exchangeable Shares. The retraction will become
effective on the Retraction Date.
When a holder requests CanArgo to redeem the Exchangeable Shares,
Fountain will have an overriding Retraction Call Right to purchase all but not
less than all of the Exchangeable Shares that the holder has requested CanArgo
to redeem at the Redemption Price. When a Retraction Request is made by a holder
of Exchangeable Shares, CanArgo will immediately notify Fountain, and Fountain
must then advise CanArgo within two business days as to whether or not the
Retraction Call Right will be exercised. If Fountain so advises CanArgo within
such two business day period, CanArgo will notify the holder as soon as possible
thereafter that the Retraction Call Right will be exercised. A holder may revoke
his or her Retraction Request at any time prior to the close of business on the
business day preceding the Retraction Date, in which case the holder's
Exchangeable Shares will not be purchased by Fountain nor be redeemed by
CanArgo. If the holder does not revoke his or her Retraction Request, the
Exchangeable Shares that the holder has requested CanArgo to redeem will be
purchased by Fountain or redeemed by CanArgo on the Retraction Date, as the case
may be, at the Redemption Price.
If CanArgo is not permitted to redeem all Exchangeable Shares tendered
by a retracting holder as a result of solvency provisions of applicable law,
CanArgo will redeem only those Exchangeable Shares tendered by a retracting
holder (rounded down to a whole number of shares) as would not be contrary to
such provisions. The holder of any Exchangeable Shares not redeemed by CanArgo
will be deemed to have required Fountain to purchase such unretracted shares in
exchange for Fountain Common Stock on the Retraction Date pursuant to the
optional Exchange Right. See "-- Voting, Support and Exchange Trust Agreement --
Exchange Rights."
Redemption of Exchangeable Shares. Subject to applicable law and the
Redemption Call Right on any Optional Redemption Date, CanArgo will redeem all
but not less than all of the then outstanding Exchangeable Shares for the
Redemption Price. CanArgo will provide the registered holders of the
Exchangeable Shares with written notice of the proposed redemption of the
Exchangeable Shares by CanArgo at least 120 days prior to the relevant Optional
Redemption Date. On or after the date such proposed redemption is exercised,
CanArgo will deliver the Redemption Price to the holder at the address of the
holder recorded in the securities register or by holding the Redemption Price
for pick up by the holder at the registered office of CanArgo or the office of
the transfer agent as specified in the written notice.
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Fountain may exercise its Redemption Call Right to purchase on any
Optional Redemption Date all but not less than all of the Exchangeable Shares
then outstanding (other than Exchangeable Shares held by Fountain and certain
subsidiaries of Fountain) in exchange for the Redemption Price notwithstanding a
proposed redemption of the Exchangeable Shares by CanArgo on the Optional
Redemption Date pursuant to the Exchangeable Share Provisions. Upon the exercise
of the Redemption Call Right, the holders of the redeemed Exchangeable Shares
will be obligated to sell such shares to Fountain. If Fountain exercises the
Redemption Call Right, CanArgo's right to redeem the Exchangeable Shares on such
Optional Redemption Date will terminate.
Voting Rights. Except as required by applicable law, the holders of the
Exchangeable Shares are not entitled to receive notice of or attend any meeting
of the shareholders of CanArgo or to vote at any such meeting. The holders of
the Exchangeable Shares will be entitled to provide directions with respect to
the exercise of the Voting Rights with respect to matters submitted for a vote
to the holders of Fountain Common Stock. See "-- Voting, Support and Exchange
Trust Agreement."
Amendment and Approval. The rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares may be changed only with the
approval of the holders of Exchangeable Shares having not less than two-thirds
of the votes cast thereon (other than shares beneficially owned by Fountain or
any of its direct or indirect subsidiaries) at a meeting of the holders of
Exchangeable Shares duly called and held at which holders of at least 10% of the
then outstanding Exchangeable Shares are present or represented by proxy. In the
event that no such quorum is present at such meeting within one-half hour after
the time appointed therefor, then the meeting will be adjourned to such place
and time (not less than ten days later) as may be determined at the original
meeting and the holders of Exchangeable Shares present or represented by proxy
at the adjourned meeting will constitute a quorum at the rescheduled meeting and
may transact the business for which the meeting was originally called. At the
rescheduled meeting, a resolution passed by the affirmative vote of not less
than two-thirds of the votes cast will constitute the approval or consent of the
holders of the Exchangeable Shares.
Actions by CanArgo under Voting, Support and Exchange Trust Agreement.
Under the Exchangeable Share Provisions, CanArgo will take all such actions and
do all such things as are necessary or advisable to perform and comply, and to
ensure the performance and compliance by Fountain with its obligations under,
the Voting, Support and Exchange Trust Agreement.
FUTURE ISSUANCES OF AUTHORIZED SHARES
Following the Transaction, the CanArgo Articles will authorize
22,472,860 of Exchangeable Shares, all of which will have been reserved for
issuance pursuant to the Arrangement. Any Exchangeable Shares as to which such
reserve is canceled could be issued, without approval of holders of shares of
Fountain Common Stock or Exchangeable Shares, at such time or times, to such
persons and for such consideration as CanArgo may determine, except as may
otherwise be required by applicable laws, regulations or stock exchange
requirements. NASDAQ currently requires stockholder approval of the issuance of
shares in certain instances, including certain transactions where the issuance
could increase the number of outstanding shares by 20% or more.
Neither CanArgo nor Fountain has any present understanding, agreement or
intention with respect to the issuance of any additional Exchangeable Shares or
shares of Fountain Common Stock, respectively, other than pursuant to the
Arrangement, upon exchange of Exchangeable Shares, in connection with an
agreement to issue up to 375,000 shares of Fountain Common Stock in respect of
Fountain's Stynawske Field project and pursuant to outstanding stock options,
stock purchase warrants and employee benefit plans. Additional Exchangeable
Shares or shares of Fountain Common Stock could be issued in one or more
transactions (within limitations imposed by applicable law), however, which
would make a takeover of Fountain more difficult and therefore less likely, even
though such a takeover might be economically beneficial to holders of Fountain
Common Stock and Exchangeable Shares. The Fountain Board and management of
Fountain have no knowledge of any person or entity that intends to seek a
controlling interest in, or to make a takeover proposal with respect to,
Fountain.
VOTING, SUPPORT AND EXCHANGE TRUST AGREEMENT
The following is a summary description of the material provisions of the
Voting, Support and Exchange Trust Agreement and is qualified in its entirety by
reference to the full text of the Voting, Support and Exchange Trust Agreement
which appears as Annex G hereto.
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Voting Rights
Pursuant to the Voting, Support and Exchange Trust Agreement, Fountain
will issue the Fountain Special Voting Stock to the Trustee for the benefit of
the holders (other than Fountain and certain subsidiaries of Fountain) of the
Exchangeable Shares. Each share of Fountain Special Voting Stock will have a
number of votes which may be cast at any meeting at which Fountain stockholders
are entitled to vote equal to the quotient (rounded down to the nearest whole
number) obtained by dividing the number of outstanding Exchangeable Shares
(other than shares held by Fountain and certain subsidiaries of Fountain) by the
number of shares of Fountain Special Voting Stock outstanding as of the
applicable record date. With respect to any written consent sought from Fountain
stockholders, the Fountain Special Voting Stock will have a similar number of
votes.
Each holder (other than Fountain and certain subsidiaries of Fountain)
of Exchangeable Shares on the record date for any meeting at which Fountain
stockholders are entitled to vote will be entitled to provide directions to the
Trustee with respect to the manner in which the Trustee will exercise the Voting
Rights associated with the Fountain Special Voting Stock. With respect to any
matter as to which holders of shares of Fountain Common Stock are entitled to
vote, the holder of each outstanding Exchangeable Share will have the right to
provide directions to the Trustee with respect to one vote for each Exchangeable
Share owned on the applicable record date. The Trustee will tally the directions
received from holders of Exchangeable Shares with respect to each such matter
and calculate for each possible direction choice (i.e., in favor of, against or
abstain) the percentage (rounded down to the nearest whole number) of the
aggregate number of outstanding Exchangeable Shares specifying that particular
direction. The Trustee will vote the Fountain Special Voting Stock in accordance
with such percentages. All votes attached to a particular share of Fountain
Special Voting Stock must be voted by the Trustee in the same manner with
respect to any matter. The Trustee may give a proxy to a designated agent,
including a representative of Fountain management, to vote in a manner
consistent with the directions of such holders of Exchangeable Shares.
The Trustee will send to the holders of the Exchangeable Shares the
notice of each meeting at which the Fountain stockholders are entitled to vote,
together with the related proxy statement and a statement as to the manner in
which the holder may direct the Trustee to exercise the votes attaching to the
Fountain Special Voting Stock at the same time as Fountain sends such notice and
materials to Fountain stockholders. The Trustee will also send to the holders
copies of all information statements, interim and annual financial statements,
reports and other materials sent by Fountain to the Fountain stockholders at the
same time as Fountain sends such notice and materials to the Fountain
stockholders. To the extent such materials are provided to the Trustee by
Fountain or third parties, the Trustee will also send to the holders of all
materials sent by third parties to Fountain stockholders, including dissident
proxy statements and tender and exchange offer circulars, as soon as possible
after such materials are first sent to Fountain stockholders.
All rights of a holder of Exchangeable Shares to exercise votes attached
to the Fountain Special Voting Share will cease upon the exchange of such
holder's Exchangeable Shares for shares of Fountain Common Stock.
Optional Exchange Right
At any time, including upon the occurrence and during the continuance of
a CanArgo Insolvency Event, a holder of Exchangeable Shares will be entitled to
instruct the Trustee to require Fountain to purchase such Exchangeable Shares by
exercising the optional Exchange Right with respect to any or all of the
Exchangeable Shares held by such holder. To cause the exercise of the Exchange
Right by the Trustee, the holder must deliver to the Trustee the certificates
representing the Exchangeable Shares which such holder desires Fountain to
purchase, duly endorsed in blank, and accompanied by such documents and
instruments as the Trustee or CanArgo may reasonably require together with (i) a
duly completed form of notice of exercise (a "Notice of Exercise") of the
Exchange Right, contained on the reverse of or attached to the Exchangeable
Share certificates, and (ii) payment (or evidence satisfactory to the Trustee,
CanArgo and Fountain of payment) of the taxes (if any) payable with respect to
the exchange. If only a portion of the Exchangeable Shares represented by any
certificate delivered to the Trustee are to be purchased by Fountain under the
Exchange Right, a new certificate for the balance of such Exchangeable Shares
shall be issued to the holder at the expense of CanArgo. If the holder is a
non-resident of Canada, Fountain may be obligated to withhold certain shares on
account of withholding tax in certain circumstances. See "TAX CONSIDERATIONS."
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If, as a result of solvency provisions of applicable law, CanArgo is
unable to redeem all of the Exchangeable Shares tendered for retraction by a
holder in accordance with the Exchangeable Share Provisions, the holder will be
deemed to have exercised the optional Exchange Right with respect to the
unredeemed Exchangeable Shares and Fountain will be required to purchase such
shares from the holder in the manner set forth above.
CanArgo and Fountain must immediately give written notice to the Trustee
of the occurrence of a CanArgo Insolvency Event or any event which may, with the
passage of time or the giving of notice or both, become a CanArgo Insolvency
Event. As soon as practicable thereafter, the Trustee will notify each holder of
Exchangeable Shares of such event and will advise the holder of its rights with
respect to the optional Exchange Right. The purchase price payable by Fountain
for each Exchangeable Share to be purchased under the optional Exchange Right
will be the Redemption Price.
Fountain Support Obligation
Under the Voting, Support and Exchange Trust Agreement, Fountain will
agree that: (i) it will not declare or pay dividends on the Fountain Common
Stock unless CanArgo is able to and simultaneously declares and pays an
equivalent dividend on the Exchangeable Shares; (ii) it will advise CanArgo in
advance of the declaration of any dividend on the Fountain Common Stock and
ensure that the declaration date, record date and payment date for dividends on
the Exchangeable Shares are the same as that for the Fountain Common Stock and
that such dates will correspond with any requirement of any stock exchange on
which the Exchangeable Shares are then listed; (iii) it will ensure that the
record date for any dividend declared on the Fountain Common Stock is not less
than ten business days after the declaration date for such dividend or such
shorter period within which applicable law may be complied with; (iv) it will
take all actions and do all things necessary to ensure that CanArgo is able to
pay to the holders of the Exchangeable Shares the Redemption Price in the event
of a liquidation, dissolution or winding up of CanArgo, a retraction request by
a holder of Exchangeable Shares or a redemption of Exchangeable Shares by
CanArgo; and (v) it will not vote or otherwise take any action or omit to take
any action causing the liquidation, dissolution or winding up of CanArgo.
The Voting, Support and Exchange Trust Agreement also provides that,
without the prior approval of CanArgo and the holders of the Exchangeable
Shares, Fountain will not distribute additional shares of Fountain Common Stock
subscription rights or other property or assets to all or substantially all
holders of Fountain Common Stock, or change the Fountain Common Stock, unless
the same or an economically equivalent distribution on, or change is made
simultaneously with respect to the Exchangeable Shares. The CanArgo Board is
conclusively empowered to determine in good faith and in its sole discretion
whether any corresponding distribution on or change to the Exchangeable Shares
is the same as or economically equivalent to any proposed distribution on or
change to the Fountain Common Stock. In the event of any proposed tender offer,
share exchange offer, issuer bid, take-over bid or similar transaction affecting
the Fountain Common Stock, Fountain will use reasonable efforts to take all
actions necessary or desirable to enable holders of Exchangeable Shares to
participate in such transaction to the same extent and on an economically
equivalent basis as the holders of Fountain Common Stock.
With the exception of adding covenants to protect the holders of the
Exchangeable Shares, making certain necessary amendments or curing ambiguities
or clerical errors (in each case provided that the Fountain Board, the CanArgo
Board and the Trustee and its counsel are of the opinion that such amendments
are not prejudicial to the interests of the holders of the Exchangeable Shares),
the Voting, Support and Exchange Trust Agreement may not be amended without the
approval of the holders of the Exchangeable Shares. See "-- CanArgo Share
Capital -- Exchangeable Shares of CanArgo -- Amendment and Approval."
Under the Voting, Support and Exchange Trust Agreement, Fountain has
agreed not to exercise any voting rights attached to the Exchangeable Shares
owned by it or any of its direct or indirect majority-owned subsidiaries on any
matter considered at meetings of holders of Exchangeable Shares (including any
approval sought from such holders in respect of matters arising under the
Voting, Support and Exchange Trust Agreement).
Delivery of Fountain Common Stock
Fountain will ensure that all shares of Fountain Common Stock to be
delivered by it under the Voting, Support and Exchange Trust Agreement or the
Plan of Arrangement are duly registered, qualified or approved under applicable
Canadian and United States securities laws, if required, so that such shares may
be freely traded by the holders thereof (other than any restriction on transfer
by reason of a holder being a "control person" of CanArgo
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for purposes of Canadian law or an "affiliate" of Fountain, for purposes of
United States law). In addition, Fountain will take all actions necessary to
cause all such shares of Fountain Common Stock to be listed or quoted for
trading or eligible for listing or quotation on all stock exchanges or quotation
systems on which outstanding shares of Fountain Common Stock are then listed or
quoted for trading.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., Fountain's current independent accountants,
will be the independent accountants of Fountain and its consolidated
subsidiaries, including CanArgo, after the Effective Date.
At the CanArgo Shareholders Meeting, CanArgo shareholders will vote with
respect to the appointment of Ernst & Young as CanArgo's independent auditors.
If the appointment is approved, Ernst & Young will be the independent auditors
of CanArgo pending consummation of the Transaction. See "THE MEETINGS -- GENERAL
PROXY INFORMATION -- CanArgo."
TRANSFER AGENTS AND REGISTRARS
The Montreal Trust Company at its offices in Calgary, Alberta, Canada,
will be the transfer agent and registrar for CanArgo. Signature Stock Transfer,
Inc. at its office in Dallas, Texas, is the transfer agent and registrar for
Fountain.
TAX CONSIDERATIONS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO CANARGO SHAREHOLDERS
The following summary of the principal Canadian federal income tax
considerations under the Canadian Tax Act generally applicable to holders of
CanArgo Warrants and CanArgo shareholders who, for purposes of the Canadian Tax
Act, hold their CanArgo Common Shares and will hold their Exchangeable Shares
and Fountain Common Stock as "capital property" (as defined below) and deal at
arm's length with CanArgo and Fountain is the opinion of Lang Michener, counsel
for CanArgo, insofar as it relates to matters of Canadian income tax law and
legal conclusions with respect thereto. This summary does not apply to a
shareholder with respect to whom Fountain is or will be a "foreign affiliate"
for Canadian federal income tax purposes or who holds more than 10% of the
CanArgo Common Shares. As defined by the Canadian Tax Act, a "foreign affiliate"
is a non-resident corporation in which, at that time, the taxpayer's equity
percentage is not less than 1% and the total of the equity percentages in the
corporation of the taxpayer and each person related for tax purposes to the
taxpayer is not less than 10%.
The Canadian Tax Act provides that a property such as a share will be
"capital property" when its disposition will give rise to a capital gain or a
capital loss. The shares will generally be considered to be capital property to
a shareholder unless held in the course of carrying on a business, in an
adventure in the nature of trade or as "mark-to-market" property for purposes of
the Canadian Tax Act. Shareholders who are resident in Canada and whose CanArgo
Common Shares or Exchangeable Shares might not otherwise qualify as capital
property may be entitled to obtain such qualification by making the irrevocable
election provided by subsection 39(4) of the Canadian Tax Act. Shareholders who
do not hold their shares as capital property should consult their own tax
advisors regarding their particular circumstances and, in the case of certain
"financial institutions" (as defined in the Canadian Tax Act), the potential
application to them of the special "mark-to-market" rules in the Canadian Tax
Act, as the following discussion does not apply to such shareholders.
This summary is based on the Canadian Tax Act, the regulations
thereunder, the Canada-United States Income Tax Convention (the "Tax Treaty")
and Lang Michener's understanding of the administrative practices published by
Revenue Canada, Customs, Excise and Taxation ("Revenue Canada"), all in effect
as of the date hereof. This summary takes into account specific proposals to
amend the Canadian Tax Act and regulations announced prior to the date hereof
(the "Tax Proposals"), although no assurances can be given that the Tax
Proposals will be enacted in the form presented, or at all. This summary does
not take into account or anticipate any other changes in law, whether by
judicial, governmental or legislative action or decision, nor does it take into
account provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian federal income tax
considerations described herein. No advance income tax ruling has been obtained
from Revenue Canada to confirm the tax consequences of any of the transactions
described herein.
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THIS SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE,
LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR CANARGO SHAREHOLDER OR HOLDER OF
CANARGO WARRANTS. SHAREHOLDERS AND WARRANT HOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE ARRANGEMENT IN THEIR PARTICULAR
CIRCUMSTANCES.
In computing a shareholder's liability for tax under the Canadian Tax
Act, any cash amounts received by the shareholder in U.S. dollars must be
converted into the Canadian Dollar Equivalent, and the amount of any non-cash
consideration received by the shareholder must be expressed in Canadian dollars,
generally determined at the time such consideration is received.
Shareholders Resident in Canada
The following portion of the summary is applicable to CanArgo
shareholders who, for purposes of the Canadian Tax Act, are residents or deemed
to be residents of Canada.
Exchange of CanArgo Common Shares for Exchangeable Shares
So long as, at the Effective Time, the aggregate adjusted cost base of a
holder's CanArgo Common Shares exchanged for Exchangeable Shares exceeds the sum
of (i) any cash received in respect of a fractional Exchangeable Share and (ii)
the fair market value of the Ancillary Rights acquired by such holder in
connection with the exchange and net of any reasonable costs of disposition,
such holder will not realize a capital gain for purposes of the Canadian Tax Act
on the exchange. To the extent that such sum, net of any reasonable costs of
disposition, exceeds the aggregate adjusted cost base of such holder's CanArgo
Common Shares, such holder will realize a capital gain for purposes of the
Canadian Tax Act. The taxation of capital gains is described below under "--
Taxation of Capital Gain or Capital Loss" in respect of a redemption or exchange
of Exchangeable Shares.
CanArgo shareholders that participate in the Arrangement will initially
receive Exchangeable Shares and Ancillary Rights. A shareholder will be deemed
to have acquired:
(i) the Exchangeable Shares for a cost equal to the amount, if any,
by which the adjusted cost base to such holder of the CanArgo
Common Shares exceeds the sum of (x) the fair market value of
the Ancillary Rights in respect of the shareholder's
Exchangeable Shares and (y) any cash received by the holder in
lieu of a fractional Exchangeable Share; and
(ii) the Ancillary Rights in respect of the shareholder's
Exchangeable Shares for a cost equal to their fair market value.
For these purposes, a holder of CanArgo Common Shares will be required
to determine the fair market value of the Ancillary Rights on a reasonable basis
for purposes of the Canadian Tax Act. CanArgo is of the view and has advised
Lang Michener that the Ancillary Rights have only nominal value. Therefore, a
holder of CanArgo Common Shares should not realize a capital gain on the
exchange of CanArgo Common Shares for Exchangeable Shares. Such determinations
of value of the Ancillary Rights are not binding on Revenue Canada and Lang
Michener can express no opinion on matters of factual determination such as
this. If challenged by Revenue Canada, CanArgo will defend its view that the
value of these rights is nominal.
Call Rights
CanArgo is of the view and has advised Lang Michener that the
Liquidation Call Right, the Redemption Call Right and the Retraction Call Right
(collectively the "Call Rights") have nominal value and that accordingly, only a
nominal amount should be allocated to the Call Rights. On this basis, no
shareholder should realize a gain at the time that any of such rights are
granted to Fountain. Such determinations of value are not binding on Revenue
Canada and Lang Michener can express no opinion on matters of factual
determination such as this. If challenged by Revenue Canada, CanArgo will defend
its view that the value of these rights is nominal.
Dividends
Exchangeable Shares. In the case of a shareholder who is an individual,
dividends received or deemed to be received on the Exchangeable Shares will be
included in computing the shareholder's income and will be subject
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to the gross-up and dividend tax credit rules normally applicable to taxable
dividends received from taxable Canadian corporations.
Subject to the discussion below as to the denial of the dividend
deduction, in the case of a shareholder that is a corporation, other than a
"specified financial institution" as defined in the Canadian Tax Act, dividends
received or deemed to be received on the Exchangeable Shares will be included in
computing the corporation's income and will normally be deductible in computing
its taxable income. A corporation is a specified financial institution for
purposes of the Canadian Tax Act if it is a bank, a trust company, a credit
union, an insurance corporation or a corporation whose principal business is the
lending of money to persons with whom the corporation is dealing at arm's length
or the purchasing of debt obligations issued by such persons or a combination
thereof, and corporations controlled by or related to such entities.
In the case of a shareholder that is a specified financial institution,
such a dividend will be deductible in computing its taxable income only if the
specified financial institution did not acquire the Exchangeable Shares in the
ordinary course of the business carried on by such institution.
A shareholder that is a "private corporation" (as defined in the
Canadian Tax Act) or any other corporation resident in Canada and controlled or
deemed to be controlled by or for the benefit of an individual or a related
group of individuals may be liable under Part IV of the Canadian Tax Act to pay
a refundable tax of 33-1/3% on dividends received or deemed to be received on
the Exchangeable Shares to the extent that such dividends are deductible in
computing the shareholder's taxable income.
If Fountain or any other person with whom Fountain does not deal at
arm's length is a specified financial institution at a point in time that a
dividend is paid on an Exchangeable Share, then dividends received or deemed to
be received by a shareholder that is a corporation will not be deductible in
computing taxable income but will be fully includable in taxable income under
Part I of the Canadian Tax Act. A shareholder that is a "Canadian-controlled
private corporation" (as defined in the Canadian Tax Act) may be liable to pay
an additional refundable tax of 6-2/3% on dividends or deemed dividends that are
not deductible in computing taxable income. Fountain has represented to CanArgo
that neither it nor any person with whom it does not deal at arm's length is a
specified financial institution as of the Effective Date. Fountain intends to
endeavor to avoid such status in the future, although there can be no assurances
that this status will not change prior to any receipt or deemed receipt of any
dividend by a corporate shareholder.
The Exchangeable Shares will be "taxable preferred shares" and
"short-term preferred shares" for purposes of the Canadian Tax Act. Accordingly,
CanArgo will be subject to a 66-2/3% tax under Part Vl.1 of the Canadian Tax Act
on dividends paid or deemed to be paid on the Exchangeable Shares and will be
entitled to deduct 9/4 of the tax payable in computing its taxable income under
Part I of the Canadian Tax Act.
Fountain Common Stock. Dividends on Fountain Common Stock will be
included in the recipient's income for the purposes of the Canadian Tax Act.
Such dividends received by an individual shareholder will not be subject to the
gross-up and dividend tax credit rules in the Canadian Tax Act. A corporation
that is a shareholder will include such dividends in computing its income and
generally will not be entitled to deduct the amount of such dividends in
computing its taxable income. A shareholder that is a Canadian-controlled
private corporation may be liable to pay an additional refundable tax of 6-2/3%
on dividends. United States non-resident withholding tax on such dividends will
be eligible for foreign tax credit or deduction treatment where applicable under
the Canadian Tax Act.
Redemption or Exchange of Exchangeable Shares
On the redemption (including a retraction) of an Exchangeable Share by
CanArgo, the holder of such Exchangeable Share will be deemed to have received a
dividend (the "Deemed Dividend") equal to the amount, if any, by which the
redemption proceeds (the fair market value at that time of Fountain Common Stock
received by the shareholder from CanArgo on the redemption plus the amount of
any accrued but unpaid dividends on the Exchangeable Share) exceeds the paid-up
capital (for purposes of the Canadian Tax Act) at that time of the Exchangeable
Share so redeemed. The amount of any such Deemed Dividend will be subject to the
tax treatment described above under "-- Dividends -- Exchangeable Shares." On
the redemption, the holder of an Exchangeable Share will also be considered to
have disposed of the Exchangeable Share for proceeds of disposition equal to the
redemption proceeds less the amount of such Deemed Dividend. A holder will
realize a capital loss (or a capital
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gain) equal to the amount by which the adjusted cost base to the holder of the
Exchangeable Share exceeds (or is less than) such proceeds of disposition. See
"-- Taxation of Capital Gain or Capital Loss" below. In the case of a
shareholder that is a corporation, in some circumstances the amount of any such
Deemed Dividend may be treated as proceeds of disposition and not as a dividend.
A Deemed Dividend realized on the redemption or the retraction will only be
treated as proceeds of disposition if received by a Canadian corporation which
is entitled to receive such Deemed Dividend free of Canadian tax, including
refundable tax (see "-- Dividends -- Exchangeable Shares"), and where the result
of the Deemed Dividend was to effect a significant reduction in the portion of
the capital gain that, but for the Deemed Dividend, would have been realized on
a disposition at fair market value of the share immediately before the Deemed
Dividend and that could reasonably be considered to be attributable to anything
other than income earned or realized, during what was essentially the holding
period of the share. Generally, only Canadian corporations which hold shares of
CanArgo representing more than 10% of all voting shares and having a fair market
value of more than 10% of the fair market value of all issued shares would be
entitled to receive such Deemed Dividend on a tax free basis.
On the exchange of an Exchangeable Share by the holder thereof with
Fountain for Fountain Common Stock, the holder will in general realize a capital
gain (or a capital loss) equal to the amount by which the proceeds of
disposition of the Exchangeable Share, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
the Exchangeable Share. For these purposes, the proceeds of disposition will be
the fair market value of Fountain Common Stock at the time of the exchange plus
the amount of any accrued but unpaid dividends on the Exchangeable Share
received by the holder as part of the exchange consideration. See "-- Taxation
of Capital Gain or Capital Loss" below.
Taxation of Capital Gain or Capital Loss
Three-quarters of any such capital gain (the "taxable capital gain")
realized on a retraction, redemption or exchange of Exchangeable Shares or on a
disposition of Fountain Common Stock will be included in the shareholder's
income for the year of disposition. Three-quarters of any capital loss so
realized (the "allowable capital loss") may be deducted by the holder against
taxable capital gains for the year of disposition. Any excess of allowable
capital losses over taxable capital gains of the shareholder for the year of
disposition may be carried back up to three taxation years or forward
indefinitely and deducted against net taxable capital gains in those other
years.
Capital gains realized by an individual or trust, other than certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act. A shareholder that is a Canadian-controlled private corporation may be
liable to pay an additional refundable tax of 6-2/3% on taxable capital gains.
If the holder of an Exchangeable Share is a corporation, the amount of
any capital loss arising from a disposition or deemed disposition of an
Exchangeable Share may be reduced by the amount of dividends received or deemed
to have been received by it on such share or on the CanArgo Common Shares
previously owned by such holder, to the extent and under circumstances provided
by the Canadian Tax Act. Similar rules may apply where a corporation is a member
of a partnership or a beneficiary of a trust that owns Exchangeable Shares or
where a trust or partnership of which a corporation is a beneficiary or a member
is a member of a partnership or a beneficiary of a trust that owns Exchangeable
Shares.
Acquisition and Disposition of Fountain Common Stock
The cost of Fountain Common Stock received on the retraction, redemption
or exchange of an Exchangeable Share will be equal to the fair market value of
Fountain Common Stock at the time of such event.
A disposition or deemed disposition of Fountain Common Stock by a holder
will generally result in a capital gain (or capital loss) equal to the amount by
which the proceeds of disposition, net of any reasonable costs of disposition,
exceed (or are less than) the adjusted cost base to the holder of Fountain
Common Stock.
Foreign Property Information Reporting
Tax proposals, which do not to require reporting until 1999, will
require certain entities, including most taxpayers resident in Canada who hold a
specified amount of Fountain Common Stock, to file an information return in
respect of such shares disclosing the holder's cost amount, any dividends
received in the year and any gains or losses realized in the year in respect of
such shares.
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Dissenting Shareholders
A dissenting CanArgo shareholder will be considered to have realized a
deemed dividend and capital gain (or capital loss) based on proceeds equal to
the fair value of the CanArgo Common Shares held by such holder determined as of
the appropriate date, computed as generally described above in the case of a
redemption (including a retraction) of an Exchangeable Share by CanArgo for
Fountain Common Stock under "-- Redemption or Exchange of Exchangeable Shares."
The amount of any such deemed dividend received by an individual will be
included in computing the individual's income and will be subject to the
gross-up and dividend tax credit rules normally applicable to taxable dividends
received from taxable Canadian corporations. The amount of any such deemed
dividend received by a corporation (except to the extent that it may in some
circumstances be treated as proceeds of disposition and not as a dividend) will
be included in computing its income, will normally be deductible in computing
its taxable income and may be subject to tax under Part IV of the Canadian Tax
Act if received by a private corporation and certain other corporations as
described under "-- Dividends -- Exchangeable Shares" above. Dissenting CanArgo
shareholders should consult their own tax advisors in respect of the treatment
of such deemed dividends. Additional income tax considerations may be relevant
to dissenting CanArgo shareholders who fail to perfect or withdraw their claims
pursuant to the right of dissent.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS OF CANARGO WARRANTS
No gain or loss will be realized by a holder of CanArgo Warrants as a
consequence of the Arrangement or upon exercise of the CanArgo Warrants for
Exchangeable Shares. The cost to the holder of the Exchangeable Shares acquired
on the exercise of a CanArgo Warrant will be the aggregate of the adjusted cost
basis of the CanArgo Warrant and the amount paid (if any) to acquire the
Exchangeable Shares upon such exercise. Upon the expiration of an unexercised
CanArgo Warrant, the holder will realize a capital loss equal to the adjusted
cost base, if any, of the CanArgo Warrant to such holder immediately prior to
the time of expiration.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of the summary is applicable to holders of CanArgo
Common Shares who, for purposes of the Canadian Tax Act, have not been and will
not be resident or deemed to be resident in Canada at any time while they have
held CanArgo Common Shares or will hold Exchangeable Shares or Fountain Common
Stock, who hold the shares as capital property and who do not use or hold and
are not deemed to use or hold such shares in connection with carrying on a
business in Canada.
So long as the aggregate adjusted cost base of a holder's CanArgo Common
Shares exchanged for Exchangeable Shares at the Effective Time exceeds the sum
of (i) any cash received in respect of a fractional Exchangeable Share and (ii)
the fair market value of the Ancillary Rights acquired by such holder in
connection with the exchange and net of any reasonable costs of disposition,
such holder will not realize a capital gain for purposes of the Canadian Tax Act
on the exchange. To the extent that such sum, net of any reasonable costs of
disposition, exceeds the aggregate adjusted cost base of such holder's CanArgo
Common Shares, such holder will realize a capital gain for purposes of the
Canadian Tax Act. The exchange of an Exchangeable Share for Fountain Common
Stock or the sale or other disposition of an Exchangeable Share (except to the
extent such exchange or other disposition results in a deemed dividend, see "--
Shareholders Resident in Canada -- Redemption or Exchange of Exchangeable
Shares" above), will result in the realization of a capital gain for purposes of
the Canadian Tax Act.
If the Tax Proposals are enacted in the form proposed, the CanArgo
Common Shares and the Exchangeable Shares will constitute "taxable Canadian
property" (as defined in the Canadian Tax Act), retroactively from April 27,
1995. Accordingly, any capital gains realized on the disposition of such shares
may be treated in Canada subject to the provisions of any applicable income tax
treaty, including the Tax Treaty, which may exempt such capital gains from
Canadian income tax.
A non-resident holder who proposes to dispose or disposes of CanArgo
Common Shares to CanArgo for Exchangeable Shares, or proposes to dispose or
disposes of Exchangeable Shares (including a disposition to Fountain pursuant to
the exercise of any Exchange Right) is required to apply for a Clearance
Certificate in respect of the disposition of CanArgo Common Shares or
Exchangeable Shares and to provide the Clearance Certificate to Fountain or
CanArgo, as the case may be. If the
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non-resident holder does not provide a Clearance Certificate to CanArgo on or
before the Effective Date or to Fountain or CanArgo on or before the date on
which the exchange of Exchangeable Shares is to occur, CanArgo or Fountain will
be entitled to withhold shares having a fair market value equal to the amount
that it would be required to pay on behalf of such non-resident shareholder
pursuant to subsection 116(5) of the Canadian Tax Act and to sell such shares
and to remit the proceeds of the sale thereof to Revenue Canada.
Lang Michener has been advised by CanArgo that CanArgo is a "public
corporation" (as defined in the Canadian Tax Act). As such, under existing law,
its shares are not taxable Canadian property to a non-resident who, alone or
together with persons with whom such holder does not deal at arm's length, has
not owned (or had under option) 25% or more of the issued shares of any class or
series of the capital stock of CanArgo at any time within five years preceding
the date of disposition. When the Tax Proposals are enacted, the CanArgo Common
Shares and the Exchangeable Shares will be taxable Canadian property
retroactively from April 27, 1995. Lang Michener has been advised by Revenue
Canada that it will not issue a Clearance Certificate for dispositions of shares
which are not taxable Canadian property under existing law and accordingly a
non-resident holder who proposes to dispose or disposes of CanArgo Common Shares
or Exchangeable Shares before the Tax Proposals become law will be unable to
obtain a Clearance Certificate. Lang Michener has further been advised by
Revenue Canada that when the Tax Proposals become law it will not require that a
Clearance Certificate be obtained retroactively for such dispositions made prior
to the Tax Proposals becoming law. Revenue Canada's administrative position that
a Clearance Certificate will not have to be obtained retroactively in such
circumstances does not exempt a non-resident holder from any liability for
Canadian income tax which such holder may have as a result of a disposition of
CanArgo Common Shares or Exchangeable Shares.
A holder whose Exchangeable Shares are redeemed (either under CanArgo's
redemption right or pursuant to the holder's retraction rights) will be deemed
to receive a dividend as described above for shareholders resident in Canada
under "-- Redemption or Exchange of Exchangeable Shares." The amount of such
deemed dividend will be subject to the tax treatment accorded to dividends
described below.
Generally, a non-resident holder will not be subject to tax in Canada
with respect to the disposition of Fountain Common Stock provided that such
shares are listed on a prescribed stock exchange (which currently includes
NASDAQ), and the holder, alone or together with persons with whom such holder
does not deal at arm's length, has not owned (or had under option) 25% or more
of the issued shares of any class or series of the capital stock of Fountain at
any time within five years preceding the date of disposition. Fountain has
agreed to take action reasonably necessary to maintain the listing of Fountain
Common Stock on NASDAQ.
Dividends paid or deemed to be paid on the Exchangeable Shares are
subject to non-resident withholding tax under the Canadian Tax Act at the rate
of 25%, although such rate may be reduced under the provisions of an applicable
income tax treaty. Under the Tax Treaty, the rate is generally reduced to 15% in
respect of dividends paid to a person who is the beneficial owner and who is
resident in the United States for purposes of the Tax Treaty.
A dissenting CanArgo shareholder will be considered to have realized a
deemed dividend computed as generally described above in the case of
shareholders resident in Canada. See "-- Shareholders Resident in Canada --
Dissenting Shareholders" above. The amount of any such deemed dividend will be
subject to the tax treatment accorded to dividends described immediately above.
Additional income tax considerations may be relevant to dissenting CanArgo
shareholders who fail to perfect or withdraw their claims pursuant to the right
of dissent.
Non-Resident Holders of CanArgo Warrants
See "Canadian Federal Income Tax Considerations to Holders of CanArgo
Warrants" above, as the tax treatment to non-residents of Canada is identical.
UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations generally applicable to CanArgo shareholders or Fountain
stockholders arising from and relating to the Arrangement, including the receipt
and ownership of Exchangeable Shares and Fountain Common Stock. Gibson, Dunn &
Crutcher LLP, special tax counsel to Fountain, has rendered an opinion to
Fountain that, based upon the facts, representations and assumptions set forth
therein, the following summary, insofar as it relates to matters of United
States federal income tax law and legal conclusions with respect thereto, is the
opinion of Gibson, Dunn & Crutcher LLP. This summary is based on the U.S. Code,
existing and proposed Treasury regulations, and judicial and administrative
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determinations, all of which are subject to change at any time, possibly on a
retroactive basis. This summary does not address aspects of United States
taxation other than United States federal income taxation, nor does it address
the United States state or local tax consequences or the foreign tax
consequences of the Arrangement or the receipt and ownership of the Exchangeable
Shares or shares of Fountain Common Stock.
No statutory, judicial, or administrative authority exists which
directly addresses certain significant aspects of the Arrangement such as the
issuance and ownership of instruments and rights comparable to the Exchangeable
Shares, the Voting Rights, the Exchange Rights and the Call Rights. Consequently
(as discussed more fully below), some aspects of the United States federal
income tax treatment of the Arrangement, including the receipt and ownership of
Exchangeable Shares and the exchange of Exchangeable Shares for shares of
Fountain Common Stock, are not certain. No advance income tax ruling has been
sought or obtained from the IRS regarding the United States federal income tax
consequences of any of the transactions described herein.
Holders of Fountain Common Stock
No United States federal income taxation considerations are generally
applicable to holders of Fountain Common Stock with respect to the Transaction.
United States Holders of CanArgo Common Shares
The following is a summary of the material United States federal income
tax considerations generally applicable to United States Holders, arising from
and relating to the Arrangement, including the receipt and ownership of
Exchangeable Shares and Fountain Common Stock. This summary does not address all
aspects of United States federal income taxation that may be applicable to
particular United States holders, including, without limitation, holders of
CanArgo Warrants and holders of CanArgo Common Shares acquired as a result of
the exercise of employee stock options and United States Holders that own, or
have owned during a five-year lookback period, 10% or more of the voting power
of CanArgo, tax-exempt organizations, financial institutions, insurance
companies, broker-dealers, persons having a "functional currency" other than the
United States dollar, and holders who hold CanArgo Common Stock or Exchangeable
Shares as part of a straddle, wash sale, hedging or conversion transaction
(other than by virtue of their participation in an exchange of Exchangeable
Shares for Fountain Common Stock as contemplated herein). For United States
federal income tax purposes, "United States persons" are United States citizens
or residents (determined under the U.S. Code), corporations or partnerships
organized under the laws of the United States or any state thereof, estates
subject to United States federal income tax on their income regardless of
source, trusts subject to the primary supervision of a court within the United
States and control of a United States person as described in Section 7701(a)(30)
of the U.S. Code, and certain electing trusts that were existing on August 19,
1996 and treated as domestic trusts on such date. In addition, this discussion
does not address the state, local or foreign tax consequences of the
Transaction.
UNITED STATES HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS IN REGARD TO
ISSUES ARISING OUT OF THEIR PARTICULAR CIRCUMSTANCES WITH RESPECT TO THE UNITED
STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN TAX
CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF
EXCHANGEABLE SHARES, VOTING RIGHTS, EXCHANGE RIGHTS AND SHARES OF FOUNTAIN
COMMON STOCK.
Characterization of the Arrangement for United States Federal Income Tax
Purposes. There is no direct authority addressing the proper treatment of the
Arrangement for United States federal income tax purposes, and, therefore, the
conclusions contained in the discussion below are subject to significant
uncertainty. There can be no assurance that the IRS would not challenge the
characterization of the Arrangement discussed below, or that, if challenged, a
court would not agree with the IRS.
Although there is no direct authority addressing the proper treatment of
the Arrangement for United States federal income tax purposes and, therefore,
the treatment of the Arrangement is not free from doubt, it is more likely than
not that the Arrangement will qualify as a "reorganization" within the meaning
of Section 368(a) of the U.S. Code with respect to United States Holders of
CanArgo Common Shares who receive Exchangeable Shares pursuant to the
Arrangement. Because there is no direct authority addressing the proper
treatment of the Arrangement for United States federal income tax purposes,
the treatment of the Arrangement for United States
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federal income tax purposes is subject to significant uncertainty. Accordingly,
there can be no assurance that the IRS would not challenge the status of the
Arrangement as a reorganization or that, if challenged, a court would not agree
with the IRS.
Receipt of Exchangeable Shares. Assuming the Arrangement qualifies as a
reorganization under Section 368(a) of the U.S. Code, the following federal
income tax consequences should occur: (i) except as otherwise provided below, a
United States Holder of CanArgo Common Shares who receives Exchangeable Shares
pursuant to the Arrangement should not recognize any gain or loss with respect
to the receipt of such shares; (ii) except as provided below, the aggregate
basis of the Exchangeable Shares received pursuant to the Arrangement by a
United States Holder of CanArgo Common Shares should equal such holder's
aggregate tax basis in the shares of CanArgo Common Shares surrendered pursuant
to the Arrangement reduced by the tax basis allocated to fractional share
interests for which cash is received; (iii) the holding period of the
Exchangeable Shares received by a United States Holder of CanArgo Common Shares
pursuant to the Arrangement should include the holding period of the CanArgo
Common Shares surrendered in exchange therefor; and (iv) cash payments in lieu
of a fractional Exchangeable Share should be treated as if a fractional
Exchangeable Share had been received in the Arrangement and then redeemed by
CanArgo. Such redemption may qualify as a distribution in full payment in
exchange for the fractional share or may be treated as a distribution of a
dividend. Even if the Arrangement is treated as a reorganization, however, a
holder of Exchangeable Shares may nevertheless be required to recognize gain
with respect to the Arrangement. See "-- Possibility of Gain Recognition on
Constructive Sale."
If the Arrangement fails to qualify as a reorganization, a United States
Holder of the CanArgo Common Shares who receives Exchangeable Shares pursuant to
the Arrangement would recognize gain or loss equal to the difference between the
fair market value of the Exchangeable Shares and such holder's tax basis in the
CanArgo Common Shares exchanged therefor. Although the value of the Voting
Rights and Exchange Rights received, and any Call Rights deemed to be conveyed,
by CanArgo Shareholders who receive Exchangeable Shares pursuant to the
Arrangement is uncertain, CanArgo and Fountain have indicated their belief that
such Voting Rights, Exchange Rights and Call Rights will have only nominal
value. Further, the exchange of certain of the Call Rights for the Voting Rights
and Exchange Rights may not be taxable to United States Holders because United
States Holders and Fountain may be deemed to have granted purchase options to
each other, which grants would not generally be treated as taxable events for
United States federal income tax purposes. It is possible, however, that the
Voting Rights, Exchange Rights and Call Rights have greater than nominal value
and that the transfer or receipt of such rights is taxable. In such event, the
receipt of the Voting Rights and Exchange Rights and the conveyance of certain
of the Call Rights could generate taxable gain or loss in addition to any
taxable gain or loss that may be recognized if the Arrangement is not treated as
a "reorganization" as described above.
If the Voting Rights and Exchange Rights have greater than nominal value
and such rights are deemed to have been transferred by CanArgo rather than
Fountain in redemption of CanArgo Common Shares, a United States Holder would
recognize dividend income equal to the value of such rights to the extent of the
current and accumulated earnings and profits of CanArgo (as determined under
United States federal income tax principles) unless such deemed redemption is
either "not essentially equivalent to a dividend" or "substantially
disproportionate," as such terms are defined in Section 302(b) of the U.S. Code.
If the deemed redemption is "substantially disproportionate" or "not essentially
equivalent to a dividend," any gain recognized by a United States Holder would
be capital gain. The tax basis of the Exchangeable Shares received pursuant to
the Arrangement will not include the tax basis of any CanArgo Common Shares
deemed to have been redeemed by CanArgo. United States Holders should consult
their tax advisors with respect to the potential tax consequences of the receipt
of the Voting Rights and Exchange Rights pursuant to the Arrangement.
Requirement of Notice Filing. If the Arrangement otherwise qualifies as
a "reorganization" as discussed above, any United States Holder that receives
the Exchangeable Shares in exchange for CanArgo Common Shares generally must
file a notice with the IRS on or before the last date for filing a United States
federal income tax return for the holder's taxable year in which the Arrangement
occurs in order for the Arrangement to be treated as a "reorganization" with
respect to that shareholder. The notice must contain certain information
specifically enumerated in the United States Treasury regulations, and United
States Holders are advised to consult their tax advisors for assistance in
preparing such notice.
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If a United States Holder required to give notice as described above
fails to give such notice, and if the United States Holder further fails to
establish reasonable cause for the failure, then the Commissioner of IRS (the
"Commissioner") will be required to determine, based on all the facts and
circumstances, whether the exchange of CanArgo Common Shares for Exchangeable
Shares is eligible for nonrecognition treatment. In making this determination,
the Commissioner may conclude (i) that the exchange is eligible for
nonrecognition treatment, despite such noncompliance, (ii) that the exchange is
eligible for nonrecognition treatment, provided that certain other conditions
imposed by the United States Treasury regulations are satisfied, or (iii) that
the exchange is not eligible for nonrecognition treatment and that any gain
realized (i.e., the difference between the value of the Exchangeable Shares and
other rights received and the United States Holder's basis in the CanArgo Common
Stock surrendered) will be recognized and such recognized gain will be taken
into account for purposes of increasing the tax basis of the Exchangeable Shares
received pursuant to the Arrangement. Nevertheless, the failure of any one
United States Holder to satisfy such requirements should not bar other United
States Holders that do satisfy such requirements from receiving nonrecognition
treatment with respect to the exchange of their CanArgo Common Shares for
Exchangeable Shares pursuant to the Arrangement, assuming the exchange otherwise
qualifies as a "reorganization" as discussed above.
Possibility of Gain Recognition on Constructive Sale. Under Section 1259
of the U.S. Code, enacted as part of the Taxpayer Relief Act of 1997, if there
is a "constructive sale" of an "appreciated financial position" a taxpayer would
recognize gain (but not loss) as if such appreciated financial position were
sold for its fair market value on the date of such constructive sale. For this
purpose, an "appreciated financial position" would include ownership of
appreciated stock. A taxpayer would be treated as having made a constructive
sale of the appreciated financial position if the taxpayer (or a related person)
enters into one or more of the following: (A) a short sale of the same or
substantially identical property, (B) offsetting notional principal contracts
with respect to the same or substantially identical property, (C) a futures or
forward contract to deliver the same or substantially identical property, (D) in
the case of an appreciated financial position that is a short sale or a contract
described in (B) or (C) with respect to any property, an acquisition of the same
or substantially identical property, or (E) to the extent provided in Treasury
regulations that have not yet been issued, one or more other transactions (or
the acquisition of one or more positions) that have substantially the same
effect as a transaction described above. The IRS is authorized to issue
regulations that would treat as constructive sales other financial transactions
that, like those specified above, have the effect of eliminating substantially
all of the taxpayer's risk of loss and opportunity for income or gain with
respect to the appreciated financial position.
Upon entering into one of the enumerated transactions with respect to
CanArgo Common Shares, the holder of such CanArgo Common Shares must recognize
gain, if any, on such CanArgo Common Shares as if it sold the CanArgo Common
Shares for their fair market value. Proper adjustment will be made to the amount
of gain or loss subsequently realized with respect to the CanArgo Common Shares
for any gain taken into account by virtue of the constructive sale, and the
holding period of such CanArgo Common Shares will be determined as if such
instrument were acquired on the date of the constructive sale.
Because the IRS has not yet issued regulations interpreting Section
1259, the application of the constructive sale rule contained in Section 1259 of
the U.S. Code to the receipt of Exchangeable Shares in exchange for CanArgo
Common Shares is uncertain, and no assurances can be given as to the effect of
Section 1259 on the receipt of Exchangeable Shares by holders of CanArgo Common
Shares pursuant to the Arrangements. United States Holders are urged to consult
their tax advisors with respect to the application of Section 1259 to the
Arrangement and to their specific circumstances.
Exchange of Exchangeable Shares. Although the matter is not free from
doubt, it is anticipated that (subject to certain exceptions described below) a
United States Holder that exchanges the Exchangeable Shares for shares of
Fountain Common Stock generally will recognize gain or loss on the receipt of
the shares of Fountain Common Stock in exchange for such Exchangeable Shares.
Such gain or loss will be equal to the difference between the fair market value
of the shares of Fountain Common Stock at the time of the exchange and the
United States Holder's tax basis in the Exchangeable Shares (and the Ancillary
Rights) exchanged therefor. The gain or loss will be capital gain or loss,
except that, ordinary income may be recognized to the extent of any declared but
unpaid dividends. Noncorporate taxpayers are generally taxed at a maximum rate
of 20% on net capital gains attributable to gains realized on the sale of
property held for more than eighteen months, and a maximum rate of 28% of net
capital gain attributable to gain realized on the sale of property held for more
than one year and eighteen
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months or less. Gain recognized on the exchange of Exchangeable Shares for
shares of Fountain Common Stock generally will be treated as United States
source gain for U.S. foreign tax credit purposes. Assuming the exchange results
in the recognition of such gain or loss, the United States Holder's tax basis in
the shares of Fountain Common Stock received will equal the fair market value of
those shares of Fountain Common Stock, and such holder's holding period will
begin on the day after such exchange. The IRS could assert, however, that the
Exchangeable Shares and certain of the rights associated therewith constitute
"offsetting positions" for purposes of the straddle rules set forth in Section
1092 of the U.S. Code. In such a case, the holding period of the Exchangeable
Shares would not increase while held by a United States Holder.
It is also possible that the exchange of Exchangeable Shares for shares
of Fountain Common Stock could be treated as a reorganization in which no gain
or loss is recognized if the Exchangeable Shares are treated as stock of
Fountain for United States federal income tax purposes. Given the lack of
authority on the treatment of shares having features and attendant rights
similar to the Exchangeable Shares, it is uncertain whether the Exchangeable
Shares will be treated as shares of Fountain Common Stock for this purpose.
Also, an exchange of Exchangeable Shares for Fountain Common Stock that
otherwise would be taxable may be characterized as a tax-free exchange depending
upon facts and circumstances existing at the time of the exchange, which cannot
be accurately predicted as of the date hereof.
If the exchange of Exchangeable Shares for Fountain Common Stock did
qualify as a tax-free exchange, a United States Holder's tax basis in the shares
of Fountain Common Stock received would be equal to such holder's tax basis in
the Exchangeable Shares (and, possibly, the Ancillary Rights) exchanged
therefor. The holding period of the shares of Fountain Common Stock received by
such United States Holder would include the holding period of the Exchangeable
Shares exchanged therefor.
Distributions on the Exchangeable Shares. Although such treatment is not
free from doubt, CanArgo and Fountain intend to treat dividends, if any, paid on
the Exchangeable Shares as dividends from CanArgo, rather than from Fountain.
The following discussion assumes that such dividends will be treated as
dividends from CanArgo. A United States Holder of Exchangeable Shares generally
will be required to include in gross income as ordinary income dividends paid on
the Exchangeable Shares to the extent paid out of the earnings and profits of
CanArgo, as determined under United States federal income tax principles.
Dividends generally should be treated as foreign source passive income
for foreign tax credit limitation purposes. Under the current tax treaty between
the United States and Canada, such distributions generally will be subject to
Canadian withholding tax at a rate of 15%. Subject to certain limitations of
United States federal income tax law, a United States Holder generally should be
entitled to credit such withholding tax against such holder's United States
federal income tax liability or to deduct such tax in computing United States
taxable income.
Dissenters. A United States Holder who exercises such holder's right to
dissent from the Arrangement will recognize gain or loss on the exchange of such
holder's CanArgo Common Shares for cash in an amount equal to the difference
between the amount of cash received and such holder's basis in the CanArgo
Common Shares. Such gain or loss will be capital gain or loss if the CanArgo
Common Shares were held as capital assets at the Effective Time of the
Arrangement. See "Exchange of Exchangeable Shares" above for a general
discussion of the capital gain tax rates applicable to individuals.
Passive Foreign Investment Company Considerations. For United States
federal income tax purposes, CanArgo generally will be classified as a PFIC for
any taxable year during which either (i) 75% or more of its gross income is
passive income (as defined for United States federal income tax purposes) or
(ii) on average for such taxable year, 50% or more of its assets (by value)
produce or are held for the production of passive income. For purposes of
applying the foregoing tests, the assets and gross income of corporations with
respect to which CanArgo owns at least 25% of the stock (by value) will be
attributed to CanArgo.
At the present time, CanArgo and Fountain intend to endeavor to cause
CanArgo to avoid PFIC status in the future, although there can be no assurance
that they will be able to do so or that their intent will not change. Moreover,
in connection with the transactions contemplated herein, no opinion will be
given regarding CanArgo's status as a PFIC, and no ruling from the IRS will be
requested or received. After the Arrangement, CanArgo
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intends to monitor its status regularly and will endeavor to notify United
States Holders of Exchangeable Shares if it believes that CanArgo was a PFIC for
that taxable year.
For purposes of applying the 50% asset test following the Arrangement,
CanArgo's assets must be measured by their adjusted tax bases (as calculated in
order to compute earnings and profits for United States federal income tax
purposes) instead of by value, subject to certain adjustments. As a result, it
is possible that CanArgo will be a PFIC for taxable years ending after the
Arrangement even though less than 50% of CanArgo's assets (measured by the fair
market value of such assets) constitute passive assets.
Although the matter is not free from doubt, if CanArgo were a PFIC at
any time during a particular United States Holder's holding period for its
CanArgo Common Shares, and the United States Holder had not made an election to
treat CanArgo as a qualified electing fund (a "QEF") under Section 1295 of the
U.S. Code (a "QEF Election"), then such United States Holder might be required
to recognize gain upon the exchange of its CanArgo Common Shares for
Exchangeable Shares, which gain would be allocable over its holding period for
such Common Shares and would be taxable as an excess dividend, as described
below. In the event that gain recognition were so required, the amount of such
gain would be equal to the excess of the fair market value of the CanArgo Common
Shares over their adjusted tax bases. Further, in such event, any gain
recognized on the exchange of Exchangeable Shares for shares of Fountain Common
Stock would be similarly taxable.
If CanArgo is a PFIC following the Arrangement during a United States
Holder's holding period for such holder's Exchangeable Shares, and the United
States Holder does not make a QEF Election, then (i) the United States Holder
would be required to allocate income recognized upon receiving certain excess
dividends with respect to, and gain recognized upon the disposition of, such
United States Holder's Exchangeable Shares (including upon the exchange of
Exchangeable Shares for shares of Fountain Common Stock) ratably over the United
States Holder's holding period for such Exchangeable Shares, (ii) the amount
allocated to each year other than (x) the year of the excess dividend payment or
disposition of the Exchangeable Shares or (y) any year prior to the beginning of
the first taxable year of CanArgo for which it was a PFIC, would be subject to
tax at the highest rate applicable to individuals or corporations, as the case
may be, for the taxable year to which such income is allocated, and an interest
charge would be imposed upon the resulting tax attributable to each such year
(which charge would accrue from the due date of the return for the taxable year
to which such tax was allocated), and (iii) amounts allocated to periods
described in (x) and (y) will be taxable to the United States Holder as ordinary
income.
If CanArgo is a PFIC and the United States Holder makes a QEF Election,
then the United States Holder generally will be currently taxable on such
holder's pro rata share of CanArgo's ordinary earnings and net capital gains (at
ordinary income and capital gains rates, respectively) for each taxable year of
CanArgo in which CanArgo is classified as a PFIC, even if no dividend
distributions are received by such United States Holder, unless such United
States Holder makes an election to defer such taxes. In addition, it is possible
that under Section 1296 of the U.S. Code, a United States Holder will be
permitted to make a mark-to-market election with respect to shares of a PFIC in
lieu of incurring the special tax and interest charge on disposition of those
shares. United States Holders should consult their tax advisors concerning the
merits and mechanics of making a QEF Election and other relevant tax
considerations if CanArgo is a PFIC for any taxable year.
The foregoing summary of the possible application of the PFIC rules to
CanArgo and the United States Holders of CanArgo Common Shares or Exchangeable
Shares is only a summary of certain material aspects of those rules. Because the
United States federal tax consequences to a United States Holder of CanArgo
Common Shares under the PFIC provisions are significant, United States Holders
of CanArgo Common Shares or Exchangeable Shares are urged to discuss those
consequences with their tax advisors.
CanArgo Shareholders That Are Not United States Holders
The following summary is applicable to holders of CanArgo Common Shares
that are not United States Holders ("non-United States Holders"). CanArgo and
Fountain intend to treat dividends, if any, received by a non-United States
Holder with respect to the Exchangeable Shares as dividends from CanArgo rather
than from Fountain and as not subject to United States withholding tax, and
CanArgo and Fountain do not intend that CanArgo or Fountain will withhold United
States tax from such dividends. There is some possibility, however, that the IRS
may assert that United States withholding tax is payable with respect to any
dividends paid on the Exchangeable Shares to non-United States Holders. In such
case, a non-United States Holder of Exchangeable Shares could be subject to
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United States withholding tax at a rate of 30%, which rate may be reduced by an
applicable income tax treaty in effect between the United States and the
non-United States Holder's country of residence (generally 15% on dividends paid
to residents of Canada under the tax treaty between the United States and
Canada). Similarly, dividends received by non-United States Holders with respect
to the Fountain Common Stock generally will be subject to United States
withholding tax at a rate of 30%, which rate may be subject to reduction by an
applicable income tax treaty (generally 15% on dividends paid to residents of
Canada under the tax treaty between the United States and Canada).
Under current United States Treasury regulations, dividends paid to an
address in a country outside the United States are presumed to be paid to a
resident of such country for purposes of the withholding discussed above (unless
the payor has knowledge to the contrary) and under the current interpretation of
United States Treasury Regulations, for purposes of determining the
applicability of a tax treaty rate (the "address rule"). Thus, Non-United States
Holders who receive dividends at addresses outside the United States generally
are not yet required to file tax forms to obtain the benefit of an applicable
treaty rate. Under recently issued Treasury regulations scheduled to take effect
January 1, 2000 (the "Final Regulations"), the address rule will no longer
apply, and a Non-United States Holder who seeks to claim the benefit of an
applicable treaty rate would be required to satisfy certain certification and
other requirements. The Final Regulations also provide special rules regarding
whether, for purposes of determining the applicability of an income tax treaty,
dividends paid to a Non-United States Holder that is an entity should be treated
as being paid to the entity itself or to the persons holding an interest in that
entity.
Subject to the discussion below, a non-United States Holder generally
will not be subject to United States federal income tax on gain (if any)
recognized on the receipt of the Exchangeable Shares or shares of Fountain
Common Stock, on the sale or exchange of the CanArgo Common Shares or the
Exchangeable Shares, or on the sale or exchange of shares of Fountain Common
Stock, unless (i) such gain is attributable to an office or fixed place of
business and is effectively connected with a trade or business of the non-United
States Holder in the United States, or, if a tax treaty applies, is attributable
to a permanent establishment maintained by the non-United States Holder in the
United States, (ii) the non-United States Holder is an individual who holds the
CanArgo Common Shares, the Exchangeable Shares or the Fountain Common Stock, as
the case may be, as capital assets and is present in the United States for 183
days or more in the taxable year of disposition, and certain other conditions
are satisfied, or (iii) the non-United States Holder is subject to tax pursuant
to the U.S. Code provisions applicable to certain United States expatriates. If
an individual non-United States Holder falls under clause (i) or (iii) above, he
or she will be taxed on his or her net gain derived from the sale under regular
United States federal income tax rates. If the individual non-United States
Holder falls under clause (ii) above, he or she will be subject to a flat 30%
tax on the gain derived from the sale which may be offset by United States
source capital losses (notwithstanding the fact that he or she is not considered
a resident of the United States).
Notwithstanding the general rule set forth above, gain or loss
recognized by a non-United States Holder on the exchange of Exchangeable Shares
for Fountain Common Stock or on the sale or exchange of shares of Fountain
Common Stock will be subject to regular United States federal income tax, as if
such gain or loss were effectively connected with a United States trade or
business, if (a) Fountain is or has been a "United States real property holding
corporation" (a "USRPHC") within the meaning of section 897(c)(2) of the U.S.
Code at any time within the shorter of the five-year period preceding such
disposition or such non-United States Holder's holding period (the "Required
Holding Period") and (b) such non-United States Holder is a "greater than 5%
shareholder" (as defined below) of Fountain actually or constructively. If
Fountain qualifies as a USRPHC, a non-United States Holder that is a corporation
will be taxed on such gain under regular graduated United States federal income
tax rates.
Fountain will be a USRPHC with respect to any shareholder who, under
U.S. Code Section 897(c)(3), is considered to own more than 5% of the Fountain
Common Stock during a specified period and if, at any time during that period,
the fair market value of Fountain's interests in United States real property
equaled or exceeded 50% of the sum of the fair market values of all of its
interests in real property and all of its other assets used or held for use in a
trade or business (as defined in applicable regulations). Fountain believes that
it is not currently a USRPHC. Although Fountain considers it unlikely that
Fountain will become a USRPHC in the future, there can be no assurance as to
this issue.
Fountain Common Stock (or a previously triggered obligation of Fountain
or CanArgo to deliver Fountain Common Stock along with unpaid dividends) will be
deemed to be a United States situs asset for purposes of United
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States federal estate tax law, and, therefore, Fountain Common Stock (or a
previously triggered obligation of Fountain or CanArgo to deliver Fountain
Common Stock along with unpaid dividends) held by an individual non-United
States Holder at the time of his or her death will generally be subject to the
United States federal estate tax, except as may otherwise be provided by an
applicable tax or estate tax treaty with the United States. Non-United States
Holders should consult their tax advisors as to the consequences to them of
applicable tax or estate tax treaties with the United States.
Limitation on U.S. Net Operating Loss Carryovers
Fountain has substantial United States federal income tax net operating
loss carryovers. The value of the carryovers depends on the ability of Fountain
to generate United States federal taxable income. The use of such carryovers may
be restricted in cases where Fountain undergoes an "ownership change," which
generally is a 50 percentage point change in the beneficial ownership of
Fountain occurs during any three-year period (subject to special rules set forth
in Section 382 of the U.S. Code and the Treasury regulations thereunder).
The Transaction may result in a current or future ownership change in
Fountain for purposes of Section 382 of the U.S. Code. In the event of such an
ownership change in Fountain, Section 382 of the U.S. Code would impose an
annual limitation on the amount of Fountain's taxable income that may be offset
by its net operating loss carryovers. The limitation is generally the amount
equal to the product of the fair market value of the equity of Fountain
immediately before such ownership change and a percentage approximately equal to
the highest yield on long-term U.S. government securities for the three-month
period ending with the month in which the ownership change occurs. Fountain has
experienced such ownership changes and the imposition of annual limitations in
the past. See Note 13 of Notes to Fountain's Consolidated Financial Statements.
NORWEGIAN TAX CONSIDERATIONS
It is the opinion of Wikborg, Rein & Co., special Norwegian tax counsel
to Fountain, that no Norwegian income taxation considerations are generally
applicable to holders of Fountain Common Stock with respect to the Transaction.
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FOUNTAIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
THE FOLLOWING CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED UPON
THE CURRENT EXPECTATIONS OF FOUNTAIN AND SPEAK ONLY AS OF THE DATE MADE. THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND UNCERTAINTIES.
FOUNTAIN'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THE FACTORS DISCUSSED BELOW, AS WELL AS THE FACTORS
DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
December 31, 1997 Compared to December 31, 1996
As of December 31, 1997, Fountain had current assets of US$24,626,000,
of which US$14,164,000 was in the form of cash and cash equivalents and
US$9,700,000 was in the form of restricted cash, and current liabilities of
US$10,655,000, leaving Fountain with working capital of US$13,971,000. This
compares to current assets of US$32,306,000, cash and cash equivalents of
US$31,424,000, current liabilities of US$1,924,000 and working capital of
US$30,382,000 as of December 31, 1996.
The decrease in cash and cash equivalents from December 31, 1996 through
December 31, 1997 is attributable primarily to US$13,240,000 of cash used in
1997 investing activities, primarily US$7,599,000 of investments in and advances
to oil and gas properties and ventures and an additional US$4,300,000 of
restricted cash deposits collateralizing letters of credit issued by banks to
guarantee repayment of obligations by oil and gas ventures, and US$4,176,000 of
cash utilized in 1997 operating activities, including US$3,903,000 of general
and administrative expenses that were largely cash items. The decrease in
current assets attributable to the reduction in cash and cash equivalents was
partially offset by the classification of US$9,700,000 of restricted cash at
December 31, 1997 as a current asset in light of Fountain's expectation that the
restricted cash would be either applied to satisfy accrued liabilities or
released from restrictions during 1998. Other current assets increased from
US$622,000 at December 31, 1996 to US$762,000 at December 31, 1997 primarily as
a result of a US$256,000 increase in prepaid expenses, largely relating to lease
and consulting obligations, and a US$69,000 increase in miscellaneous
receivables, substantially offset by a US$200,000 reduction in inventory.
During the fourth quarter of 1997, Fountain commenced a program to
preserve its financial resources by reducing general and administrative expenses
and limiting its investments in and advances to oil and gas ventures and
properties in which it holds interests, while it explored and pursued strategic
alternatives with the assistance of investment advisors. As a result of its
consideration of strategic alternatives, Fountain entered into the Combination
Agreement in February 1998. Consummation of the Transaction with CanArgo is
subject to the satisfaction of a number of conditions, including approval of the
business combination by the stockholders of CanArgo and Fountain. See "THE
TRANSACTION -- Background of the Transaction" "-- Reasons for the Transaction --
Fountain's Reasons for the Transaction" and "-- The Combination Agreement."
As part of its program to preserve financial resources, Fountain has
terminated or delivered termination notices to approximately three-quarters of
its employees, each of whom is expected to cease employment by July 31, 1998.
The rate at which Fountain utilizes cash in the ordinary conduct of business is
expected to decrease substantially during 1998 as compared to 1997, at least
prior to the consummation of the Transaction. Cash expenses associated with the
Transaction, principally fees to financial advisors and legal counsel, are
however expected to amount to approximately $1,000,000, most of which will be
incurred prior to the consummation of the Transaction. The sharp reduction in
Fountain's workforce will make it significantly more difficult for Fountain to
function as an independent entity if the Transaction does not occur.
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The US$8,730,000 increase in current liabilities is attributable to a
US$9,202,000 increase in accrued liabilities, which in turn is based primarily
on an US$8,970,000 accrual associated with the impairment of the Lelyaky Field
oil and gas venture. The accrual includes US$8,280,000 of debt and accrued
interest of Kashtan, on which Kashtan has defaulted or is expected to default
and which was effectively guaranteed by Fountain through restricted cash
deposits of US$9,350,000, and US$691,000 of estimated liabilities for severance
and related costs associated with closing down Kashtan operations. Such costs
are expected to be paid during 1998.
In 1997, Fountain placed an additional US$4,300,000 in a restricted
deposit account to collateralize letters of credit used for the benefit of oil
and gas ventures in which Fountain holds interests, increasing the balance from
US$5,400,000 at December 31, 1996 to US$9,700,000 at December 31, 1997. Based on
Fountain's expectation that the restricted cash would be either applied to
satisfy accrued liabilities or released from restrictions during the twelve
months following December 31, 1997, restricted cash was classified as a current
asset as of December 31, 1997.
Notes receivable of US$190,000 as of December 31, 1996 representing
obligations of an entity that had sold to Fountain shares of UK-RAN, the
subsidiary through which Fountain holds its interest in Kashtan, were written
off during 1997 to reflect doubtful collectability.
Property and equipment decreased US$1,824,000 during 1997, from
US$7,766,000 at December 31, 1996 to US$5,942,000 at December 31, 1997. Drilling
rigs and related equipment originally intended for use in the Maykop Field
project, with a carrying value of US$6,957,000 at December 31, 1996 represented
substantially all of the property and equipment at the end of both 1996 and
1997. Fountain shipped the rigs and equipment from the United States in December
1996, but when Intergas, the entity developing the Maykop Field, failed to
complete various corporate formalities believed by Fountain to be necessary for
the efficient and economical importation of the rigs and equipment into Adygea,
the shipment was diverted to Cyprus where the rigs and equipment remain in
bonded storage. During 1997, an additional US$1,392,000 was invested in the
drilling rigs and related equipment, particularly in the equipment category.
Because of the very substantial delays it has experienced in resolving operating
arrangements and other matters relating to Intergas, Fountain has concluded that
under present circumstances it cannot effectively pursue commercial activities
including the development of the Maykop Field through Intergas. Since the
drilling rigs and related equipment are expected to be employed for applications
other than those for which they were specifically intended, Fountain has written
down the carrying value of the rigs and equipment by US$2,844,000 to
US$5,504,000 at December 31, 1997.
Oil and gas properties, net, increased US$1,220,000 in 1997, from
US$259,000 at December 31, 1996 to US$1,479,000 at December 31, 1997. During
1997, Fountain acquired a majority interest in a heavy oil field located at
Sylvan Lake, Alberta, Canada for US$1,009,000. In the same year, Fountain
recorded capitalized development costs, primarily related to the Sylvan Lake
property, amounting to US$679,000. The 1997 additions to oil and gas properties,
net, were partially offset by unit-of-production amortization expenses of
US$211,000 and the impairment of the remaining carrying value of the Rocksprings
property, amounting to US$257,000. Fountain expects during the second half of
1998 to install EEOR equipment in the Sylvan Lake well drilled during 1997. This
equipment is designed to provide thermal stimulation to the heavy oil reservoir
by heating it electrically and is expected to cost approximately US$150,000.
Investments in and advances to oil and gas ventures - net decreased
during 1997 from US$8,568,000 at December 31, 1996 to US$5,387,000 at December
31, 1997. Total investments in and advances to oil and gas ventures during 1997
aggregated US$7,223,000, of which US$4,145,000 (including Fountain Common Stock
having a value of US$1,061,000 issued in connection with the acquisition of an
interest in the Stynawske Field project) was directed to the Stynawske Field
project, US$2,272,000 was directed to the Maykop Field project, US$876,000 was
directed to the Gorisht-Kocul Field project, and US$37,000 was directed to the
Lelyaky Field project, which was funded during 1997 primarily through a bank
line of credit supported by restricted cash deposits made by Fountain.
Investments in and advances to the Stynawske Field project will be the only
significant investments in and advances to oil and gas ventures anticipated
during 1998 prior to the consummation of the Transaction.
During 1997, Fountain for varying reasons recognized impairment losses
related to the Lelyaky Field, Maykop Field and Gorisht-Kocul Field projects.
Impairment of oil and gas ventures aggregated US$15,736,000, which is in
addition to aggregate losses of US$3,365,000 recorded in 1997 with respect to
Fountain's equity in the
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losses of Kashtan, Intergas and the Gorisht-Kocul joint venture which operate
those three projects, respectively. A loss of US$414,000 was also recorded in
1997 with respect to Fountain's equity in the loss of Boryslaw Oil Company which
operates the Stynawske Field.
Based on its analysis of the results of the initial development efforts
in the Lelyaky Field project, Fountain concluded that the Lelyaky Field will not
support a successful commercial development. As a result, Fountain recorded an
impairment charge totaling US$9,108,000. The impairment charge consisted of
US$137,000 representing the carrying value of an investment related to Kashtan,
US$8,280,000 of debt and accrued interest of Kashtan on which Kashtan has
defaulted or is expected to default and which was effectively guaranteed by
Fountain through restricted cash deposits, and US$691,000 of estimated
liabilities for severance and related costs associated with closing down
Kashtan's operation. Such costs are expected to be paid in 1998. In addition,
Fountain recognized a loss in 1997 of US$2,080,000 reflecting its equity in the
loss of Kashtan.
Because it has experienced extended delays in resolving operating
arrangements and other Intergas matters including completion of corporate
formalities, Fountain has concluded that under present circumstances it cannot
effectively pursue commercial activities and develop the Maykop Field through
Intergas. As a result, Fountain recorded during the fourth quarter of 1997 an
impairment of US$5,258,000 for the entire amount of its investment in and
advances to Intergas. In addition, in recognition that drilling rigs and related
equipment originally intended for use in the Maykop Field are expected to be
employed for applications other than those for which they were specifically
intended, Fountain wrote those rigs and equipment down to their estimated fair
value. During 1997, Fountain also recognized a US$851,000 loss with respect to
its equity in the loss of Intergas.
In March 1997, Fountain declared the political unrest in Albania to be a
force majeure with respect to the Gorisht-Kocul project, and development efforts
there have been suspended since the declaration. In light of the extended period
that the force majeure condition has continued and the absence of any indication
of an imminent termination of that condition, Fountain recognized at December
31, 1997 a US$1,370,000 impairment of oil and gas ventures, writing off its net
investment in and advances to the joint venture developing the Gorisht-Kocul
Field. During 1997, Fountain also recognized a US$433,000 loss as its equity in
the loss of that joint venture.
As a result of the events described above relating to Kashtan, Intergas
and the Gorisht-Kocul joint venture, Fountain may be subject to contingent
liabilities in the form of claims from those ventures and other participants
therein. Fountain has been advised that Intergas and another shareholder of
Intergas are considering asserting such claims. Fountain management is unable to
estimate the range that such claims, if made, might total. However, if any
claims were asserted and determined to be valid, they could have a material
adverse effect on Fountain's financial position, result of operations and cash
flows. Such claims may be adjudicated in the host country forum under host
country law. See "RISK FACTORS -- Litigation and Claims" and "INFORMATION
CONCERNING FOUNTAIN -- Legal Proceedings."
The remaining balance of US$5,387,000 in investment in and advances to
oil and gas ventures - net at December 31, 1997 relates solely to Boryslaw Oil
Company, the entity holding the license to develop the Stynawske Field. Fountain
has the responsibility of arranging financing for this venture and, unless
third-party financing can be arranged, Fountain might have to supply the capital
to finance operations until the venture generates positive cash flow, which will
have the effect of increasing investments in and advances to oil and gas
ventures. The amount of such advances may be greater than the amount of the
operating losses recognized by Fountain, which would cause such net investment
balances to increase. Such investments are essentially unevaluated oil and gas
properties, and such costs may not be recovered if the venture is not
successful. No assurance can be given that Fountain will either be able to
arrange third-party financing for such venture or have sufficient resources to
fund the capital and operating needs of the venture or that the venture will be
successful. See "RISK FACTORS -- Fountain Liquidity and Capital Resources."
Other assets decreased from approximately from US$886,000 at December
31, 1996 to nil at December 31, 1997 primarily as a result of the application
during 1997 of deposits placed by Fountain related to oil and gas properties and
ventures that were outstanding at December 31, 1996 and the write-off in 1997 of
Fountain's US$137,000 investment in the entity that held a minority interest in
UK-RAN, the subsidiary through which Fountain held its interest in Kashtan. The
write-off of the investment is reflected in the Consolidated Statement of
Operations as impairment of oil and gas ventures.
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Accounts payable decreased from US$800,000 at December 31, 1996 to
US$328,000 at December 31, 1997, primarily as a result of the substantial
reduction in project activity during the fourth quarter of 1997, as Fountain
focused considerable attention on cash conservation.
Accrued liabilities increased US$9,202,000 during 1997, primarily as a
result of accruals associated with the impairment of the Lelyaky Field project.
Stockholders' equity decreased US$26,466,000 in 1997 from US$53,245,000
at December 31, 1996 to US$26,779,000, primarily as a result of the
US$27,683,000 net loss reported by Fountain for 1997, offset to a minor degree
by issuances of Common Stock, primarily in connection with the acquisition of an
interest in an oil and gas venture, which added US$1,217,000 to stockholders'
equity.
Fountain has had and continues to have outstanding obligations with
respect to the acquisition and development of oil and gas properties and
ventures in which it has interests that require or may require Fountain to
expend funds and to issue shares of its Common Stock. Some of these obligations
are subject to the satisfaction of various conditions related to, among other
things, achievement of specified project performance standards. At December 31,
1996, Fountain had unconditional obligations regarding the acquisition and
development of its oil and gas projects and ventures amounting to US$5,500,000,
of which US$4,000,000 was being satisfied through the collateralization of
letters of credit guaranteeing obligations of Kashtan, as well as the
unconditional obligation to issue 425,000 shares of its Common Stock. During
1997, Fountain effectively discharged its obligations regarding the US$5,500,000
by, among other things, accruing for its obligation with respect to its
effective guaranty of Kashtan's indebtedness to a bank, and issued 175,000
shares of its Common Stock in satisfaction of unconditional obligations existing
on December 31, 1996. As the result of the occurrence of a condition subsequent,
Fountain's obligation to issue the other 250,000 shares was terminated in 1997.
On December 31, 1996, Fountain also had contingent obligations relating to the
acquisition and development of its oil and gas properties and ventures amounting
to US$1,300,000 and 1,825,000 shares of Common Stock. As of December 31, 1997,
the conditions that would have required the payment of US$1,300,000 and the
issuance of 1,450,000 shares of Common Stock could no longer be met or have
become remote, so those conditional obligations were eliminated. Since no
additional conditional or unconditional obligations to expend funds or issue
shares in connection with the acquisition and development of oil and gas
properties and ventures were incurred in 1997, at December 31, 1997 Fountain had
contingent obligations involving 375,000 shares which relate to development of
the Stynawske Field project. Those contingent obligations are conditioned on the
achievement of specified performance standards by the Stynawske Field project.
While Fountain believes that the Stynawske Field project will meet such
performance standards and that such shares will therefore be issued, no
assurances can be given that the performance standards will be met. If such
shares are issued, the issuance will be accounted for as an additional
investment by Fountain in BOC, based upon the fair market value of the shares at
the time of issuance. As Fountain develops current projects and undertakes other
projects, significant additional obligations may be incurred.
Development of the oil and gas properties and ventures in which Fountain
has interests involves multi-year efforts and substantial cash expenditures.
Fountain had working capital of approximately US$13,971,000 at December 31,
1997, which it considered inadequate to proceed with full implementation of its
program of developing its principal oil and gas properties and ventures. Full
development of Fountain's oil and gas properties and ventures will require the
availability of substantial additional funds from external sources. Fountain
believes that its ability to access external financing is dependent upon the
successful completion of a business combination with, or the farm-out of a
significant portion of its interest in BOC and possibly other properties and
ventures to, an entity that can provide or attract such financing. Fountain
generally has the principal responsibility for arranging financing for the oil
and gas properties and ventures in which it has an interest. There can be no
assurance, however, that Fountain or the entities that are developing the oil
and gas properties and ventures will be able to arrange the financing necessary
to develop the projects being undertaken or to support the corporate and other
activities of Fountain or that such financing as is available will be on terms
that are attractive or acceptable to or are deemed to be in the best interest of
Fountain, such entities and their respective stockholders or participants. See
"RISK FACTORS -- Fountain Liquidity and Capital Resources."
As of December 31, 1997 and 1996, Fountain had net investments in oil
and gas properties and ventures totaling approximately US$6,866,000 and
US$8,827,000, respectively. Of these amounts, US$5,387,000 and US$8,463,000,
respectively, relate to ventures in Eastern Europe. Ultimate realization of the
carrying value of
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Fountain's oil and gas properties and ventures will require production of oil
and gas in sufficient quantities and marketing such oil and gas at sufficient
prices to provide positive cash flow to Fountain, which is dependent upon, among
other factors, achieving significant production at costs that provide acceptable
margins, reasonable levels of taxation from local authorities, and the ability
to market the oil and gas produced at or near world prices. In addition,
Fountain must mobilize drilling equipment and personnel to initiate drilling,
completion and production activities. Fountain has plans to mobilize resources
and achieve levels of production and profits sufficient to recover its carrying
value. However, if one or more of the above factors, or other factors, are
different than anticipated, these plans may not be realized, and Fountain may
not recover its carrying value. Fountain will be entitled to distributions from
the various properties and ventures in accordance with the arrangements
governing the respective properties and ventures. See "RISK FACTORS --
Exploration, Development and Production Risks."
In 1997, Fountain implemented new computer information systems, which
Fountain believes are Year 2000 compliant. Although Fountain does not expect to
incur additional expenditures to address Year 2000 issues, there can be no
assurance that this will be the case. Additionally, the ability of third parties
with whom Fountain transacts business to adequately address their Year 2000
issues is outside of Fountain's control. There can be no assurance that the
failure of Fountain or such third parties to adequately address their respective
Year 2000 issues will not have a material adverse effect on Fountain's business,
financial condition, results of operations or cash flows.
December 31, 1996 Compared to August 31, 1996
As of December 31, 1996, Fountain had current assets of US$32,306,000,
of which US$31,424,000 was in the form of cash and cash equivalents, and current
liabilities of US$1,924,000, leaving Fountain with working capital of
US$30,382,000. This compares to current assets of US$17,986,000, cash and cash
equivalents of US$17,329,000, current liabilities of US$1,060,000 and working
capital of US$16,926,000 as of August 31, 1996. The increase in current assets,
cash and cash equivalents and working capital from August 31, 1996 through
December 31, 1996 was attributable primarily to issuance and sale of Fountain
Common Stock for cash upon exercise of stock purchase warrants, partially offset
by investments in oil and gas ventures and operating losses.
During the four months ended December 31, 1996, Fountain received
approximately US$25,000,000 as a result of the exercise of outstanding stock
purchase warrants that resulted in the issuance of 4,720,754 shares of Fountain
Common Stock. As Fountain entered 1997, no further stock purchase warrants
issued by Fountain remained outstanding.
The cash proceeds from the exercise of the stock purchase warrants were
partially offset during the four month period ended December 31, 1996 by (i)
US$5,400,000 of cash which was restricted to collateralize letters of credit
issued for the benefit of oil and gas ventures accounted for using the equity
method, (ii) US$3,108,000 for investments in and advances to such oil and gas
ventures, (iii) capital expenditures of US$1,228,000 on drilling rigs and
related equipment which Fountain had expected to transfer to Intergas, and (iv)
US$1,230,000 used in operating activities during the four months ended December
31, 1996 principally representing the cash portion of Fountain's net loss for
that period.
Property and equipment, net increased from US$6,578,000 at August 31,
1996 to US$7,766,000 at December 31, 1996, reflecting the improvement of rigs
and equipment acquired along with Fountain's principal interest in Intergas and
the acquisition of additional equipment through December 31, 1996.
Investments in and advances to oil and gas ventures net increased from
US$6,876,000 at August 31, 1996 to US$8,568,000 at December 31, 1996, reflecting
Fountain's increasing involvement in projects in Eastern Europe. During the four
months ended December 31, 1996, Fountain entered into a joint venture to develop
the Stynawske Field.
Other assets increased from US$171,000 at August 31, 1996 to US$886,000
at December 31, 1996, primarily as a result of deposits placed by Fountain on
items related to oil and gas ventures.
Accrued liabilities increased from US$298,000 at August 31, 1996 to
US$1,124,000 at December 31, 1996. Accrued liabilities principally reflected the
accrual of salaries and related employment taxes and professional fees, and, at
December 31, 1996, transportation charges associated with shipping drilling rigs
and related equipment that were eventually placed in bonded storage in Cyprus.
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Stockholders' equity increased from US$30,505,000 at August 31, 1996 to
US$53,245,000 at December 31, 1996, as a result of Fountain's issuance and sale
of equity securities, partially offset principally by operating losses.
As of December 31 and August 31, 1996, Fountain had net investments in
oil and gas properties and ventures totaling US$8,827,000 and US$7,164,000,
respectively. Of these amounts, approximately US$8,463,000 and US$6,783,000,
respectively, related to the ventures in Eastern Europe. Ultimate realization of
the cost of Fountain's oil and gas properties and ventures will require
production of oil and gas in sufficient quantities and marketing such oil and
gas at sufficient prices to provide positive cash flow to Fountain, which is
dependent upon, among other factors, achieving significant increases in
production from existing levels, production of oil and gas at costs that provide
acceptable margins, reasonable levels of taxation from local authorities, and
the ability to market the oil and gas produced at or near world prices. See
"RISK FACTORS -- Exploration, Development and Production Risks."
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended August 31, 1996
Fountain has typically acquired its interests in oil and gas properties
through interests in joint ventures, partially owned corporate and other
entities and joint operating arrangements. While it has normally sought to be
the operator of substantial oil and gas projects in which it has an interest,
Fountain has generally acquired interests representing 50% or less of the equity
in various oil and gas projects. Accordingly, most of the activities in which
Fountain has an interest are conducted through unconsolidated entities.
Fountain's interest in the assets and liabilities of unconsolidated entities is
reflected on Fountain's consolidated balance sheet on a net basis as investment
in and advances to oil and gas ventures; Fountain's share of revenue, other
income and expenses of unconsolidated entities is reported in Fountain's
consolidated statement of operations as income or loss from equity investment in
oil and gas ventures; and Fountain's interest in the cash flow of unconsolidated
entities is reported in Fountain's consolidated statement of cash flows as
distributions from or investment in or advances to oil and gas ventures.
Interests acquired in certain joint ventures, partnerships and production
sharing, working interest and other arrangements are proportionately
consolidated. Fountain will report the same stockholders' equity and net income
or loss whether it accounts for various oil and gas ventures using the equity
method or on a consolidated basis.
Fountain recorded operating revenue of US$313,000 during the year ended
December 31, 1997 compared with US$35,000 for the year ended August 31, 1996.
Revenue in both years was related to a modest amount of oil and gas production
from property in Alberta, Canada in which Fountain has interests. The 1997
production was generated primarily at the Sylvan Lake property in which Fountain
acquired an interest in 1997.
The operating loss for the year ended December 31, 1997 amounted to
US$29,090,000, compared with US$5,640,000 for the year ended August 31, 1996.
The increase in the operating loss is attributable primarily to the impairment
of oil and gas ventures, oil and gas properties, and property and equipment and
other assets which aggregated US$19,424,000 in 1997, as well as a US$3,778,000
loss representing Fountain's equity in the loss of oil and gas ventures. There
were no comparable impairment charges in fiscal 1996, and in that year,
Fountain's equity in the loss of oil and gas ventures was US$13,000.
Lease operating expenses increased to US$200,000 in 1997, as compared to
US$11,000 in fiscal 1996, primarily as a result of Fountain's acquisition of an
interest in the Sylvan Lake property in early 1997. 1997 direct project costs
increased US$485,000 from the US$1,268,000 experienced during the fiscal year
ended August 31, 1996, reflecting principally the higher level of project
activity and the inability of Fountain to recoup from Kashtan certain expenses
related to the Lelyaky Field project incurred during December 1997. General and
administrative expenses in the years ended December 31, 1997 and August 31, 1996
were comparable. General and administrative expense are expected to decrease
during 1998, at least prior to the consummation of the Transaction. The increase
in depreciation and amortization expense from US$77,000 in the year ended August
31, 1996 to US$345,000 in the year ended December 31, 1997 is attributable
principally to the increased production of oil.
During the year ended December 31, 1997, Fountain recognized an
aggregate of US$19,237,000 in losses as a result of the impairment of long-lived
assets, as compared to an impairment loss of US$420,000 for the year
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ended August 31, 1996. Impairment of the ventures operating the Lelyaky, Maykop
and Gorisht-Kocul Field projects resulted in a combined loss of US$15,736,000.
The impairment of drilling rigs and related equipment originally intended to be
utilized in the Maykop Field project and certain office furniture, fixtures and
equipment resulted in a loss of US$3,244,000. The remaining investment in the
Rocksprings property, which was carried in Fountain's December 31, 1996 balance
sheet as a US$257,000 unevaluated oil and gas property was recognized as
impaired in 1997. The remaining assets impaired during 1997 were notes
receivable from the entity that sold to Fountain its principal interest in
Kashtan, as to which there were doubts regarding collectability.
In 1997, Fountain recorded total other income of US$1,202,000, as
compared to total other expense of US$854,000 in the year ended August 31, 1996.
Interest income increased to US$1,615,000 for the year ended December 31, 1997
from US$332,000 for the year ended August 31, 1996 due to higher average cash
and cash equivalent investments. Interest expense decreased from US$1,016,000
for the year ended August 31, 1996, when Fountain recorded amortization of
financing costs, discount and interest related to the 8% Convertible
Subordinated Fountain Debentures, to US$69,000 for calendar 1997. In both 1997
and fiscal 1996, Fountain recorded losses from the sale of miscellaneous
equipment and property amounting to US$271,000 and US$182,000, respectively.
The net loss of US$27,683,000, or US$1.24 per share, in 1997 compares to
a net loss of US$6,494,000, or US$.52 per share, in the fiscal year ended August
31, 1996. The disproportionate losses per share are attributable to Fountain's
issuance of additional shares subsequent to August 31, 1996, resulting in a
substantially higher weighted average number of common shares outstanding during
the year ended December 31, 1997.
Four Months Ended December 31, 1996 Compared With Four Months Ended December
31, 1995
Fountain recorded an operating loss of US$2,983,000 during the four
month period ended December 31, 1996 compared with US$1,470,000 for the same
1995 period. The increased loss resulted from an increase of approximately
US$1,357,000 of equity loss from investments in unconsolidated subsidiaries
primarily associated with the activities of the oil and gas ventures in Eastern
Europe in which Fountain has interests.
General and administrative expenses for the four month period ended
December 31, 1996 amounted to US$1,282,000 reflecting a modest decrease from the
US$1,303,000 for the comparable 1995 period. For the 1995 period, general and
administrative costs included a charge for external services for public
relations activities of a non-recurring nature. The decrease in the 1996 period
for such expense was substantially offset by increases in salaries and other
administrative costs related to the build-up of staff associated with the
projects in Eastern Europe. General and administrative expense is net of
US$1,220,000 and US$320,000 capitalized pursuant to full cost accounting rules
during the four month period ended December 31, 1996 and 1995, respectively.
Interest income increased to US$424,000 for the four month period ended
December 31, 1996 from US$55,000 in the comparable period for the prior year due
to higher average cash investments. Interest expense increased to US$13,000 for
the four month period ended December 31, 1996 from US$3,000 in the comparable
period for the prior year due to the amortization of financing costs and
interest related to the Fountain Debentures and financing of insurance premiums.
Twelve Months Ended August 31, 1996 Compared With Twelve Months Ended August
31, 1995
Fountain recorded operating revenue of US$35,000 during the year ended
August 31, 1996 compared with US$625,000 for the year ended August 31, 1995. The
decrease in revenue resulted from a decline in sale of EEOR equipment. Fountain
decided not to market the EEOR technology to third parties but rather to use the
technology primarily as a competitive advantage to secure new heavy oil
interests and, assuming successful commercialization, to optimize production and
reserves from such interests. Consequently while all US$625,000 of 1995 revenue
related to EEOR technology, only US$9,000 of 1996 revenue was associated with
the EEOR technology. Most 1996 revenue was related to a modest amount of oil and
gas production from an overriding royalty interest held by Fountain relating to
property in Alberta, Canada. See "INFORMATION CONCERNING FOUNTAIN -- Technology
for Enhanced Production of Heavy Oil."
The operating loss for the year ended August 31, 1996 amounted to
US$5,640,000 compared with US$7,883,000 for the year ended August 31, 1995. The
reduction in the operating loss was attributable primarily to non-recurring 1995
expense items relating to the impairment of patent rights and certain other
assets written off at the end of fiscal 1995, the amortization of those patent
rights during 1995, and 1995 financial public relations
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expenses paid primarily by the issuance of Fountain Common Stock, partially
offset by higher 1996 direct project costs of US$1,268,000 and general and
administrative expense (other than those related to financial public relations)
associated with the development of an organization and infrastructure for
Fountain's oil and gas activities.
General and administrative expenses for the year ended August 31, 1996
amounted to US$3,854,000 compared to US$4,013,000 for the year ended August 31,
1995. For the 1995 period, general and administrative costs included a
substantial charge for external services fees for financial public relations
activities of a non-recurring nature. The decrease in the 1996 financial public
relations expense was substantially offset by increases in salaries and other
administrative costs related to the build-up of staff associated with the
projects in Eastern Europe.
Depreciation, depletion, and amortization expense decreased from
US$1,157,000 in fiscal 1995, to US$77,000 for fiscal 1996. This reduction was
attributable primarily to the recognition at August 31, 1995 of the impairment
of intangible assets on which amortization had been charged at the rate of
approximately US$223,000 per quarter during fiscal 1995.
During fiscal 1996, Fountain recognized an impairment of US$420,000 on
its oil and gas properties as a result of applying the full cost ceiling
limitation. Of this amount, US$269,000 related to Fountain's investment in the
Rocksprings project in West Texas. As of August 31, 1996, the Rocksprings field
had only produced insignificant amounts of gas from one of the two wells in
which Fountain participated. During fiscal year 1995, Fountain recognized
US$608,000 of impairment expense on the same project. As of August 31, 1996,
Fountain had a US$257,000 unevaluated oil and gas property on its balance sheet
related to the Rocksprings project. The remaining 1996 expense associated with
impairment of oil and gas properties related to Fountain's 50% working interest
in the West Mexia field, which involved a now abandoned experimental well to
test new technology for determining the remaining predictable oil between wells
and in wells that had become early water producers.
During 1996, Fountain recorded a loss of US$182,000 from the sale of
certain drilling equipment. Interest income increased to US$332,000 for the year
ended August 31, 1996 from US$251,000 in the prior year due to higher average
cash investments. Interest expense increased to US$1,016,000 for the year ended
August 31, 1996 from US$28,000 in the prior year due to the amortization of
financing costs, discount and interest related to the Fountain Debentures.
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INFORMATION CONCERNING FOUNTAIN
GENERAL DEVELOPMENT OF FOUNTAIN'S BUSINESS
Fountain is a Delaware corporation formed in 1994. Its predecessor was
incorporated in Oklahoma in 1980 and operated as an oil and gas exploration and
production company until 1988, when it shifted its focus to the application of
the EEOR Process. The EEOR Process represented the basis for Fountain's
principal business from 1988 through December 1994. See "-- Technology for
Enhanced Production of Heavy Oil -- EEOR Process."
In August 1994, a new management group with experience in the
international oil and gas industry became involved with Fountain, and beginning
in 1995 Fountain shifted its principal activities to the acquisition and
development of interests in a portfolio of oil and gas properties with a
production history, including engaging in such activities through joint venture,
stock ownership, production sharing, working interest, and other arrangements.
In a series of private placements in 1994, 1995 and 1996, Fountain raised equity
capital to finance its operations.
At January 31, 1998, Fountain had cash and cash equivalents of
approximately US$12,500,000, which it considers inadequate to proceed with its
program of acquiring and developing oil and gas properties. During 1997, the
initial development of the Lelyaky Field, the first substantial oil and gas
venture in which Fountain had an interest to be developed, failed to produce
commercial quantities of oil. In the fall of 1997, following the announcement of
the disappointing initial results from the Lelyaky Field in Ukraine, Orkla, one
of Fountain's financial advisors, indicated that in its judgment, based on the
information made available to Orkla from the senior management of Fountain, it
might be extremely difficult for Fountain to raise either equity and debt
capital in the financial markets at satisfactory terms at that point in time.
Contemporaneously, Fountain undertook a program to preserve its financial
resources by limiting its investments in and advances to oil and gas ventures
and properties in which it holds interests and reducing its general and
administrative expenses, which has resulted in the termination or delivery of
contractually required notices preceding termination to three-quarters of
Fountain's employees. Fountain also engaged investment bankers to advise it
regarding the strategic alternatives available to it, which engagement has
ultimately resulted in Fountain entering into the Combination Agreement with
CanArgo. See "THE TRANSACTION -- Background of the Transaction" and "--
Fountain's Reasons for the Transaction."
Fountain's principal activities during the past three years have
involved the acquisition of interests in and development of oil and gas fields.
Fountain's primary focus has been the acquisition of ownership interests in
existing oil and gas fields with a productive history that indicate the
potential for increased production through rehabilitation and utilization of
modern production techniques and enhanced oil recovery processes. Fountain has
looked for, among other characteristics in addition to petroleum production
potential, convenient access to oil and gas transportation and marketing systems
and the existence of an infrastructure for oil and gas production. Fields
meeting Fountain's requirements have been found in countries that in the past
have lacked the technical expertise or economic resources to exploit such fields
effectively. Oil and gas ventures in such countries are typically structured
through joint ownership arrangements with the state oil company or other local
interests. Fountain established a position in four projects in Eastern Europe,
including the Russian Federation - one in Adygea, two in Ukraine and one in
Albania. Production and, in some cases, exploration licenses have been granted
in regard to all four projects. During 1997, Fountain recorded losses associated
with the impairment of three of those four projects. Fountain also has interests
in small oil and gas properties in Canada, some of which have produced and are
producing modest amounts of crude oil. Fountain's principal product from its
existing ventures and properties is crude oil.
VENTURES IN EASTERN EUROPE
Stynawske Field, Western Region, Ukraine
In November 1996, Fountain entered into a joint venture arrangement with
Ukranafta for the development of the 6,000 acre Stynawske Field, located in
Western Ukraine near the city of Stryy. Fountain has a 45% interest in the joint
venture, with Ukranafta holding the remaining 55% interest. The formal
registration of BOC occurred in December 1996, and BOC received a production
license for the Stynawske Field in June 1997. At December 31, 1997 and 1996,
Fountain's net investment in and advances to BOC amounted to approximately
US$5,387,000 and US$1,656,000, respectively.
The Stynawske Field is a relatively tight sandstone reservoir containing
light oil. The production from the field commenced in 1967 but was substantially
terminated after a few years of production due to environmental
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considerations. The field is located underneath the main water supply for
Western Ukraine, and leakage from producing wells some 20 years ago threatened
pollution of this aquifer. Four wells that are located away from the water
supply have been allowed to continue production. Ukranafta retains rights to
base production, representing a projection of the net value of what the
Stynawske Field would produce in the future, based on the physical plant and
technical processes in use at the time of license grant, on a declining basis
through 2011. BOC will be entitled to all incremental production above that
declining base.
The preliminary field development for the rehabilitation of the
Stynawske Field is based on deviated drilling, in which the drilling sites for
the wells would be located a safe distance from the water supply and the wells
would enter the reservoir at angles avoiding the aquifer. Additional measures
would be taken with the drilling mud and otherwise to protect the environmental
integrity of the project. Gas injection to maintain reservoir pressure will be
considered. The full field development plan and marketing arrangements for the
Stynawske Field have not yet been formulated and will depend upon data developed
during an initial phase. In anticipation of the initial phase development, BOC
is proceeding with an environmental audit of the Stynawske Field, the technical
and economic evaluation of the project and the selection and preparation of
drilling sites.
Fountain is actively seeking arrangements with other oil and gas
production companies as Farm-Out Partners, under which one or more such
companies would acquire a portion of Fountain's interest in BOC and would assume
no less than a proportionate share of the historic and future financial
responsibilities for the Stynawske Field project associated with such interest
in BOC.
Lelyaky Field, Pryluki Region, Ukraine
Fountain holds a 90% interest in UK-RAN, which in turn owns 45% of the
equity of Kashtan, providing Fountain with an effective 40.5% ownership interest
in Kashtan. Ukranafta owns the other 55% of Kashtan. In May 1996, Kashtan
received a 20 year oil and gas production license for a 67 square kilometer
("km(2)") portion of the Lelyaky Field, as well as a five year exploration
license for 327 km(2) surrounding the production area. Ukranafta retained rights
to net "base production," representing a projection of what the Lelyaky Field
would produce in the future, based on the physical plant and technical processes
in use at the time of license grant, on a declining basis through 2008. Kashtan
would be entitled to all incremental production above that declining base, with
all production costs, taxes and other expenses of Kashtan to be covered before
the owners of Kashtan would share its profit, if any, in proportion to their
ownership interests.
Fountain has been responsible for arranging financing for the Lelyaky
Field project, which has involved both direct investment in and advances to
Kashtan and credit support through the pledge of cash collateral. Through
December 31, 1997, Fountain had made gross investments in and advances to
Kashtan aggregating US$2,436,000. In addition, at December 31, 1997, Fountain
had pledged a total of US$9,350,000 to collateralize indirectly a US$8,500,000
credit facility for Kashtan, on which Kashtan had drawn down US$8,150,000. At
December 31, 1997, Fountain had also pledged an additional US$350,000 to
collateralize a letter of credit to guarantee payment to a Kashtan contractor,
and the contractor has since been paid.
During 1997, Kashtan reentered nine wells in the Lelyaky Field for
purposes of recompletion, resulting in three productive and six unproductive
wells. The three producing Lelyaky Field wells have shown an aggregate average
production of approximately 120 barrels of oil per day. Originally, Kashtan had
planned to work over twelve wells in the initial phase of its field development
plan and then prepare a full field development plan. The disappointing results
from the initial nine wells caused Kashtan to suspend its workover operations
and to analyze the results of the initial development efforts in order to assess
the feasibility of developing the Lelyaky Field.
Based on its analysis of the initial development efforts including
consultation with independent petroleum engineers, Fountain has concluded that
the Lelyaky Field will not support a successful commercial development. On the
basis of that conclusion, Fountain has advised Kashtan that Fountain will not
provide any additional financial support for Kashtan and has recorded a 1997
impairment charge totaling $9,108,000. The impairment charge consisted of
$137,000, which represented the carrying value of an investment related to
Kashtan, $8,280,000 of debt and accrued interest of Kashtan on which Kashtan has
defaulted or is expected to default and which was effectively guaranteed by
Fountain through restricted cash deposits, and $691,000 of estimated liabilities
for severance and related costs associated with closing down Kashtan's
operations.
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Kashtan continues to produce a modest amount of oil from the recompleted
wells, which is sold in the Ukrainian market.
Gorisht-Kocul Field, Albania
Fountain and Albpetrol formed ALBJV, in which each has a 50% interest,
to rehabilitate and develop the Gorisht-Kocul Field. ALBJV was granted a 25 year
production license covering approximately 16.5 km(2) constituting the
Gorisht-Kocul Field. Albpetrol retained rights to base production, representing
a projection of the net value of what the Gorisht-Kocul Field would produce in
the future, based on the physical plant and technical processes in use at the
time of license grant, on a declining basis through 2011. ALBJV would be
entitled to all incremental production above that declining base.
Fountain was named operator of the Gorisht-Kocul Field, with
responsibility for implementing the development plan and arranging financing for
the project, which could involve financing ALBJV directly or guaranteeing,
collateralizing or providing other forms of credit support for ALBJV borrowings.
Up to 80% of the incremental production could be utilized to pay for project
operating costs and capital expenditures and to repay borrowings. Any shortfall
in recovery of such costs and other items in any period could be carried forward
and recovered from the 80% of incremental production available for such costs in
any subsequent period. The venturers could take base production and their
respective shares of net incremental production, after operating costs, capital
expenditures and debt repayment, either in kind or, following sale by ALBJV, in
cash based on world market prices.
Production at the Gorisht-Kocul Field commenced in 1966. The field,
which contains relatively heavy oil, has reportedly produced approximately 69
MMBbls to date. 1996 production was approximately 1,100 BOPD from the 160 wells
then still producing out of a total of 300 wells drilled. Initial production
from these wells is reported to have ranged between 187 and 630 BOPD.
Historically, wells in the Gorisht-Kocul Field have been completed open hole,
with no completion equipment utilized. Fountain believes, based on available
data, that the decline in productivity has been caused by water coning and
natural depletion.
In March 1997, Fountain declared the political unrest in Albania to be a
force majeure, and ALBJV suspended activities related to the development of the
Gorisht-Kocul Field as a result thereof. The suspension continues, and the level
of production has reportedly declined somewhat during the suspension. In light
of the extended period that the force majeure condition has continued and in the
absence of any indication of an imminent termination of that condition, Fountain
recorded during the fourth quarter of 1997 an impairment for the entire amount
of its investment in and advances to ALBJV of $1,370,000. Fountain also
recognized a $433,000 loss in 1997, as Fountain's equity in the loss of ALBJV.
Maykop Field, Adygea
Fountain holds 37% of the issued and outstanding stock of Intergas.
Other shareholders of Intergas include Adygea, Mostransgas Gas Transmission and
Supply Enterprise JSC ("Mostransgas"), an affiliate of Gasprom which is the
largest gas distribution group in Russia, and Petrogas JSC, a private Russian
company. In 1994, Intergas was granted an exclusive 25 year exploration and
production license covering specified zones in the 12,500 acre Maykop gas
condensate field in Adygea located approximately 185 kilometers from the Black
Sea.
The Maykop Field was discovered in 1958 and commercial production
commenced in 1966. The field has reportedly produced over two trillion cubic
feet of natural gas to date. In 1995, daily production was reported to have been
approximately 2,000,000 cubic feet of gas per day.
The development plan contemplated an initial phase that would have
commenced with the drilling of two new wells to assess the flow of primary gas
production and the possible concurrent recompletion and stimulation of certain
existing but non-producing wells in order to increase production. A delineation
well to assess a possible extension of the field was planned after the first two
wells were drilled. Based on data developed during the initial phase, Intergas
would have adopted a full development plan for the Maykop Field. In December
1996, Fountain shipped two drilling rigs and related equipment, which were
intended to be transferred to Intergas for use in the initial phase of the
Maykop Field development. When Intergas did not complete certain corporate
formalities believed by Fountain to be necessary for the efficient and
economical importation of the rigs and equipment into Adygea, Fountain diverted
the shipment to Cyprus where it remains in bonded storage. Fountain continues to
experience delays and difficulty in resolving operating arrangements and other
matters relating to Intergas,
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including completion of corporate formalities and regularization of its
corporate affairs. The very extended period during which it has been dealing
with these matters has caused Fountain to conclude that under present
circumstances it cannot effectively pursue commercial activities and develop the
Maykop Field through Intergas. As a result, Fountain recorded during the fourth
quarter of 1997 an impairment for the entire amount of its investment in and
advances to Intergas of US$5,258,000. In addition Fountain recognized a loss in
1997 of US$851,000, reflecting Fountain's equity in the loss of Intergas.
With the rigs and equipment now expected to be employed for applications
other than the specific applications for which they were originally intended,
Fountain recorded an impairment of $2,844,000 at December 31, 1997, which
represents the difference between the book value of rigs and equipment and their
estimated fair value. Fountain has had discussions with CanArgo regarding
CanArgo's possible future use of the rigs and equipment.
Risks Associated with Fountain's Eastern European Ventures
While all oil and gas development and production activities are subject
to uncertainties inherent in the oil and gas industry, projects in Eastern
Europe are subject to certain additional specific risks. The forms of government
and the economic institutions in most Eastern European countries have been
established relatively recently and, accordingly, may be subject to a greater
risk of change and the risk of greater change than may be the case with respect
to governments and economies that have been in existence for longer periods of
time. Generally, the government is an important participant in the establishment
of the arrangements defining a project, and there is a risk that a future
government may seek to alter project arrangements. The infrastructures, labor
pools, sources of supply, and legal and social institutions in Eastern European
countries may not be equivalent to those normally found in connection with
projects in North America, which may result in a lower level of predictability
and a higher risk of frustration of expectations. More permits and approvals may
be required for Eastern European entities and projects than for North American
entities and projects. The procedures for obtaining such permits and approvals
may be more cumbersome, and officials may have more discretion in acting on
application and requests. See "RISK FACTORS -- Risks of Foreign Operations."
Payment for any oil and gas sold in Eastern European countries may be in
local currencies. While such currencies are now generally freely convertible
into United States dollars, there is no assurance that such convertibility will
continue throughout the period Fountain is involved in projects in such
countries. Even where convertibility is available, applicable exchange rates may
not reflect a parity in purchasing power. Fluctuations of exchange rates could
result in a devaluation of foreign currencies being held by the entities
operating such projects in excess of their obligations denominated in such
currencies. In addition, Eastern European countries may impose various
restrictions on the transfer of currency into or out of such countries, which
could affect the ability of a Western operator to repatriate its investment or
its share of distributable earnings, if any. See "RISK FACTORS -- Risks of
Foreign Operations."
Fountain expects that its Stynawske Field project will commence with an
initial phase of the development plan. Among the purposes of the initial phase
of the development plans are the generation of additional data regarding the
geology and production characteristics of the field, testing the premises of the
tentative development plans for the field, refining such development plan, and
generally seeking confirmation of the commercial feasibility of the project.
While the staged approach to project development is designed to mitigate
investment risk and optimize hydrocarbon recovery, there can be no assurance
that such approach will have that effect. No assurance can be given that the
Stynawske Field project will be determined to be commercially feasible, that the
development of such project will produce oil and gas in commercial quantities,
or that any oil and gas produced will be sold for a profit. In order to produce
oil and gas in sufficient quantities and to market such oil and gas at
sufficient prices to provide positive cash flow to Fountain, the exploration and
development efforts of any oil and gas ventures in which it has an interest must
be successful. See "RISK FACTORS -- Exploration and Development Risks."
Fountain has the responsibility for arranging financing for the
Stynawske Field venture, subject to the approval of the BOC board. Fountain
hopes to finance the net development costs of such venture with funds made
available through a combination of its present cash position and equity or debt
financing either by Fountain and its Farm-Out Partners, if any, or by BOC. Debt
financing may be sought from both international development agencies, such as
the European Bank for Reconstruction and Development, and conventional lenders.
To the extent that loans are incurred by BOC, it is likely that Fountain and its
Farm-Out Partners, if any, will be required to
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guarantee or otherwise provide credit enhancements, including cash collateral,
with respect to all or a portion of such loans, at least until such venture
demonstrates economic self-sufficiency. There can be no assurance that Fountain
and its Farm-Out Partners, if any, or BOC will be able to arrange the financing
necessary to develop the Stynawske Field project or that such equity or debt
financing as is available will be on terms that are attractive or acceptable to
Fountain and its Farm-Out Partners or BOC or that are deemed to be in their
respective best interests. See "RISK FACTORS -- Liquidity and Capital Reserves."
The consolidated financial statements of Fountain do not give effect to
any further impairment in the value of Fountain's investment in oil and gas
ventures and properties or other adjustments that would be necessary if
financing cannot be arranged for the development of such ventures and properties
or if such ventures and properties are unable to achieve profitable operations.
Fountain's consolidated financial statements have been prepared under the
assumption of a going concern. Failure to arrange such financing on reasonable
terms or failure of such ventures and properties to achieve profitability would
have a material adverse effect on the results of operations, financial condition
including realization of assets, cash flows and prospects of Fountain and
ultimately its ability to continue as a going concern. See "RISK FACTORS --
Liquidity and Capital Reserves."
As a result of the events associated with the impairment of Fountain's
investment in and advances to and other assets related to Kashtan, Intergas and
ALBJV, Fountain may be subject to contingent liabilities in the form of claims
from Kashtan, Intergas or ALBJV or from other participants therein. Fountain has
been advised that Intergas and another shareholder of Intergas are considering
asserting such claims. Fountain management is unable to estimate the range that
such claims, if made, might total. However, if one or more such claims were
asserted and determined to be valid, they could have a material adverse effect
on Fountain's financial position, results of operations and cash flows. Such
claims may be adjudicated in the host country forum under host country laws. See
"RISK FACTORS -- Litigation and Claims" and "-- Legal Proceeding."
Fountain has made advances and may make additional advances to BOC and
other Eastern European oil and gas ventures for capital and operating
expenditures. Advances previously made to Kashtan, Intergas and ALBJV have been
either lost through Fountain's equity in the operating losses of such venture or
impairment. Advances, which are classified as investments in and advances to oil
and gas ventures, are generally recoverable only from future revenue of the
ventures. Fountain has generally negotiated agreements with its venture partners
to provide for priority distributions to repay these advances. No assurance can
be given that such distributions will be adequate to recover such advances.
No assurance can be given that any or all negotiations required in
connection with Fountain's oil and gas ventures and properties will be
satisfactorily concluded; that negotiated arrangements will be implemented; or
that all governmental and quasi-governmental licenses, registrations and
approvals required for the projects will be granted or, if granted, will not be
revoked.
PROPERTIES AND VENTURES IN NORTH AMERICA
Sylvan Lake Area, Alberta, Canada
In January 1997, Fountain purchased a 60% interest in a 2,080 acre heavy
oil property in the Sylvan Lake area in Alberta, Canada, from Amoil Resources
Inc., effective from December 20, 1996. Fountain paid approximately US$1,009,000
for its interest in the property, and also undertook to drill one pilot well in
which Fountain's electrically enhanced oil recovery equipment would be
installed. That well was drilled during the third quarter of 1997 and is
producing. The EEOR equipment is expected to be installed during the second half
of 1998. During 1997, Fountain's share of production from the field was
approximately 16,500 bbls, and during December 1997, Fountain's share of
production averaged 71 BOPD.
Frog Lake Area, Alberta, Canada
Fountain has two relatively insubstantial interests in producing oil and
gas projects in the Frog Lake area of Alberta, Canada. Fountain holds a 15%
working interest in the Beaver Dam project covering 640 acres. One well was
completed during the third quarter of l997, which was producing at the rate of
20 BOPD at 1997 year-end. The operator is planning to drill additional wells in
1998.
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Fountain also holds 15% of a 7.5% overriding royalty interest in
approximately 2,600 acres known as the Bear Trap project. During 1997, Fountain
received C$38,000 with respect to its royalty interest.
Skiff Sawtooth Field, Alberta, Canada
Fountain has a 50% working interest in oil and gas leases covering
approximately 320 undeveloped acres adjacent to a producing field. Recent
drilling by the offset operator has shown that the producing formation thins in
the general direction of Fountain's leasehold. Fountain has not yet been
involved in any drilling in the Skiff Sawtooth Field.
Rocksprings Field, Edwards County, West Texas
Fountain has a 37.5% working interest before payout and a 33.3% working
interest after payout in 1,799 undeveloped gross acres under lease. Two wells
have been drilled by the group in which Fountain is a working interest
participant. The first well was non-producing, and the second of the two wells
produced insignificant amounts of gas. In December 1997, Fountain recognized the
impairment of its remaining investment in the Rocksprings Field, resulting in a
US$257,000 impairment loss.
COMPETITION
The oil and gas industry is highly competitive. Fountain encounters
competition from other oil and gas companies in all areas of operations,
including the acquisition of producing properties. Fountain's competitors
include integrated oil and natural gas companies and numerous independent oil
and gas companies, individuals and drilling and income programs. Many of these
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than Fountain and which, in many
instances, have been engaged in the energy business for a much longer time than
Fountain. Such competitors may be able to develop better information and provide
better analysis of available information, to pay more for productive oil and
natural gas properties and exploratory prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than Fountain's
financial or human resources permit. In the competition to acquire oil and gas
properties, Fountain has relied substantially on the relationships its officers
and directors have developed in the international oil and gas industry, which
has been or will be significantly reduced as a result of the termination of
employment of various officers. Fountain management believes that Fountain's
relatively small size has enabled it to consider projects that would be deemed
to be too small for consideration by many larger competitors. See "RISK FACTORS
- -- Competition."
TECHNOLOGY FOR ENHANCED PRODUCTION OF HEAVY OIL
EEOR Process
Heavy oil resources are often located in shallow reservoirs with low
reservoir temperatures. Heavy oil is very viscous at moderate temperatures and
normally needs to be heated in order to flow easily. Fountain, together with
Illinois Institute of Technology Research Institution ("IITRI"), has developed
since the mid-1980's a technology for EEOR. Fountain has exclusive rights to the
technology through an agreement with IITRI, as well as through Fountain owned
patents. Fountain believes that its patent position is important in connection
with maintaining its competitive position relating to the EEOR Process. See "--
Licenses, Concessions and Patents."
Several pilot projects involving the EEOR Process have been implemented
during the past ten years. While pilot projects results have varied, Fountain
believes they suggest the validity of the EEOR technology and its ability in
appropriate circumstances to increase the production rates by a factor of two or
more. Recent emphasis has been on improving equipment reliability. To date,
Fountain has not achieved commercial success with this technology, and no
assurance can be given that Fountain will be successful in commercializing the
EEOR Process.
The potential advantages of the EEOR technology include improved
production rates, energy efficiency, environmental acceptability, absence of
practical depth limits, suitability for extremely cold climates, preventing or
removing paraffin buildup, and counteracting or removing hydrate formation.
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<PAGE> 110
Management believes that the EEOR technology could provide Fountain with
a competitive advantage in negotiating for heavy oil participations,
particularly in Eastern Europe. In North America, large heavy oil reserves are
lying idle because present owners have not found economic ways to develop them,
and this may represent opportunities for Fountain to obtain interests in such
fields on reasonable terms and to make production economic through the use of
the EEOR technology. Fountain therefore determined to use EEOR's technology
principally as a competitive advantage to acquire and, if successfully
commercialized, to develop heavy oil reserves. As a first step to implement this
strategy, Fountain has acquired a 60% share in a heavy oil property in the
Sylvan Lake Area in Alberta, Canada, and intends to install the technology in a
well in this field.
Fountain's ability to develop the EEOR technology is dependent upon its
ability to raise capital in addition to that needed for its oil and gas
properties and ventures.
Competition
The principal competition of the EEOR Process is a process based upon
injecting steam into wells to heat oil reservoirs. The steam process can heat
thicker zones faster and can heat larger volumes of a reservoir than the EEOR
Process. The steam process works best in thick, widespread formations but may
not be effective in various reservoirs by reason of factors such as climate,
depth, thickness, permeability variations, faulting, low porosity and
incompatibility of fresh water with reservoir constituents. The EEOR Process
does not appear to be limited by such conditions.
The EEOR Process has significant environmental advantages over the steam
process. The steam process utilizes substantial quantities of pure water in
producing the steam, and then steam condensate polluted with salt and petroleum
constituents, some of which may be carcinogenic, is returned with the oil and
must be recycled or disposed. The EEOR Process neither utilizes fresh water nor
produces condensate. The energy generated for the EEOR Process can normally be
generated in a central facility with better pollution control measures than
those available onsite where energy for the steam process is normally produced,
and the EEOR Process is normally more energy efficient. Environmental
considerations are generally more important with respect to projects in the more
highly developed countries, such as the United States, Canada and Western
Europe.
The principal dimensions of competition for reservoir heating systems
are the relative effectiveness, reliability and cost-effectiveness of the
competing systems, the environmental impact of the competing processes, and the
ability of the competing suppliers to respond to customers' needs in a timely
fashion. To date, Fountain has not been successful in establishing the EEOR
Process as a commercially accepted method of thermal stimulation.
PRINCIPAL MARKETS
The principal market for crude oil produced in North America is refiners
located in proximity to the place of production.
METHODS OF DISTRIBUTION
In North America crude oil generally is either distributed through
pipeline facilities located in proximity to the place of production or trucked.
LICENSES, CONCESSIONS AND PATENTS
BOC will be operating pursuant to a license or concession granted by
Ukrainian governmental authorities. The license imposes various requirements
upon the licensee, and the failure to satisfy such requirements could result in
the termination or cancellation of the license or concession. In addition, as
sovereign agencies, the governmental authorities that have granted such licenses
or concessions may have greater power than private parties to terminate licenses
or concessions arbitrarily. Loss of the license to operate the Stynawske Field
could have a material adverse effect upon the financial condition, results of
operations and prospects of Fountain.
Fountain believes that the patents it owns or has the exclusive licenses
to exploit could be important to the acquisition of interests in and to the
development of heavy oil fields. The IITRI license agreement covers one United
States patent that expires in 2002. Fountain holds directly twelve United States
patents with expiration dates ranging from 2004 to 2015. In addition, there are
eighteen issued foreign patents, expiring 2005 to 2014, and
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sixteen foreign patent applications currently pending based on the technology
embodied in the United States patents and patent applications.
ENVIRONMENTAL MATTERS
The development of oil and gas fields and the production of hydrocarbons
inherently involve environmental risks. These risks can be minimized, but not
eliminated, through use of various engineering and other technological methods,
and Fountain intends to employ such methods to industry standards. The potential
environmental problems are enhanced when the oil and gas development and
production activities involve the rehabilitation of fields where the practices
and technologies employed in the past have not embodied the highest standards
then in effect. It is the policy of Fountain to attempt to deal with this
situation by conducting an environmental audit before assuming responsibility
for operations of an oil or gas field and arranging for the prior operator to
accept liability for any environmental problems existing when Fountain, or a
venture in which it is interested, accepts responsibility for the field.
Fountain does not anticipate any material capital expenditures for environmental
control facilities during 1998, 1999 or the foreseeable future. See "RISK
FACTORS -- Exploration, Development and Production Risks."
Fountain's business is subject to certain national, provincial, state
and local laws and regulations relating to the exploration for and the
development, production and transportation of oil and natural gas, as well as
environmental and safety matters. Although many of these laws and regulations
have become more stringent in recent years, often imposing greater liability on
a larger number of potentially responsible parties, Fountain believes it has
complied with these laws and regulations. Because the requirements imposed by
such laws and regulations are frequently changed, Fountain is unable to predict
the ultimate cost of compliance with these requirements or their effect on its
operations. See "RISK FACTORS -- Extensiveness of Laws and Regulations
Applicable to Oil and Gas Operations."
EMPLOYEES
As of January 31, 1998, Fountain had 34 full time employees, of whom 23
had received contractually required or other notifications that their employment
would be terminated no later than July 31, 1998.
PROPERTIES
Fountain does not have complete ownership of any real property. Fountain
leases office space in Calgary, Houston, Maidenhead, England and Asker, Norway
under leases having remaining terms varying from eight to ninety-six months.
Fountain has subleased its Maidenhead and Calgary offices and substantially all
of its Asker, Norway office, with CanArgo being the sublessee of the Calgary
office. See "General Development of Fountain's Business," "Ventures in Eastern
Europe" and "Properties and Ventures in North America" for a description of the
principal oil and gas properties in which Fountain has an interest.
Since January 1, 1997, the beginning of Fountain's most recent full
fiscal year, neither Fountain nor any entities for which it accounts using the
equity method has filed with or included in reports to any Federal authority or
agency any estimates of total, proved net oil or gas reserves. During the past
three fiscal years, Fountain and its unconsolidated entities have not had any
substantial production of oil and gas.
In the year ended August 31, 1995, Fountain participated in the drilling
of three gross wells (1.3 net wells), two of which were exploratory and located
in the Rocksprings Field in Edwards County, Texas, and one of which was dry and
located in Evangeline Parish, Louisiana. Of the two Rocksprings wells, one was
completed and produced 20 MCF per day while the other was abandoned as a
non-producer. The Louisiana well was abandoned as a dry hole. In the year ended
August 31, 1996, Fountain participated in the drilling of one gross well in West
Mexia which was later abandoned. In the four months ended December 31, 1996,
Fountain did not drill any exploratory wells or development wells. In the year
ended December 31, 1997, Fountain participated in the drilling of two gross
wells (0.75 net wells), both of which were developmental. One of the wells, in
which Fountain has a 60% interest, was drilled in the Sylvan Lake Field,
Alberta, Canada and was completed in October 1997. It initially produced at the
rate of 160 BOPD and by year-end was producing at a rate of 40 BOPD. The second
well which was drilled in the Beaver Dam Field, Alberta, Canada, in which
Fountain has a 15% interest, and was also completed in October 1997. It
initially produced at the rate of 70 BOPD and by year-end was producing at a
rate of 20 BOPD.
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In the year ended December 31, 1997, the Sylvan Lake Field produced
25,048 barrels from four wells, and Fountain's share of production was 16,470
barrels, or an average of 45 BOPD. As of December 31, 1997, three wells were
producing, and Fountain's share of production in December was 71 BOPD from these
wells. During 1997, the average Sylvan Lake sales price was C$148.12 per m3, the
average Sylvan Lake production cost was C$104.64 per m3, and the average Sylvan
Lake royalties were C$13.35 per m3. As of December 31, 1997, the Sylvan Lake
Field had 3 productive oil wells, 640 gross developed acres and 1440 gross
undeveloped acres. Net to Fountain were 1.8 net wells, 384 net developed acres
and 864 net undeveloped acres.
In the year ended December 31, 1997, the first well in the Beaver Dam
project was put on production, with initial production in November. As of
December 31, 1997, Fountain's share of production from this well was 3 BOPD. As
of December 31, 1997, gross developed acreage was 80 acres and gross undeveloped
acreage was 560 acres. Net to Fountain were 0.15 net well, 12 net developed
acres and 84 net undeveloped acres.
In the year ended December 31, 1997, there was no activity in the Skiff
Sawtooth Field in Alberta, Canada, which consists of 320 gross undeveloped
acres. Net acreage to Fountain as of December 31, 1997 was 160 net undeveloped
acres.
In the year ended August 31, 1996, three gross horizontal re-entry wells
were added to the Inverness Unit in Canada, in which a then unconsolidated
subsidiary of Fountain had an interest. One Inverness well was put on production
with approximately 60 BOPD, of which Fountain's share was 5%. A second Inverness
well was abandoned, and the third well was awaiting completion. Average sales
price and production costs as of December 31, 1996 for the Inverness Unit were
US$18.05 per barrel and US$9.35 per barrel, respectively. As of December 31,
1996, the Inverness Unit had 37 productive oil wells, 1.85 net wells, 23,360
gross developed acres and 1,168 net developed acres. During 1997, Focan Ltd.
redeemed the 50% of its outstanding shares not owned by Fountain through the
distribution of Focan Ltd.'s interest in the Inverness Unit.
In the year ended December 31, 1997, nine gross wells (3.6 net wells) in
the Lelyaky Field project, in which an unconsolidated subsidiary of Fountain has
an interest, were reentered for the purpose of recompletion. Three gross wells
(1.2 net wells) were productive, showing an average aggregate production of
approximately 120 BOPD, of which Fountain's share is 40.5%, or approximately 49
BOPD. Average sales price and production cost as of December 31, 1997 for the
Lelyaky Field project were US$131.20 per metric ton and approximately US$25.00
per metric ton, respectively. As of December 31, 1997, Lelyaky Field gross
developed property was 67.32 km2, of which 27.26 km2 were net to Fountain.
LEGAL PROCEEDINGS
On February 20, 1998, Zhoda Corporation ("Zhoda"), which sold to
Fountain most of Fountain's interest in UK-RAN, filed suit against Fountain and
two of its consolidated subsidiaries in the District Court of Harris County,
Texas. Zhoda alleges under several theories that Zhoda was wrongfully deprived
of the value of the UK-RAN shares it transferred to Fountain or the contingent
consideration it might have received under its agreement with Fountain. Among
the theories of Zhoda's complaint are breach of contract, breach of fiduciary
duty and duty of good faith and fair dealing, fraud and constructive fraud,
fraud in the inducement, negligent misrepresentation, civil conspiracy, breach
of trust, unjust enrichment and rescission. Zhoda seeks damages in excess of
$7,500,000, redelivery of the UK-RAN shares transferred to Fountain, fees,
expenses and costs and any further relief to which it may be entitled. An
outcome of this proceeding unfavorable to Fountain could have a material adverse
impact on Fountain's financial condition and results of operations. On April 8,
1998, the Harris County District Court issued an order staying the litigation
initiated by Zhoda in its entirety and indicating that the Court would dismiss
the action if the parties do not commence arbitration in New York, New York on
or before June 30, 1998.
On March 24, 1998, Fountain and two consolidated subsidiaries filed an
action against Zhoda in the Court of Queen's Bench of Alberta, Judicial Centre
of Calgary, in which Fountain seeks to recover $190,000, plus interest thereon,
which Fountain asserts is owing by Zhoda pursuant to promissory notes and loan
agreements. On March 31, 1998, Zhoda filed an answer and counterclaims denying
that it is indebted to the plaintiffs and asserting as counterclaims against
Fountain and its two subsidiaries essentially the same claims as were asserted
in the Texas action described in the previous paragraph, with the exception that
fraud and civil conspiracy claims asserted in the Texas suit were not included
in the Alberta counterclaims. On the basis of its counterclaims, Zhoda seeks
damages estimated to be at least C$10,500,000,
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redelivery of the UK-RAN shares transferred to Fountain, interest, costs and
such further relief as the court may deem just. An outcome of this proceeding
that is unfavorable to Fountain could have a material adverse impact on
Fountain's financial condition and results of operations.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to
Fountain the outstanding capital of Gastron, which in turn owned 31% of the
capital of Intergas, filed suit against Fountain and one of its consolidated
subsidiaries in the Third Judicial District Court of Salt Lake County, Utah. In
its complaint, Ribalta alleges breach by Fountain of the contract governing the
sale of the outstanding capital of Gastron and failure of a condition in that
contract that should have resulted in its termination. Ribalta seeks the return
of all benefits conferred on Fountain pursuant to the contract, including the
shares of Gastron and any property transferred by Gastron, or, alternatively,
damages equal to the value of such benefits, as well as fees, costs and such
other relief as the court deems proper. Under that contract, as amended, the
maximum consideration to which Ribalta might have been entitled was US$800,000
and 700,000 shares of Fountain Common Stock, and Fountain believes that as a
result of the failure of conditions precedent to the payment of consideration no
consideration is payable under that contract. As of May 4, 1998, the defendants
in this action had not been served with the complaint. An outcome of this
proceeding that is unfavorable to Fountain could have a material adverse impact
on Fountain's financial condition and results of operations.
The entity that sold to Fountain certain rights related to the Stynawske
Field project has indicated to Fountain that it is considering an action seeking
the contingent consideration payable with respect to that sale on the grounds
that the Transaction or other action by or inaction of Fountain has unreasonably
delayed or will unreasonably delay the satisfaction of the conditions precedent
to the issuance of such contingent consideration. An outcome of this dispute
that is unfavorable to Fountain could have a material adverse impact on
Fountain's financial condition and results of operations. See "RISK FACTORS --
Litigation and Claims."
SECURITY OWNERSHIP
The following table sets forth information as of April 30, 1998, with
respect to the persons believed by Fountain to be the beneficial owners of the
twenty largest holdings of Fountain Common Stock, none of which is the
beneficial owner of more than 5% of Fountain Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF FOUNTAIN
BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK
------------------- -------------------- ----------------------
<S> <C> <C>
Independent Oilfield 1,100,000 4.90%
Increased Oil Recovery 855,900 3.81%
Gjensidige Kapital v/Gjensidige Fondsfo 850,000 3.79%
Eugene J. Meyers 532,728 2.37%
Alfred Berg Norge PE c/o Berg Fondsforval 420,500 1.87%
G-Fondspar 2020 v/Gjensidige Fondsfo 250,000 1.11%
Alfred Berg Aksjefon c/o Berg Fondsforval 238,900 1.06%
Southwest Capital Group Inc. 238,888 1.06%
Newcrest Capital Inc. 221,387 0.99%
G-Fondspar 2005 v/Gjensidige Fondsfo 216,500 0.96%
Bergerud Roar R 213,700 0.95%
Arne Hellesto AS 213,600 0.95%
Part Invest A.S 200,000 0.89%
Egil Johannesson 175,600 0.78%
Fielden Petroleum Development 175,000 0.78%
Nyboco As Attn: Ottar Nyborg 168,000 0.75%
Haaco A/S 163,000 0.73%
Fokus Bank ASA 150,919 0.67%
Horisonten A/S V/Lars Ditlevsen 147,500 0.66%
Nils Nilsen Trulsvik 134,900 0.60%
</TABLE>
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The following table sets forth information as of April 30, 1998 with
respect to beneficial ownership of Fountain Common Stock by each director, each
executive officer, a former executive officer who was an executive officer at
December 31, 1997, and all directors and current executive officers as a group:
<TABLE>
<CAPTION>
PERCENTAGE
OF FOUNTAIN
NUMBER OF COMMON
NAME POSITION SHARES STOCK
---- -------- ------ -----
<S> <C> <C> <C>
Einar H. Bandlien Director, Executive Vice 205,968(1) *
President
Nick Dobrotwir Former Vice President 175,025(2) *
Rune Falstad Vice President, Acting Chief 21,000(3) *
Financial Officer
Robert A. Halpin Vice Chairman of the Board 42,000(4) *
Stanley D. Heckman Director 115,793(5) *
Alfred Kjemperud Senior Vice President 0(6) *
Eugene J. Meyers Director 547,728(5) 2.44%
Oistein Nyberg Chairman of the Board 209,333(7) *
Nils N. Trulsvik Director, President and Chief 207,400(8) *
Executive Officer
Current Executive Officers 1,349,222 5.95%
and Directors as a Group
(8 persons)
</TABLE>
- -------
* less than 1%
(1) Includes 44,000 shares underlying options expiring August 16, 1999 and
presently exercisable at $1.50 per share. In addition, Mr. Bandlien
holds options expiring January 30, 1999 to purchase 100,000 shares at
$8.99 per share, which are not exercisable until December 30, 1998.
(2) Includes 175,000 shares indirectly beneficially owned through Fielden
Petroleum Developments Inc.
(3) In addition, Mr. Falstad holds options expiring July 29, 1999 to
purchase 30,000 shares at $5.27 per share, which are not exercisable
until June 29, 1999.
(4) Includes 15,000 shares underlying options expiring February 11, 1999 and
presently exercisable at $3.84 per share and an additional 15,000 shares
underlying options expiring June 2, 2000 and presently exercisable at
$4.50 per share.
(5) Includes as to each person 7,500 shares underlying options expiring
February 11, 1999 and presently exercisable at $3.84 per share and an
additional 7,500 shares underlying options expiring June 2, 2000 and
presently exercisable at $4.50 per share.
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<PAGE> 115
(6) Mr. Kjemperud holds options expiring January 30, 1999 to purchase 20,000
shares at $8.99 per share, which are not exercisable until December 30,
1998, and additional options expiring July 29, 1999 to purchase 10,000
shares at $5.27 per share, which are not exercisable until June 29,
1999.
(7) Includes 44,000 shares underlying options expiring August 16, 1999 and
presently exercisable at $1.50 per share and an additional 33,333 shares
underlying options expiring December 30, 2003 and presently exercisable
at $7.25 per share. In addition, Mr. Nyberg holds options expiring
December 30, 2003 to purchase 33,333 and 33,334 shares at $7.25 per
share, which are not exercisable until December 30, 1998 and December
30, 1999, respectively.
(8) Includes 60,000 shares underlying options expiring August 16, 1999 and
presently exercisable at $1.50 per share. In addition, Mr. Trulsvik
holds options expiring January 30, 1999 to purchase 100,000 shares at
$8.99 per share, which are not exercisable until December 30, 1998.
To Fountain's knowledge, neither Peder Paus nor any director or officer
of CanArgo is the beneficial owner of any Fountain Common Stock.
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<PAGE> 116
The only persons known to Fountain who would be beneficial owners of
more than 5% of Fountain Common Stock after giving effect to the Transaction as
of the Fountain Record Date and deeming prospective holders of Exchangeable
Shares to be holders of the Fountain Common Stock for which such Exchangeable
Shares may be exchanged are the following:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
NAME AND ADDRESS OF OWNERSHIP (BUT WITHOUT GIVING PERCENTAGE OF FOUNTAIN
BENEFICIAL OWNER EFFECT TO THE REVERSE SPLIT) COMMON STOCK
---------------- ---------------------------- ------------
<S> <C> <C>
Terrenex Acquisition 5,098,944(1)(2) 12.0%
Corporation
1710-407 2 Street SW
Calgary, Alberta T2P 2Y3
Provincial Securities Ltd. 3,342,500(1) 7.9%
c/o Yorkton Securities Limited
4400-400 3 Avenue SW
Calgary, Alberta T2P 4H2
Caldwell Associates Ltd. 2,835,000(1) 6.7%
P.O. Box 190
Valley House
St. Peter Port, Guernsey
Channel Island GYA 48J
</TABLE>
(1) Includes shares of Fountain Common Stock to be issued to such holder
upon the redemption, purchase or exchange of Exchangeable Shares.
(2) Includes rights to acquire 623,680 shares.
See "INFORMATION CONCERNING CANARGO -- Principal Holders of Securities."
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<PAGE> 117
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows all compensation paid or accrued by Fountain
and its subsidiaries during the fiscal years ended August 31, 1995 and August
31, 1996, the four month period ended December 31, 1996 and the year ended
December 31, 1997 to certain executive officers of Fountain (the "Named
Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND YEAR SALARY COMPENSATION OPTIONS/SARS COMPENSATION (9)
PRINCIPAL POSITION ENDED (US$) (US$) (#) (US$)
------------------ ----- ----- ----- --- -----
<S> <C> <C> <C> <C> <C>
Nils N. Trulsvik(1) 12/97 140,333 -- -- 6,653
12/96* 51,834 -- 100,000 5,679
8/96 161,241 -- -- 8,635
8/95 147,754 -- -- 6,344
0istein Nyberg(2) 12/97 147,442 106,373(2) -- 18,890
12/96* 53,425 48,994 100,000 6,801
8/96 154,104 83,151 -- 21,695
8/95 113,246 24,199 -- 6,125
Arnfin Haavik(3) 12/97 159,795 -- -- 88,029(3)
12/96* 54,893 9,070 100,000 6,801
8/96 154,560 34,560 -- 21,259
8/95 92,685 24,234 -- 6,279
Arild Boe(4) 12/97 138,464 22,808(4) -- 75,792(4)
12/96* 51,833 -- 100,000 5,679
8/96 149,380 -- -- 8,780
8/95 22,125 -- -- --
Svein Johansen(5) 12/97 138,351 -- -- 6,448
12/96* 51,833 -- 100,000 5,679
8/96 134,722 -- -- 7,254
8/95 81,667 -- -- 4,307
Einar Bandlien(6) 12/97 136,218 -- -- 6,333
12/96* 51,833 -- 100,000 5,679
8/96 121,054 -- -- 6,086
8/95 85,587 -- -- 4,307
Alfred Kjemperud(7) 12/97 101,296 -- 10,000 5,014
12/96* 38,875 -- 20,000 2,342
Nicholas Dobrotwir(8) 12/97 211,563 14,131(8) -- --
</TABLE>
- ------------
* Four month period ended December 31, 1996.
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<PAGE> 118
(1) Mr. Trulsvik has served as President and Chief Executive Officer since
February 4, 1997; as Executive Vice President from March 9, 1995 to
February 4, 1997 and as President and Chief Executive Officer from
November 21, 1994 to March 9, 1995.
(2) Mr. Nyberg has served as Chairman of the Board since February 4, 1997
and as President and Chief Executive Officer from March 9, 1995 to
February 4, 1997. Other annual compensation paid in the year ended
December 31, 1997 includes $75,312 as a housing allowance and $26,104 in
childrens' school fees.
(3) Mr. Haavik resigned as Executive Vice President and Chief Financial
Officer on December 1, 1997. All other compensation includes $68,926
accrued in fiscal year 1997 which is payable through May 1998 in
connection with the termination of Mr. Haavik's employment contract.
(4) Mr. Boe resigned as Executive Vice President on December 1, 1997. Other
annual compensation paid in the year ended December 31, 1997 includes
$14,331 as a housing allowance and $6,416 of which was part of an
allowance applied to pay personal taxes. All other compensation includes
$68,926 accrued in fiscal year 1997 which is payable through May 1998 in
connection with the termination of Mr. Boe's employment contract.
(5) Mr. Johansen was elected Executive Vice President on December 15, 1994.
(6) Mr. Bandlien has served as Executive Vice President since November 14,
1995 and as Senior Vice President from December 14, 1994 to November 14,
1995.
(7) Mr. Kjemperud has served as Senior Vice President since February 4, 1997
and as a member of management since September 1, 1996.
(8) Mr. Dobrotwir served as Vice President from September 16, 1997 until
January 26, 1998. His 1997 salary includes payments he received for
consulting services rendered to the Company from January 1, 1997,
pursuant to contracts the Company had with Fielden Management Services
Pty. Ltd. (of which Mr. Dobrotwir was President and Chief Executive
Officer until April 30, 1997) and with Trident Petroleum Inc. Other
annual compensation paid in the year ended December 31, 1997 includes
$12,800 as relocation costs also paid under the contract with Trident
Petroleum Inc.
(9) The balance of any amounts not described in Notes 3 and 4 represent the
Company's contributions to or accruals with respect to individual
retirement and pension plans.
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<PAGE> 119
Option Grants During the Year Ended December 31, 1997
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT DATE
UNDERLYING GRANTED TO EXERCISE PRESENT VALUE(2)
OPTIONS EMPLOYEES OR BASE EXPIRATION --------------------------
NAME GRANTED(1) IN FY 12/97 PRICE DATE PER SHARE TOTAL
---- ---------- ----------- -------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Nils N. Trulsvik 0 0% $0 -- $0 $0
0istein Nyberg 0 0% $0 -- $0 $0
Arnfin Haavik 0 0% $0 -- $0 $0
Arild Boe 0 0% $0 -- $0 $0
Svein Johansen 0 0% $0 -- $0 $0
Einar Bandlien 0 0% $0 -- $0 $0
Alfred Kjemperud 10,000 6.17% $5.27 7/29/99 $.92 $9,225
Nicholas Dobrotwir 0 0% $0 -- $0 $0
</TABLE>
- -----------
(1) The options granted to Mr. Kjemperud are exercisable only from June 29,
1999 through the expiration date of July 29, 1999, and were granted at
an exercise price equal to 124% of the fair market value of the
Company's Common Stock on the date of grant. Pursuant to the terms of
the 1995 Long-Term Incentive Plan, the Compensation Committee may,
subject to Plan limits, modify the terms of outstanding options,
including the exercise price and vesting schedule thereof.
(2) These values were derived using the Black-Scholes option pricing model
applying the following assumptions: dividend yield of 0%; volatility of
44.7%; 6.08% risk-free interest rate and a 2.05-year expected term.
These values are not intended to forecast future appreciation of the
Company's stock price. The actual value, if any, that an executive
officer may realize from his options (assuming that they are exercised)
will depend solely on the increase in the market price of the shares
acquired through option exercises over the exercise price, measured when
the shares are sold.
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<PAGE> 120
Option Exercises and Values at December 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL
SHARES OPTIONS HELD AT FISCAL YEAR END(1)
ACQUIRED YEAR END ------------------------------
ON VALUE ----------------------------- EXERCISABLE UNEXERCISABLE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE (US$) (US$)
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nils N. Trulsvik -- -- 60,000 100,000 0 0
0istein Nyberg -- -- 77,333 66,667 0 0
Arnfin Haavik 36,000 $54,000 33,333 66,667 0 0
Arild Boe -- -- 28,000 100,000 0 0
Svein Johansen -- -- 0 100,000 0 0
Einar Bandlien -- -- 44,000 100,000 0 0
Alfred Kjemperud -- -- 0 30,000 0 0
Nicholas Dobrotwir -- -- 0 0 0 0
</TABLE>
- ----------
(1) Represents the difference between the market value on December 31, 1997
and the exercise price. All options had an exercise price in excess of
$0.94, market value at December 31, 1997.
DIRECTORS' COMPENSATION
Fountain currently pays non-employee directors (other than Robert A.
Halpin, Vice Chairman of the Board, who is compensated pursuant to a separate
agreement) fees at the rate of US$14,000 per year plus a fee of US$3,000 per
year for each committee on which such non-employee director serves. Fountain
also pays a fee of US$1,000 per day, other than a day on which the Fountain
Board meets, for each day spent by a non-employee director on the business of
Board committees which exceeds one day per year with respect to the compensation
committee and three days per year with respect to the audit committee and the
petroleum committee. Fountain also reimburses ordinary out-of-pocket expenses
for attending Board and committee meetings.
Fountain provides automatic grants of non-qualified options to
non-employee directors pursuant to the 1995 Long-Term Incentive Plan. Pursuant
to the Plan, a non-qualified option to purchase 7,500 shares of Fountain Common
Stock is granted automatically to each non-employee director on each of (i) the
date of each meeting of stockholders at which such non-employee is elected or
re-elected as a director or, if in any fiscal year directors are not elected at
a meeting of stockholders, on the last day of such fiscal year, and (ii) the
date such non-employee is first elected as a director, if not at a meeting of
stockholders. In addition, a non-employee director will automatically be granted
a non-qualified option to purchase 7,500 shares of Fountain Common Stock on each
date on which such non-employee director is elected or re-elected by the Board
as Chairman of the Board of Directors, or, if the Chairman of the Board is then
an employee of Fountain, as Vice Chairman of the Board of Directors. The
exercise price of each option is equal to 100% of the fair market value of the
Fountain Common Stock on the date of grant. Each option so granted is 100%
vested six months after the date of grant. Options expire on the first to occur
of three years from the date of grant or the first anniversary of the date the
director ceases to be a director for any reason. Non-employee directors are not
eligible to receive other options pursuant to the 1995 Long-Term Incentive Plan.
In the fiscal year ended December 31, 1997, Robert A. Halpin was
compensated for his services as Vice Chairman of the Fountain Board and as a
member of Fountain Board committees pursuant to an agreement which provides for
an annual fee of US$45,000 plus US$1,000 per day for each day of service in
excess of 66 days per year. Fountain also provides Mr. Halpin with an office at
the Fountain offices located in Calgary, Alberta, Canada, and reimburses Mr.
Halpin for his out-of-pocket expenses in connection with services on behalf of
Fountain, including travel and related expenses for his wife if Mr. Halpin is
required to be outside of Calgary for more than two consecutive weeks on
business. Fountain paid Mr. Halpin US$45,000 in 1997 pursuant to this agreement.
On
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<PAGE> 121
June 3, 1997, Mr. Halpin was granted 15,000 options at an exercise price of
US$4.50 per share under the 1995 Long-Term Incentive Plan.
In the fiscal year ended December 31, 1997, Eugene Meyers was
compensated for his support services in the area of financial relations and
advisory services relating to corporate finance. Fountain paid Mr. Meyers
US$15,000 in 1997 pursuant to an agreement which provides for an annual fee of
US$15,000 plus a maximum of US$1,000 per day for each day of services in excess
of 22 days per year. In addition, Fountain paid Mr. Meyers US$35,600 in 1998
with respect to services rendered in 1997. Fountain also reimburses Mr. Meyers
for his out-of-pocket expenses in connection with services on behalf of
Fountain.
After the Effective Date, the Fountain Board will have authority, in its
discretion, to change the compensation to be paid to the directors.
111
<PAGE> 122
CANARGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
THE FOLLOWING CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED UPON
THE CURRENT EXPECTATIONS OF CANARGO AND SPEAK ONLY AS OF THE DATE MADE. THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND UNCERTAINTIES.
CANARGO'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THE FACTORS DISCUSSED BELOW, AS WELL AS THE FACTORS
DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
CanArgo commenced operations in June of 1997 and so the following
discussion and analysis relate to the six months ended December 31, 1997. There
are no comparative numbers. However, where relevant, comparisons to the
financial results of the predecessor business, NOC, for the period from October
24, 1995 to June 30, 1997 have been provided.
NOC commenced operations in February 1996.
During the six months ended December 31, 1997, CanArgo produced and is
currently producing sufficient oil to achieve sufficient revenue to pay all of
its costs. This level of production is approximately 2,000 bbls per day gross.
In 1997, CanArgo invested sufficiently to maintain, but not enough to increase,
these production levels.
CanArgo management plans to invest at higher levels in 1998 so as to
increase rather than just maintain production levels. CanArgo plans to drill two
new wells and work over eight existing wells in the Ninotsminda reservoir. The
estimated cost to drill two wells is US$5,000,000 and the estimated cost of the
eight work-overs is US$2,000,000. The object of this plan is to achieve higher
production levels. However, there are several impediments that CanArgo
management must overcome in order successfully to implement this plan and reach
this goal, including, but not limited to, the following:
(i) Management may not be successful in obtaining the necessary
financing to fund the development plan;
(ii) Results of the development plan may not meet expectations due to
risks inherent in the development of oil fields in general and
of the Ninotsminda reservoir in particular;
(iii) The actual costs of implementing the plan could exceed
expectations and thereby require a cut-back of the plan;
(iv) The implementation of the plan could be delayed; and
(v) Other risks inherent in the oil and gas business as well as
specific to CanArgo's business may result in poorer production
levels than projected. See "RISK FACTORS."
In addition, CanArgo anticipates that it will be required to spend US$500,000 in
1998 in respect of preliminary surveys for the Nazvrevi project.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION.
As of December 31, 1997 CanArgo had US$2,422,034 of current assets, of
which US$1,833,448 was in cash, and US$1,018,725 in current liabilities, leaving
a working capital balance of US$1,403,309.
CanArgo realized US$2,720,667 in October 1997 from the issuance of
453,500 CanArgo Common Shares and 1,636,597 CanArgo Special Warrants, each of
which is convertible into 1.1 CanArgo Common Shares and 0.55 CanArgo Purchase
Warrants at no additional cost. As a result, cash and share capital increased.
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<PAGE> 123
The non-controlling shareholder in CanArgo's subsidiary, NOC,
contributed US$870,500 during the six months ended December 31, 1997. As a
result, cash, long term debt and the non-controlling interest in a consolidated
CanArgo subsidiary increased.
CanArgo invested US$2,950,932 in additions to capital assets associated
with its Ninotsminda Field during the six months ended December 31, 1997. This
consisted primarily of the costs of drilling well N96. As a result, cash
decreased and fixed assets increased.
Charges in the amount of US$445,400 from the entity that holds the
non-controlling interest in NOC for services provided as manager of the
Ninotsminda Field project prior to CanArgo acquiring control, have not yet been
accepted or paid by CanArgo but are reflected within amounts payable and accrued
liabilities. As a result, current liabilities are higher and cash is higher.
CanArgo did not have sufficient working capital on hand at the end of
the six months ended December 31, 1997 to finance its plan to develop its oil
and gas assets in the Republic of Georgia and thus will pursue additional
financing during 1998. CanArgo is pursuing arrangements with the International
Finance Corporation ("IFC"), as well as the Transaction with Fountain, to obtain
the financing it requires for its development plan. There is no assurance that
these arrangements will be successfully concluded. See "RISK FACTORS -- CanArgo
Liquidity and Capital Resources."
CanArgo management is considering various sources of finance to fund its
plans. In particular, it will use cash on hand and seek contributions from the
non-controlling shareholder of its subsidiary NOC, pursue an equity financing by
IFC in NOC, pursue a combination with Fountain and consider other equity
finance. At this time, CanArgo management does not believe that debt is a viable
financing alternative. However, based on the results of the negotiations for
equity finance from IFC and the results of the near term development plan,
CanArgo Management believes that IFC may consider a debt financing for NOC in
the future. See "RISK FACTORS -- CanArgo Liquidity and Capital Resources."
The non-controlling shareholder in NOC has participated in a recent
share issuance in NOC and has indicated that it continues to be interested in
funding its 44.1% share of NOC costs.
CanArgo management believes that the combined cash position of CanArgo
and Fountain in the event of a successful combination would be sufficient to
carry out the current development plan.
RESULTS OF OPERATIONS
CanArgo recorded a net loss of US$255,827 and positive operating cash
flow of US$135,701 during the six months ended December 31, 1997. This compares
to net income of US$1,367,500 and operating cash flow of US$1,507,600 for the
predecessor business in the period from October 24, 1995 to December 31, 1996.
The negative variance in profit of US$1,623,327 is primarily due to the shorter
reporting period in 1997 (US$842,000), increased depletion expense (US$510,000)
and CanArgo overhead which was not borne by the predecessor company
(US$250,000).
Revenues from oil and gas in the six months ended December 31, 1997 were
US$1,324,114 on production of 300,000 bbls. gross (112,000 bbls. net), which is
less production than CanArgo management had expected. This compares to revenue
of US$3,058,900 on production of 515,000 bbls. gross (235,000 bbls. net) for the
predecessor company in 1996 resulting in a US$1,734,786 difference. This
negative variance is due primarily to the shorter reporting period in 1997
($1,500,000) and lower world prices for Brent crude ($133,000). The production
of NOC for the six months ended June 30, 1997 was 340,000 bbls. gross (128,000
bbls. net).
Revenue for 1997 was adversely affected by unexpected delays in
completing Ninotsminda Field well N96. This well was completed in October 1997
with commercial production commencing in January 1998.
Furthermore, legal action taken by the non-controlling shareholder of
NOC in 1997, which has now been withdrawn, caused delays in funding and
development plans that impacted on the production levels that CanArgo management
had hoped to achieve in 1997. See "RISK FACTORS -- Relationship between NOC and
JKX" and "INFORMATION CONCERNING CANARGO -- Legal Proceedings." This will also
impact 1998 operations because the next well for the Ninotsminda Field must wait
for spring break up before spudding.
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<PAGE> 124
Operating costs were US$790,287 compared to US$962,500 for the
predecessor company in 1996. The favorable variance is due to the shorter
reporting period (US$481,000) which is offset in part by less than twelve months
of operations in the prior year (US$320,000). General and administration costs
during the six months ended December 31, 1997 were US$386,397 compared to
US$188,900 for the predecessor company in 1996. This variance is primarily due
to the addition of CanArgo general and administrative charges ($187,000). These
figures are net of capitalized general and administrative expenditures which
relate to the CanArgo drilling, exploration and development activities. In 1997,
CanArgo capitalized $637,993 compared to $680,000 in 1996 for NOC. This variance
can be attributed to the shorter reporting period in 1997, partially offset by
the increased drilling activities in 1997 compared to 1996.
Depletion expense for CanArgo for the six months ended December 31, 1997
was US$555,960, or approximately Ninotsminda Field US$4.98 per barrel produced,
compared to NOC's depletion expense of US$79,100, or approximately US$0.34 per
barrel produced, in 1996. The difference relates primarily to the application of
the estimates in the AMH Report of the capital investment required to develop
the proved reserves which is substantially higher than the estimates used by the
predecessor company's management in 1996. It is anticipated that the combination
with Fountain will result in a purchase price adjustment to proved properties of
approximately $4,000,000 which will not cause a materially higher depletion
expense based on existing reserves. The increase in the depletion expense in
1997 (for CanArgo and NOC) is a result of the additions to capital in respect of
oil and gas properties arising from expenditures on such projects in 1997.
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<PAGE> 125
INFORMATION CONCERNING CANARGO
GENERAL
CanArgo was created through the amalgamation of Money Works Inc. and Del
Rio International, Resource and Technology Corporation under the Business
Corporations Act (Alberta) by certificate and articles of amalgamation dated
January 1, 1994 as amended by a certificate and articles of amendment dated July
2, 1997.
The registered office of CanArgo is located at 1580 Guinness House,
727-7th Avenue, S.W., Calgary, Alberta, Canada T2P 0Z5, where it maintains its
principal executive office.
CanArgo conducts its business through a wholly-owned operating
subsidiary, CanArgo Limited, a Guernsey company. CanArgo Limited has two active
second-tier subsidiaries. The first is NOC, 55.9% of the equity of which is
owned by CanArgo Limited. NOC holds an interest in the Ninotsminda Field in the
Republic of Georgia under the terms of the PSC. The second is CanArgo (Nazvrevi)
Ltd., a Guernsey company that is wholly-owned by CanArgo Limited, which has
recently entered into a further production sharing contract with Georgian Oil in
respect of the Nazvrevi prospect in Georgia. In addition, CanArgo holds an
indirect 40% interest in CanArgo Power Corporation which is pursuing an
independent power generation pilot project in respect of the Nazvrevi prospect.
HISTORY
CanArgo carried on business as Money Works, Inc., a network marketer,
prior to June 30, 1997. Effective June 30, 1997, CanArgo acquired all of the
shares of CanArgo Ltd., a company developing various oil and gas projects in the
Republic of Georgia. The principal asset of CanArgo was its 55.9% interest in
NOC through CanArgo Limited. This acquisition was completed by way of an
exchange by the shareholders of CanArgo Ltd. for shares of CanArgo. This share
exchange resulted in the former shareholders of CanArgo Ltd. holding, in
aggregate, 82% of the shares of CanArgo. See "PRO FORMA FINANCIAL INFORMATION."
BUSINESS AND PROPERTIES
Overview
CanArgo's main focus is the exploration and development of the
Ninotsminda, West Rustavi and Manavi license areas in Georgia, which includes
the producing Ninotsminda Field, through its interest in NOC. The rights to the
Ninotsminda Field and adjacent areas which cover approximately 108 km2 were
acquired by NOC in 1995, and since February 1996 this area has been operated
under the terms of the PSC. The PSC is a recognized joint venture agreement and
was signed on behalf of Georgian Oil with the authority of the President of
Georgia. The license areas include the Ninotsminda Field, the West Rustavi Field
and the Manavi prospect. NOC has commenced an appraisal program to develop the
West Rustavi field and intends to explore the Manavi prospect and other
prospects in the future.
The current operator is a local contract service company, GBOC. GBOC is
staffed with local personnel obtained from Georgian Oil who have experience with
the Ninotsminda and the adjacent Samgori fields. Overall supervision and
direction of GBOC is governed by a coordination committee, consisting of
representatives from Georgian Oil and NOC. NOC has the deciding vote on the
coordination committee.
CanArgo has also acquired the rights under an additional production
sharing contract covering an area of 2,100 square kilometers referred to as the
Nazvrevi block. In addition, CanArgo has recently announced its participation in
a joint venture company, CanArgo Power Corporation, with the objective of
involvement in electricity production in Georgia. CanArgo Power Corporation is
negotiating with the Georgian authority to install and operate a pilot 2.6
Megawatt gas fired power plant. The intention 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, this will be the
first private regional electricity company in Georgia.
CanArgo has sold all of its 1997 production and 1998 production to date
to one buyer. CanArgo expects to continue to sell all of its annual production
to a single buyer. CanArgo believes that, given its current level of production,
this practice results in greater efficiencies. CanArgo also believes that there
are a number of potential
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buyers for its production and does not anticipate that a loss of its current
customer would result in any delay in the sale of its production or in lower
selling price realization.
The Fields
Ninotsminda. The Ninotsminda Field is located 40 km east of Tbilisi.
Ninotsminda lies along the same anticlinal axis as the large Samgori field
located to the east, but has a separate closure. Samgori is Georgia's largest
discovered oil field and has produced over 170,000,000 bbls. Ninotsminda was
discovered later than Samgori and is less developed than Samgori. Production in
Ninotsminda has been hampered by, among other things, inappropriate completion
techniques, a period of civil strife and a lack of funding by Georgian Oil
before the PSC was signed.
The Ninotsminda Middle Eocene reservoir is volcanic in origin, causing
low matrix porosity and permeability, but typically exhibiting substantial flow
rates due to the presence of fractures. Although the field has been partially
appraised, with 16 reservoir penetrations, all of the wells were fully cased,
which may not be the optimum completion technique for this type of fractured
reservoir. This approach, together with reservoir damage caused by the use of
heavy mud, is believed by the management of CanArgo to have resulted in a
reduced well productivity.
Since February 1996, NOC has raised Ninotsminda production from zero to
approximately 2,000 bbls. per day by reworking and adding new perforations to
existing wells and, more recently, by the commencement of a new drilling
program. The first new well, N96, was completed in October 1997. Plans are
underway for further drilling and for additional workovers of existing wells
using up-to-date recompletion techniques. In addition, seismic data was acquired
over the eastern part of the field in the fall of 1997. This data will be used
to firm up drilling locations in this area.
West Rustavi. The West Rustavi field is located 40 km southeast of
Ninotsminda. The structure is more subtle than Ninotsminda and seismic data
suggests a stratigraphic trap. Four out of ten wells previously drilled on the
structure tested oil from the Middle Eocene (2,000 to 2,500 meter depth) and two
of these have produced oil. NOC has initiated an appraisal program, which will
include workovers and acquisition of seismic data at this location, in order to
assess Georgian Oil's original reserve estimates and initiate an appropriate
developmental program.
In addition, there are indications of gas in the deeper Cretaceous
reservoir which provides an additional exploration prospect.
Manavi. The Manavi prospect is located east of Ninotsminda. This
prospect has been previously defined from seismic. Georgian Oil previously
attempted to drill the crest of the structure but lost the well due to supply
problems. The Manavi structure has the potential to be significant, with
indications that it is larger than Ninotsminda, although smaller than Samgori.
It is a highly ranked exploration prospect.
Nazvrevi. In February 1998, CanArgo announced the execution of a
production sharing contract with Georgian Oil covering the Nazvrevi and Block
XIII areas of East Georgia, adjacent to the Ninotsminda and West Rustavi fields.
This is a large (2,100 square kilometer) exploration area adjacent to existing
infrastructure. Recent seismic data acquired on the area is currently being
interpreted, and further data will be acquired this summer prior to exploration
drilling. The primary target is the Middle Eocene sequence, which produces oil
and gas in Ninotsminda and West Rustavi, and which is the main reservoir in the
Samgori oilfield. Additional potential exists in the Upper and Lower Eocene
sequences (which are oil and gas bearing in adjacent structures) and in the
Cretaceous sequence. Under the terms of this production sharing contract, which
has a term of 23 years that can be extended for an additional five years, all
capital and operating costs will be paid by CanArgo. Fifty percent of production
revenues in any given year will be applied to CanArgo's accumulated capital and
operating costs. The remaining 50% will be shared on a 50/50 basis between
CanArgo and Georgian Oil until such time as CanArgo's capital and operating
costs have been recovered. Thereafter, 70% production revenues in such year will
be paid to Georgian Oil and 30% to CanArgo. CanArgo expects that it will be
required to spend approximately US$500,000 in each of 1998 and 1999.
Productive Wells and Acreage
The following table summarizes the number of productive oil wells of the
Ninotsminda Field and the total developed acreage for the Ninotsminda Field.
Such information has been presented on a gross basis, representing
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<PAGE> 127
the interest of NOC, and on a net basis, representing the interest of CanArgo
based on its 55.9% interest in NOC. The information is presented as at December
31, 1997.
<TABLE>
<CAPTION>
GROSS NET
---------------------- ------------------------
NUMBER OF NUMBER OF
WELLS ACREAGE WELLS ACREAGE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Ninotsminda Field(1) 7.0 2,500 3.9 1,400
</TABLE>
(1) There are no productive wells or developed acreage on any of CanArgo's
other properties.
Undeveloped Acreage
The following table summarizes the gross and net undeveloped acreage for
the Ninotsminda Field and the Nazvrevi Field as at December 31, 1997. Such
information has been presented on a gross basis, representing the interest of
NOC in the Ninotsminda Field and the interest of CanArgo in the Nazvrevi Field,
and on a net basis, representing the interest of CanArgo in the Ninotsminda
Field based on a 55.9% interest in NOC and based on a 100% interest in the
Nazvrevi Field.
<TABLE>
<CAPTION>
GROSS ACREAGE NET ACREAGE
------------- -----------
<S> <C> <C>
Ninotsminda Field 24,000 13,500
Nazvrevi Field 518,500 518,500
------------- -----------
542,500 532,000
============= ===========
</TABLE>
Independent Expert's Reports
AMH, a firm of independent petroleum consultants prepared the AMH
Report. The reserve estimates calculated by AMH are summarized under the heading
"Reserves."
The AMH Report will be available for inspection at the corporate head
office of CanArgo in Calgary, Alberta, and at the offices of Lang Michener at
Suite 2500, 181 Bay Street, Toronto, Ontario, during regular business hours
until the date of the CanArgo Shareholders Meeting.
Location, Access and Infrastructure
The Ninotsminda Field can be reached by road from Tbilisi in less than
one hour. The topography of the southern portion of the field is flat pasture at
an altitude of 700m, while the northern portion is wooded hills rising to
1,100m. Georgian Oil has built up a considerable amount of infrastructure in and
adjacent to the field. Production flows into a two-phase separator which
separates associated gas. The oil and unseparated water is transported in a
pipeline 11 km to Georgian Oil's Samgori central processing facility at
Sartichala for further treatment. The gas is transported to Sartichala in a
separate pipeline where some is used for fuel and the rest is flared.
At Sartichala, water is separated from the oil. Sales occur at
Sartichala, with the buyer taking responsibility for the oil after it leaves
there. The Buyer then transports the oil in a 20 km pipeline owned by
Trans-magistral Oil Pipeline to the rail head at Ghaciani, where it is loaded
into tankcars for transport to Batumi on the Black Sea coast. Infrastructure at
Batumi includes a terminal capable of handling tankers up to 30,000 tons.
Oil Sales
NOC sells its oil directly to international buyers. The price received
by NOC was negotiated on the basis of 95% of the Brent price less transportation
and certain processing charges and was finally fixed at the Brent price less
US$5.83 per barrel for processing and transportation from Sartichala to a port
of destination in the Mediterranean. Based on an average 1997 Brent price of
approximately US$16.50 per barrel, the Ninotsminda Field gate price would equal
US$10.67 per barrel. CanArgo expects that transportation costs will be
substantially reduced when NOC begins transporting oil through the Azerbaijan
International Oil Consortium's pipeline from
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<PAGE> 128
Baku, Azerbaijan to Supsa on the Black Sea. The pipeline, which is projected to
be operational in late 1998, passes through Sartichala and Georgian Oil has
rights to use the pipeline.
Production License
The rights of NOC to the Ninotsminda Field are governed by the PSC and
related license which has a term expiring in December 2019. Additionally, the
PSC provides for a five year extension at the option of NOC. Under the terms of
the PSC, all capital and operating costs are paid by NOC. Georgian Oil has a
right to receive in kind "determined oil" (i.e., agreed oil reserves at the time
of the PSC) during the years 1998, 1999, 2000 and 2001, aggregating
approximately 740, 542, 280 and 93 BOPD, 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 and operating 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 as to 70% by Georgian Oil and
30% by 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 US$500,000 and 1.5% of profit oil. Georgia Makoil assigned its
rights in respect of the Ninotsminda Field to NOC in 1995 in consideration, in
part, for the royalty interest described above.
The Shareholders Agreement
The relationship between NOC and its shareholders is governed by a
shareholders' agreement among NOC and the two shareholders of NOC (CanArgo, as
assignee of the previous shareholders of CanArgo Ltd., and JKX). Three of the
members of the board of directors of NOC are nominees of CanArgo, and two are
nominees of JKX. The board of directors of NOC determines the method of funding
of NOC's obligations under the PSC. To date, NOC's funding obligations have been
satisfied by share issuances to NOC's shareholders. The NOC shareholders'
agreement provides that shares of NOC may only be issued once they have been
offered to all shareholders of NOC pro rata. See "RISK FACTORS -- Relationship
of CanArgo and JKX."
NOC has agreed with certain consultants to pay to such consultants an
amount equal to 4.5% of any dividends declared and paid on the common shares of
NOC.
Production History
The Ninotsminda Field was discovered and initial development began in
1979. Ninotsminda Field is currently producing approximately 2,000 bbl per day
of oil plus associated gas from seven wells, six of which are original wells
reworked by NOC in 1996 and N96 drilled by NOC in late 1997. The following table
sets forth gross production from the Ninotsminda Field for the years ended
December 31, 1996 and 1997. There is no production history from the West Rustavi
Field, Manavi prospect or Nazvrevi prospect.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31
------------------------------------
1996 1997
------- -------
<S> <C> <C>
Oil (Bbls gross) 515,000 639,910
</TABLE>
Geology
The Ninotsminda reservoir is approximately 490 meters thick with the
depth to top of the formation varying from 2,600 to 3,000 meters. The oil is of
high quality (41 degree API), and production is facilitated by a strong water
drive. The Ninotsminda Field is set within a complex Tectonic area, where
compressional folds and thrust faults have dominated the deformational history
of the sedimentary and volcanic sediments. The field area has been affected by
the deformation fronts of the Greater Caucasus and Achara-Trialcti thrust belts.
The reservoir structure itself is a result of interference of the two
deformation belts with each other.
The main reservoir in the Ninotsminda Field area is a Middle Eocene
volcanic tuff. The rock is dominantly a coarse grained, very poorly sorted tuff
breccia with very large fragments (described up to boulder size) embedded in a
finer grained matrix of volcanoclastics and sandstone. The reservoir has
moderate to low matrix porosity (less than 16%) and very low permeability (less
than 0.5md). From core and production data, it is evident that the distribution
of producible net pay is dependent on natural fracturing within the reservoir.
It is generally accepted that a series of steep fractures, parallel to the fold
axes, are the dominant contributing features for production at
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<PAGE> 129
Ninotsminda. Tectonically, fracturing would be greatest and best developed close
to the hinge of the structure. This hypothesis is generally supported by the
location of the best producing wells within the field and the corresponding
known structural geology of the area.
In addition to the main Middle Eocene reservoir, smaller reservoirs may
be present in the stratigraphically higher Upper Eocene. In this area the Upper
Eocene is a series of sandstones, one of which has tested oil in the N-59 well.
Reports have also been made, based on the poor electric logs, that high
resistivity responses have been observed within the Upper Eocene sediments
within some of the wells within the field. Based on the test results from the
N-59 well, CanArgo management believes that some of these log responses indicate
the existence of additional uphole oil and gas reserves.
The Ninotsminda Middle Eocene reservoir has a gas cap down to the oil
contact near -1650 m. SS. The N-16 well has produced a small amount of this gas,
while the other wells have attempted to avoid this by casing through the gas and
perforating lower in the section.
The reserves and economics of production from the gas cap have not been
considered at this time, since this production would be prejudicial to oil
recovery. The solution gas produced at present is measured infrequently, but is
of a minor volume and is flared.
Reserves
The following table summarizes net hydrocarbon reserves for CanArgo.
Considerable uncertainty exists in the interpretation and extrapolation of
existing data for the purposes of projecting the ultimate recovery of oil from
underground reservoirs and of the corresponding economic return. No assurance is
made that the projections included in the evaluation by AMH will be realized.
The evaluation by AMH represents the efforts of AMH to predict the performance
of the oil recovery project using their expertise and the available data at the
effective date of the AMH Report. See "RISK FACTORS - Uncertainty of Reserve
Information."
<TABLE>
<CAPTION>
OIL RESERVES PSC ENTITLEMENT VOLUMES(1)
-------------------- -----------------------------
CANARGO
NOC SHARE OF NOC
GROSS NET(2) ENTITLEMENT ENTITLEMENT
(MSTB) (MSTB) (MSTB) (MSTB)
------ ------ ----------- ------------
<S> <C> <C> <C> <C>
Proved Producing(2) 3,649 2,048 1,929 1,078
Proved Undeveloped 16,062 8,979 9,086 5,079
------ ------ ------ -----
Total Proven 19,711 11,019 11,015 6,157
Probable Additional(3) 16,009 8,949 6,355 3,552
------ ------ ------ -----
Total Proved Plus Probable Additional(3) 35,720 19,968 17,370 9,709
</TABLE>
(1) PSC Entitlement volumes are those produced volumes which, through the
PSC and CanArgo's interest in NOC, accrue to the benefit of NOC and
CanArgo for the recovery of capital, the repayment of operating costs
and the share of profit.
(2) Net oil reserves represent CanArgo's 55.9% share of NOC's interest under
the PSC in the gross reserves, before taking into account the interest
of Georgian Oil.
(3) Probable additional reserves have been reduced by 50% to account for
risk.
"Proved reserves" are those reserves estimated as recoverable under
current technology and existing economic conditions from that portion of a
reservoir which can be reasonably evaluated as economically productive on the
basis of analysis of drilling, geological, geophysical and engineering data,
including the reserves to be obtained by enhanced recovery processes
demonstrated to be economically and technically successful in the subject
reservoir. "Proved reserves" includes "proved producing reserves" and "proved
undeveloped reserves."
119
<PAGE> 130
For the purposes of the above table, proved producing reserves have been
determined based on the following parameters. The 1997 production rate was
approximately 2,200 BOPD from seven wells. N96 was a new well in 1997; however,
the older wells have all been rehabilitated since 1995. In some cases this means
new reserves are being produced due to recompletions; in all cases the operating
conditions are changed, and continue to change. Hence decline analysis methods,
often useful for mature oil production, are not applicable at this time. Proved
producing reserves have been estimated by anticipating one more year of current
(2200 BOPD) rates, followed by a 20% annual decline to approximately 400 BOPD.
Proved undeveloped reserves have been calculated based on the following
parameters. The Ninotsminda PSA oil in-place is not well defined, and,
accordingly, it appears that well N-56 encountered the same reservoir as the
well N-9 which is five miles to the west. However the core area of the
reservoir, spanned approximately by the producing wells, covers little more than
1100 acres. This area is deemed to contain the proved reserves totaling 24
MMSTB. After deducting eight MMSTB which is produced or producing, the proved
undeveloped reserves total 16 MMSTB.
"Probable Additional Reserves" are those reserves that an analysis of
drilling, geological, geophysical and engineering data does not demonstrate to
be proved under current technology and existing economic conditions, but where
such analysis suggests the likelihood of their existence and future recovery.
Probable additional reserves to be obtained by the application of enhanced
recovery processes will be the increased recovery over and above that estimated
in the proved category which can be realistically estimated for the pool on the
basis of enhanced recovery process which can be reasonably expected to be
instituted in the future. The proved plus probable pool "area" of 2500 acres
represents a corridor from the west edge of Ninotsminda Field including the area
of the pool structurally higher than - 1750m SS, somewhat past the N-52 well.
The probable additional reserves total 32 MMSTB, representing the balance of the
Proved plus Probable reserves based on 4% total recovery.
EMPLOYEES
As of January 31, 1998, CanArgo had five full time employees and three
part time employees.
DESCRIPTION OF SHARE CAPITAL
The authorized capital of CanArgo consists of an unlimited number of the
CanArgo Common Shares, first preferred and second preferred shares, of which
10,438,391 CanArgo Common Shares were issued and outstanding as at May 5, 1998.
In addition, 1,636,597 CanArgo Special Warrants were issued and outstanding as
of May 5, 1998. Each CanArgo Special Warrant is exercisable without payment of
any additional consideration into 1.1 CanArgo Common Shares and 0.55 CanArgo
Purchase Warrants.
CanArgo Common Shares
The holders of CanArgo Common Shares are entitled to one vote per share
at all meetings of shareholders, to receive dividends as and when declared by
the directors, and to receive a pro rata share of the remaining property and
assets of CanArgo in the event of liquidation, dissolution, or winding up of
CanArgo.
First Preferred Shares
The first preferred shares may at any time be issued in one or more
series at the discretion of the CanArgo Board. The CanArgo Board may fix the
designation, rights, privileges, restrictions, conditions and limitations
attaching to the first preferred shares of such series, including the issue
price, the rate or the amount or method of calculation of dividends, the terms
and conditions of any purchase for cancellation or redemption and conversion, if
any. The first preferred shares of each series shall rank equally with the
shares of every other series in respect to priority in payment of dividends and
distribution of assets in the event of liquidation, dissolution or winding or
any other distribution of assets. When any dividends or amounts payable on a
repayment of capital are not paid in full, the first preferred shares of all
series shall participate ratably in respect of such dividends.
The first preferred shares are entitled to a preference over the CanArgo
Common Shares and any other shares ranking junior to the first preferred shares
with respect to payment of dividends and the distribution of assets in the event
of liquidation, dissolution or winding up or any other distribution of the
assets of CanArgo. The
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<PAGE> 131
holders of first preferred shares are not entitled to vote at any meetings of
shareholders of CanArgo, except as required by law.
Second Preferred Shares
The second preferred shares may at any time be issued in one or more
series, at the discretion of the CanArgo Board. The CanArgo Board may fix the
designation, rights, privileges, restrictions, conditions and limitations
attaching to the first preferred shares of such series, including the issue
price, the rate or the amount or method of calculation of dividends, the terms
and conditions of any purchase for cancellation or redemption and conversion (if
any). The second preferred shares of each series shall rank equally with the
shares of every other series in respect to priority in payment of dividends and
distribution of assets in the event of liquidation, dissolution or winding or
any other distribution of assets. When any dividends or amounts payable on a
repayment of capital are not paid in full, the second preferred shares of all
series shall participate ratably in respect of such dividends. The second
preferred shares are entitled to a preference over the CanArgo Common Shares and
other any other shares ranking junior to the second preferred shares (but are
subordinate to the first preferred shares) with respect to payment of dividends
and the distribution of assets in the event of liquidation, dissolution or
winding up or any other distribution of the assets of CanArgo. The holders of
second preferred shares are not entitled to vote at any meetings of shareholders
of CanArgo, except as required by law.
Warrants
The CanArgo Purchase Warrants (900,128 of which are to be issued upon
exercise of the CanArgo Special Warrants and 226,750 of which are currently
outstanding) are governed by the CanArgo Purchase Warrant Indenture. The holders
of CanArgo Purchase Warrants are entitled to acquire one CanArgo Common Share
for each whole CanArgo Purchase Warrant held at an exercise price of C$2.60
expiring November 1, 1999. CanArgo will be required to give notice to the
trustee and the warrantholders prior to the Effective Date or record date, as
the case may be, of any event which requires an adjustment in any of the
subscription rights pursuant to any of the CanArgo Purchase Warrants.
In addition to the CanArgo Purchase Warrants, Compensation Warrants,
1998 Warrants and employee stock options to acquire 1,235,000 shares at an
exercise price of US$2.20 expiring July 1, 2002 through April 30, 2003 were
outstanding as of May 5, 1998.
In the event of any subdivision, consolidation, reclassification or
other change to the CanArgo Common Shares, or in the event of the amalgamation,
consolidation, arrangement, or merger of CanArgo with any other body corporate,
or in the event of any conveyance or sale of all or substantially all of
CanArgo's undertaking and assets, or, except in certain circumstances, in the
event of the distribution of shares of any class of CanArgo or other corporation
or other distribution of assets of CanArgo among all or substantially all of the
holders of CanArgo Common Shares, or, in certain circumstances, in the event
CanArgo issues rights, options, or warrants to all or substantially all of the
holders of CanArgo Common Shares, the class, number and price of shares issuable
or entitled to be earned pursuant to any exercise of the CanArgo Purchase
Warrants will be adjusted, if required, so that holders of the CanArgo Purchase
Warrants will be in no less favorable position, to the extent reasonably
possible, as a result of such events. As a result of the Transaction, holders of
CanArgo Purchase Warrants, Compensation Warrants and 1998 Warrants will have a
right to purchase Exchangeable Shares (instead of a CanArgo Common Share) on the
basis of 1.6 (subject to adjustment for changes in the capitalization of
Fountain) Exchangeable Shares for each of such CanArgo Purchase Warrants,
Compensation Warrants and 1998 Warrants at an exercise price of C$2.60, C$2.20
and C$2.20, respectively, until November 1, 1999, April 30, 1999 and June 30,
1998, respectively.
CanArgo Special Warrants
The CanArgo Special Warrants were issued to investors on October 30,
1997 in a private placement at an offering price of C$2.20 for each CanArgo
Special Warrant. The CanArgo Special Warrants were issued under the CanArgo
Special Warrant Indenture.
121
<PAGE> 132
Each CanArgo Special Warrant may be exercised to acquire for no
additional consideration by the holder thereof at any time prior to 5:00 p.m.
(Toronto Time) for one unit consisting of 1.1 CanArgo Common Shares and 0.55
CanArgo Purchase Warrants on the first to occur (the "Time of Expiry") of: (i)
the fifth business day after the date (the "Qualification Date) a receipt for a
(final) prospectus is issued by each of the Ontario Securities Commission and
the Alberta Securities Commission (collectively, the "Final Receipts"), and (ii)
April 30, 1999. All of the CanArgo Special Warrants which have not been
exercised previously shall be automatically exercised, without any further
action on the holder's part at the time of expiry.
The CanArgo Special Warrant Indenture provides that if the Qualification
Date has not occurred or if the CanArgo Common Shares are not listed and posted
on The Toronto Stock Exchange on or prior to February 28, 1998, the CanArgo
Special Warrants exercised thereafter shall entitle the holder thereof, without
payment of any additional consideration, to be issued 1.1 times the number of
units otherwise issuable upon exercise of CanArgo Special Warrants. Since the
Qualification Date did not occur prior to February 28, 1998, the CanArgo Special
Warrants are exercisable into an aggregate of 1,800,257 CanArgo Common Shares
and 900,128 CanArgo Purchase Warrants.
PRIOR ISSUANCES OF SHARES
The following tables sets out the details of all issuances of CanArgo
Common Shares since January 1, 1997.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF COMMON NATURE OF CONSIDERATION PER CONSIDERATION
DATE OF ISSUANCE SHARES TRANSACTION COMMON SHARE (C$) (C$)
---------------- ---------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
June 30, 1997 8,276,250(1) acquisition of 2.20 18,218,750 (1)
interest in NOC
October 30, 1997 453,500(2) private placement 2.20 997,700
to investors
October 31, 1997 1,636,597(3) private placement 2.20 3,600,513
to investors
</TABLE>
- -----------
(1) The consideration consisted of all of the shares of CanArgo Ltd.
(2) Issuance of units, each unit consisting of one CanArgo Common Share and
one-half of one CanArgo Purchase Warrant. See "Description of Capital."
(3) Issuance of CanArgo Special Warrants each exercisable for 1.1 CanArgo
Common Shares and 0.55 Purchase Warrants. See "Description of Capital."
122
<PAGE> 133
PRINCIPAL HOLDERS OF SECURITIES
The following table lists, as at February 28, 1998, the share ownership
in CanArgo by all persons who are known to CanArgo to beneficially own, directly
or indirectly, or exercise control or direction over more than 5% of the issued
and outstanding CanArgo Common Shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF CANARGO
BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON SHARES
------------------- -------------------- ---------------------
<S> <C> <C>
Terrenex Acquisition Corporation (1) 3,186,840(4) 29.4%
1710-407 2 Street SW
Calgary, Alberta T2P 2Y3
Provincial Securities Ltd. (2) 2,089,063 20.0%
c/o Yorkton Securities Limited
4400-400 3 Avenue SW
Calgary, Alberta T2P 4H2
Caldwell Associates Ltd. (3) 1,771,875 17.0%
P.O. Box 190
Valley House
St. Peter Port, Guernsey
Channel Island GYA 48J
</TABLE>
- ----------
(1) A corporation of which J.F. Russell Hammond is the Chairman and Michael
Binnion is President and a director.
(2) A corporation to which J.F. Russell Hammond is an investment advisor.
Mr. Hammond expressly disclaims beneficial ownership of any CanArgo
Common Shares listed herein as beneficially owned by Provincial
Securities.
(3) A corporation based in Guernsey which CanArgo has been advised acts as a
nominee for other beneficial holders. CanArgo is not aware of the
identity of the beneficial owners of the shares.
(4) Includes CanArgo Purchase Warrants to acquire 389,800 CanArgo Common
Shares. Both Mr. Binnion and Mr. Hammond expressly disclaim beneficial
ownership of any CanArgo Common Shares or CanArgo Purchase Warrants
listed herein as beneficially owned by Terrenex Acquisition Corporation.
123
<PAGE> 134
DIRECTORS AND OFFICERS
The following table sets forth information as of February 28, 1998 with
respect to beneficial ownership of CanArgo Common Shares by each director, each
executive officer of CanArgo and by all directors and current executive officers
as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF
COMMON CANARGO
NAME POSITION SHARES COMMON SHARES
---- -------- ------ -------------
<S> <C> <C> <C>
David Robson Director; Chief Executive Officer 225,000(1) 2.1%
Michael Binnion Director; Chief Financial Officer 3,622,635(2)(3) 32.9%
John McLeod Director 215,000(3) 2.0%
J.F. Russell Hammond Director 5,350,903(2)(4)(5) 49.1%
Bob Moffat Director 125,000(6) 1.2%
Current Executive 6,351,698 54.9%
Officers and
Directors as a
Group
(5 persons)
</TABLE>
- -----------
(1) Consists of options to acquire CanArgo Common Shares.
(2) Includes 2,797,040 CanArgo Common Shares and CanArgo Purchase Warrants
to acquire 389,800 CanArgo Common Shares owned by Terrenex Acquisition
Corporation, of which Michael Binnion is President and a Director and
J.F. Russell Hammond is Chairman. Both Mr. Binnion and Mr. Hammond
expressly disclaim beneficial ownership of any CanArgo Common Shares or
Purchase Warrants listed herein as beneficially owned by Terrenex
Acquisition corporation.
(3) Includes options to acquire 175,000 CanArgo Common Shares.
(4) Includes 1,089,063 CanArgo Common Shares owned by Provincial Securities
Ltd. to which J.F. Russell Hammond is an investment advisor. Mr. Hammond
expressly disclaims beneficial ownership of any CanArgo Common Shares
listed herein as beneficially owned by Provincial Securities Ltd.
(5) Includes options to acquire 75,000 CanArgo Common Shares.
(6) Includes options to acquire 100,000 CanArgo Common Shares.
The information as to shares beneficially owned, directly or indirectly,
is based upon information furnished to CanArgo by the directors and officers.
David Robson. Dr. Robson (40) has been the Chairman, Chief Executive
Officer and a Director of CanArgo since June 1997. From April 1992 until March
1997, Dr. Robson was a senior officer of JKX Oil & Gas plc, including Managing
Director and Chief Executive Officer. He holds a B.Sc. (Hon) in Geology and a
Ph.D. in Geochemical Computer Simulation from the University of Newcastle upon
Tyne, and an MBA from the University of Strathclyde. He is the energy sector
representative on the East European Trade Council.
John McLeod. Mr. McLeod (51) has been Technical Director and a director
of CanArgo since August 1997. Mr. McLeod served as President and Chief Executive
Officer of Arakis Energy Corp. from 1995 to 1997. Prior to 1995, Mr. McLeod was
President of McLeod Petroleum Consulting Ltd.
Michael R. Binnion. Mr. Binnion (37) has been the Chief Financial
Officer, Secretary and a director of CanArgo since March 1997. Mr. Binnion is
also President and a director of Terrenex Acquisition Corp., an Alberta
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<PAGE> 135
Stock Exchange listed investment company. Prior to April 1997, Mr. Binnion was
Chief Financial Officer and a Director of Trans-Dominion Energy Company, a
Toronto Stock Exchange listed international exploration and production company.
J.F. Russell Hammond. Mr. Hammond (56) has been a director of CanArgo
since June 1997. For over five years, Mr. Hammond has been a director and
investment advisor to Provincial Securities Ltd., a private investment company.
Additionally, Mr. Hammond has been Chairman of Terrenex Acquisition Company
since 1992.
Bob Moffat. Mr. Moffat (43) has been a director of CanArgo since June
1997 and has been President and Director of Courage Energy Inc. since 1995.
Courage Energy is a western Canadian based oil and natural gas company, listed
on The Toronto Stock Exchange. From July 1992 to September 1995, Mr. Moffat was
President and a Director of a predecessor of Courage Energy, Springside
Resources Ltd., a public oil and natural gas company listed on the Alberta Stock
Exchange. Prior to that time, Mr. Moffat was President of Rothsay Resources
Ltd., a private investment company.
Niko Tevzadze. Mr. Tevzadze (34) has been an operations advisor to the
Board since June 1997 and is the General Director of GBOC, a position he has
held since 1993. In the period from 1991 to 1993, he was involved in the joint
venture "Georgia Makoil" as a General Director. From 1986 to 1991 he worked at
the East Georgia Drilling Office of Georgian Oil as foreman, drilling engineer
and chief technologist.
Tamara Smales. Ms. Smales (37) has been the Vice President, Business
Development of CanArgo and Vice-President of NOC since June 1997. From 1992
until 1997, she was Executive Advisor and Business Manager of JKX Oil & Gas plc.
Prior thereto, Ms. Smales was a political commentator for Georgian State
Television Company and Lecturer at the Georgian State Pedagogical Institute.
Executive Compensation
The following table, presented in accordance with Regulation 1015 of the
Securities Act (Ontario), sets forth information concerning the total
compensation paid during the fiscal year ended December 31, 1997, to CanArgo's
Chief Executive Officer and executive officers earning more than C$100,000 on an
annualized basis who held such offices at December 31, 1997. None of such
persons was employed by CanArgo prior to fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL (NUMBER OF ALL OTHER
YEAR ENDED COMPENSATION SECURITIES COMPENSATION
NAME AND POSITION DECEMBER (SALARY)(C$) UNDER OPTION) (C$)
- ----------------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
David Robson, 1997 104,000(1) 225,000 --
Chairman and
Chief Executive Officer
Michael Binnion, 1997 29,000(2) 75,000 15,000
Chief Financial
Officer and Secretary
John McLeod, 1997 65,000(3) 175,000 --
Technical Director
</TABLE>
- ---------------
(1) Represents compensation paid from June 1, 1997 to December 31, 1997.
(2) Represents compensation paid from November 1, 1997 to December 31, 1997.
(3) Represents compensation paid from August 1, 1997 to December 31, 1997.
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OPTION GRANTS DURING 1997
<TABLE>
<CAPTION>
MARKET VALUE OF
SECURITIES
SECURITIES % OF TOTAL UNDERLYING
UNDER OPTIONS GRANTED EXERCISE OR BASE OPTIONS ON THE
OPTIONS TO EMPLOYEES IN PRICE DATE OF GRANT EXPIRATION
NAME GRANTED (#) FINANCIAL YEAR (C$/SECURITY) (C$/SECURITY) DATE
---- ----------- -------------- ------------- ------------- ----
<S> <C> <C> <C> <C> <C>
David Robson 225,000 22% 2.20 2.20 July 1, 2002
Michael Binnion 75,000 7% 2.20 2.20 July 1, 2002
John McLeod 175,000 17% 2.20 2.20 July 1, 2002
</TABLE>
AGGREGATE OPTION EXERCISES DURING 1997
AND OPTION VALUES AS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
SECURITIES ACQUIRED AGGREGATE VALUE EXERCISABLE/UNEXERCISABLE
NAME ON EXERCISE (#) REALIZED (C$) DECEMBER 31, 1997 (C$) (1)
---- --------------- ------------- --------------------------
<S> <C> <C> <C>
David Robson -- -- 22,500/--
Michael Binnion 17,242 15,000 7,500/--
John McLeod -- -- 17,500/--
</TABLE>
- ---------------
(1) Determined by multiplying (a) the number of options by (b) the
difference between the market price of the CanArgo Common Shares at
December 31, 1997 and the exercise price of C$2.20.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
Other than "routine indebtedness", as that term is defined in applicable
securities legislation, no director or executive officer of CanArgo, or
associate or affiliate of any such director or executive officer, is or has been
indebted to CanArgo since the formation of CanArgo.
STOCK OPTION PLAN
The CanArgo Board established a stock option plan (the "Plan") approved
at the special and annual general meeting of shareholders of CanArgo held June
30, 1997 with the objective of advancing the interest of CanArgo by encouraging
and enabling the acquisition of a share interest in CanArgo by its directors,
officers and employees. The Plan is administered by a Compensation Committee
(the "Committee") appointed by the CanArgo Board and consists of not less than
two members of the CanArgo Board. Options may be granted in respect of
authorized and unissued CanArgo Common Shares under the Plan. The aggregate
number of CanArgo Common Shares reserved for issuance under the Plan, subject to
adjustment or increase as discussed below, is 1,250,000.
The Committee determines which persons are eligible to be granted
options, the number of CanArgo Common Shares covered by each option, the option
price, the time or times when options be granted and exercisable and determine
if the shares that are subject to an option will be subject to any restrictions
upon the exercise of such option. The option price may not be lower than the
market price of the CanArgo Common Shares
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<PAGE> 137
at the date of the grant of the option. In no event may the term of an option
exceed ten years from the date of the grant of the option.
The total number of CanArgo Common Shares to be optioned to any optionee
under the Plan, together with any shares reserved for issuance under options for
services and employee stock purchase plans or any other plans to such optionee,
may not exceed 5% of the issued and outstanding CanArgo Common Shares at the
date of the grant of the option.
Appropriate adjustments in the number of CanArgo Common Shares subject
to the Plan, and with respect to options granted or to be granted, in the number
of shares optioned and in the option price, are made by the CanArgo Board to
give effect to adjustments in the number of CanArgo Common Shares resulting from
subdivisions, consolidations or reclassifications of the CanArgo Common Shares,
the payment of stock dividends by CanArgo (other than dividends in the ordinary
course) or other relevant changes in the capital stock of CanArgo.
LEGAL PROCEEDINGS
CanArgo is not currently engaged in any legal proceedings. JKX, the
holder of 44.1% of the shares of NOC, initiated in July 1997 legal proceedings
in Cyprus claiming that an offer made in June 1997 to two predecessor
shareholders of NOC to subscribe for shares of NOC was not accepted in time and
accordingly the share issuance to such shareholders (who subsequently
transferred their shares of NOC to CanArgo Ltd.) was invalid. Had the share
issuance been invalid, CanArgo's interest in NOC would have been reduced to
approximately 49%. JKX was unsuccessful in its application before the Cyprus
Courts for injunctive relief and subsequently withdrew its claim (without
prejudice to its rights in respect of future proceedings, if any).
INTEREST OF DIRECTORS IN RELATED TRANSACTION
No director, senior officer or insider proposed nominee as director had
any material interest in any transaction since the commencement of CanArgo's
last full fiscal year that has materially affected CanArgo or any of its
subsidiaries other than the acquisition (the "Acquisition") of all of the shares
of CanArgo Ltd. effective July 1, 1997. Terrenex Acquisition Corporation, a
corporation of which Russell Hammond is Chairman and Michael Binnion is
President and a director, owned 40% of the shares of CanArgo (prior to giving
effect to the Acquisition) and 6.7% of the shares of CanArgo Ltd. Russell
Hammond was a director of Mountprop Ontario Inc., the controlling shareholder of
CanArgo Ltd. (prior to giving effect to the Acquisition). Michael Binnion was
the sole director of CanArgo Ltd. at the time of the Acquisition. A corporation
controlled by Michael Binnion held 0.3% of the shares of CanArgo Ltd. (prior to
giving effect to the Acquisition).
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<PAGE> 138
COMPARISON OF STOCKHOLDER RIGHTS
CanArgo is currently a corporation governed by the ABCA. If the
Continuance Resolution is approved by the shareholders of CanArgo, CanArgo will
become a corporation governed by the OBCA. The rights and privileges of
shareholders of an Ontario corporation are similar in all significant respects
to those of shareholders in an Alberta corporation.
In the event that the Transaction is consummated, holders of CanArgo
Common Shares will have their CanArgo Common Shares exchanged for Exchangeable
Shares at the Effective Time. Shareholders will have the right to retract the
Exchangeable Shares for an equivalent number of shares of Fountain Common Stock.
Fountain is a corporation organized under the DGCL. While the rights and
privileges of shareholders of an Ontario corporation are, in many instances,
comparable to those of stockholders of a Delaware corporation, there are certain
differences. These differences arise from differences between Ontario and
Delaware law, between the OBCA and DGCL, and between the CanArgo Articles and
CanArgo Bylaws and the Fountain Certificate and Fountain Bylaws. For a
description of the respective rights of the holders of CanArgo Common Shares and
Fountain Common Stock, see, respectively, "INFORMATION CONCERNING CANARGO --
Description of Share Capital" and "THE COMPANIES AFTER THE TRANSACTION --
Fountain Capital Stock."
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
Under the OBCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances, sales, leases or exchanges of all or substantially
all the property of a corporation other than in the ordinary course of business,
liquidations, dissolutions and (if ordered by a court) certain other
arrangements, must be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders entitled to vote on the resolution. In certain cases, a special
resolution to approve an extraordinary corporate action is also required to be
approved separately by the holders of a class or series of shares.
The DGCL generally requires the affirmative vote of a majority of the
outstanding stock entitled to vote thereon to authorize any merger,
consolidation, dissolution or sale of substantially all of the assets of a
corporation. No authorizing stockholder vote is required of a corporation
surviving a merger if such corporation's certificate of incorporation is not
amended by the merger, each share of stock of such corporation will be an
identical share of the surviving corporation after the merger, and the number of
shares to be issued in the merger does not exceed 20% of such corporation's
outstanding common stock immediately prior to the Effective Date of the merger.
Additionally, no authorizing stockholder vote is required of a corporation to
authorize a merger with or into a single direct or indirect wholly-owned
subsidiary of such corporation unless required by its certificate of
incorporation (provided certain other limited circumstances apply). The Fountain
Certificate does not require a greater percentage vote for such actions.
Finally, the DGCL does not require stockholder approval for mergers or
consolidations in which a parent corporation merges or consolidates with a
subsidiary of which it owns at least 90% of the outstanding shares of each class
of stock.
AMENDMENT TO GOVERNING DOCUMENTS
Under the OBCA, any amendment to the articles generally requires
approval by special resolution. The OBCA provides that the directors may by
resolution make, amend or repeal any by-laws that regulate the business or
affairs of a corporation unless the articles or by-laws provide otherwise. Where
the directors make, amend or repeal a bylaw, they are required under the OBCA to
submit the bylaw, amendment or repeal to the shareholders at the next meeting of
shareholders. The shareholders may confirm, reject or amend the bylaw, amendment
or repeal by an ordinary resolution, which is a resolution passed by a majority
of the votes cast by shareholders entitled to vote on the resolution.
The DGCL requires a vote of the corporation's board of directors
followed by the affirmative vote of a majority of the outstanding stock entitled
to vote for any amendment to the certificate of incorporation, unless a greater
level of approval is required by the certificate of incorporation. The Fountain
Certificate does not require a greater level of approval for amendments. If an
amendment would have the effect of altering the powers, preferences or special
rights of a particular class or series of stock, the class or series must be
given the power to vote as a class notwithstanding the absence of any
specifically enumerated power in the certificate of incorporation.
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<PAGE> 139
The DGCL also states that stockholders entitled to vote have the power to adopt,
amend or repeal the bylaws of a corporation unless the corporation in its
certificate of incorporation confers such power on its board of directors. The
Fountain Certificate expressly authorizes the Fountain Board and its
stockholders to adopt, amend or repeal the Fountain Bylaws.
DISSENTERS' RIGHTS
The OBCA provides that shareholders of an Ontario corporation entitled
to vote on certain matters are entitled to exercise dissent rights and to be
paid the fair value of their shares in connection with such matters. The OBCA
does not distinguish for this purpose between listed and unlisted shares. Such
matters include: (a) any amalgamation with another corporation (other than with
certain affiliated corporations); (b) an amendment to the corporation's articles
to add, change or remove any provisions restricting the issue, transfer or
ownership of shares; (c) an amendment to the corporation's articles to add,
change or remove any restriction upon the business or businesses that the
corporation may carry on or upon the powers that the corporation may exercise;
(d) a continuance under the laws of another jurisdiction; (e) a sale, lease or
exchange of all or substantially all the property of the corporation other than
in the ordinary course of business; (f) a court order permitting a shareholder
to dissent in connection with an application to the court for an order approving
an arrangement proposed by the corporation; or (g) certain amendments to the
articles of a corporation which require a separate class or series vote, except
that a shareholder is not entitled to dissent if an amendment to the articles is
effected by a court order approving a reorganization or by a court order made in
connection with an action for an oppression remedy. In addition to exercising
dissent rights, a shareholder may seek an oppression remedy under the OBCA for
any act or omission of a corporation which is oppressive, unfairly prejudicial
to or that unfairly disregards a shareholder's interest.
Under the DGCL, holders of shares of any class or series have the right
in certain circumstances to dissent from a merger or consolidation by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares, as determined by agreement with the corporation or
by an independent appraiser appointed by a court in an action timely brought by
the corporation or the dissenters. The DGCL grants dissenters' appraisal rights
only in the case of mergers or consolidations and not in the case of a sale or
transfer of assets, a purchase of assets for stock, or any other stock issuance,
such as in connection with the Transaction, regardless of the number of shares
being issued. Further, no appraisal rights are available for shares of any class
or series listed on a national securities exchange or NASDAQ or held of record
by more than 2,000 stockholders, unless the agreement of merger or consolidation
converts such shares into anything other than some combination of stock of the
surviving corporation, stock of another corporation which is either listed on a
national securities exchange or NASDAQ or held of record by more than 2,000
stockholders or cash in lieu of fractional shares.
OPPRESSION REMEDY
The OBCA provides an oppression remedy that enables the court to make
any order, both interim and final, to rectify the matters complained of, if the
director appointed under Section 278 of the OBCA or the OSC is satisfied upon
application by a complainant (as defined below) that: (a) any act or omission of
the corporation or an affiliate effects or threatens to effect a result; (b) the
business or affairs of the corporation or an affiliate are, have been or are
threatened to be carried on or conducted in a manner; or (c) the powers of the
directors of the corporation of an affiliate are, have been or are threatened to
be exercised in a manner that is oppressive or unfairly prejudicial to or that
unfairly disregards the interest of any security holder, creditor, director or
officer of the corporation. A complainant includes a present or former
registered holder or beneficial owner of securities of a corporation or any of
its affiliates, a present or former officer or director of the corporation or
any of its affiliates and any other person who in the discretion of the court is
a proper person to make such application.
Because of the breadth of the conduct that can be complained of and the
scope of the court's remedial powers, the oppression remedy is very flexible and
is sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the OBCA, it
is not necessary to prove that the directors of a corporation acted in bad faith
in order to seek an oppression remedy. Furthermore, the court may order the
corporation to pay the interim expenses of a complainant seeking an
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oppression remedy, but the complainant may be held accountable for such interim
costs on final disposition of the complaint, as in the case of a derivative
action. The DGCL does not provide for a similar remedy.
DERIVATIVE ACTION
Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, the corporation. The DGCL provides that a
stockholder must assert in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused unless it is
shown that such demand would have been futile.
Under the OBCA, a complainant may apply to the court for leave to bring
an action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such corporation is a party, for
the purpose of prosecuting, defending or discontinuing the action on behalf of
the corporation. Under the OBCA, no action may be brought and no intervention in
an action may be made unless the complainant has given 14 days' notice to the
directors of the corporation or its subsidiary of the complainant's intention to
apply to the court and the court is satisfied that the directors of the
corporation or its subsidiary will not bring, diligently prosecute or defend or
discontinue the action, the complainant is acting in good faith and it appears
to be in the interests of the corporation or its subsidiary that the action be
brought, prosecuted, defended or discontinued. Where a complainant makes an
application without having given the required notice, the OBCA permits the court
to make an interim order pending the complainant giving the required notice, so
long as the complainant can establish that at the time of seeking the interim
order it was not expedient to give the required notice.
Under the OBCA, the court in a derivative action may make any order it
thinks fit. Additionally, under the OBCA, a court may order a corporation or its
subsidiary to pay the complainant's interim costs, including reasonable legal
fees and disbursements. Although the complainant may be held accountable for the
interim costs on final disposition of the complaint, it is not required to give
security for costs in a derivative action.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Under the DGCL, any action required to be taken or which may be taken at
an annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted,
unless otherwise provided in the certificate of incorporation. The Fountain
Certificate does not contain any special provision prohibiting action by written
consent. Under the OBCA, shareholder action without a meeting may only be taken
by written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting.
DIRECTOR QUALIFICATIONS
A majority of the directors of an OBCA corporation generally must be
resident Canadians but, where a corporation has only one or two directors, that
director or one of the two directors, as the case may be, must be a resident
Canadian. The OBCA also requires that at least one-third of the directors of a
corporation whose securities are publicly traded must not be officers or
employees of the corporation or any of its affiliates. The DGCL does not have
comparable requirements.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations governed by the OBCA have fiduciary
obligations to the corporation. Directors of corporations incorporated or
organized under the DGCL have fiduciary obligations to the corporation and its
shareholders. Pursuant to these fiduciary obligations, the directors must act in
accordance with the so-called duties of "due care" and "loyalty." Under the
DGCL, the duty of care requires that the directors act in an informed and
deliberative manner and to inform themselves of all material information
reasonably available to them prior to making a business decision. The duty of
loyalty requires that the directors act in good faith in a manner which the
directors reasonably believe to be in the best interests of the stockholders. It
requires that there be no conflict
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between duty and self-interest. The DGCL permits a provision in the certificate
of incorporation of a corporation organized under it eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for (i)
breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) statutory liability for unlawful payment of dividends or unlawful stock
purchase or redemption, and (iv) any transaction from which the director derived
an improper personal benefit. The Fountain Certificate contains a provision so
eliminating or limiting the personal liability of its directors. An additional
provision of the Fountain Certificate provides that, if the DGCL is amended to
authorize the further elimination or limitation of the liability of a director,
the liability of Fountain's director shall be eliminated or limited to the
fullest extent permitted by the DGCL.
Under the OBCA, the duty of loyalty requires directors of an Ontario
corporation to act honestly and in good faith with a view to the best interests
of the corporation, and the duty of care requires that the directors exercise
the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the OBCA, a corporation may indemnify a director or officer, a
former director or officer or a person who acts or acted at the corporation's
request as a director or officer of a corporation of which the corporation is or
was a shareholder or creditor, and his or her heirs and legal representatives
(an "Indemnifiable Person"), against all costs, charges and expenses, including
any amount paid to settle an action or satisfy a judgment, reasonably incurred
by him or her in respect of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having been
a director or officer, if: (a) he or she acted honestly and in good faith with a
view to the best interests of such corporation; and (b) in the case of a
criminal or administrative action or proceeding that is enforced by a monetary
penalty, he or she had reasonable grounds for believing that his or her conduct
was lawful An Indemnifiable Person is entitled to such indemnity from the
corporation if he or she was substantially successful on the merits in his or
her defense of the action or proceeding and fulfilled the conditions set out in
(a) and (b), above. A corporation may, with the approval of a court, also
indemnify an Indemnifiable Person in respect of an action by or on behalf of the
corporation to procure a judgment in its favor, to which such person is made a
party by reason of being or having been a director or an officer of the
corporation, if he or she fulfills the conditions set out in (a) and (b), above.
The CanArgo Bylaws provide for indemnification of directors and officers to the
fullest extent authorized by the OBCA.
The DGCL provides that a corporation may indemnify its present and
former directors, officers, employees and agents (each, an "indemnitee") against
all reasonable expenses (including attorneys' fees) judgments, fines and amounts
paid in settlement incurred in an action, suit or proceeding, other than in
actions initiated by or in the right of the corporation, to which the indemnitee
is made a party by reason of service as a director, officer, employee or agent,
if such individual acted in good faith and in a manner which he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. A Delaware corporation shall
indemnify an indemnitee to the extent that he or she is successful on the merits
or otherwise in the defense of any claim, issue or matter associated with an
action, suit or proceeding, including one initiated by or in the right of the
corporation. The Fountain Bylaws provide for indemnification of directors and
officers to the fullest extent permitted by the DGCL.
The DGCL allows and the Fountain Bylaws provide for the advance payment
of an indemnity for expenses prior to the final disposition of an action,
provided that the indemnitee undertakes to repay any such amount advanced if it
is later determined that the indemnitee is not entitled to indemnification with
regard to the action for which the expenses were advanced. Neither the OBCA nor
the CanArgo Bylaws expressly provides for such advance payment.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
The DGCL prohibits in certain circumstances a "business combination"
between the corporation and an "interested stockholder" within three years of
the stockholder becoming an "interested stockholder." An "interested
stockholder" is a holder who directly or indirectly controls 15% or more of the
outstanding voting stock or is an affiliate of the corporation and was the owner
of 15% or more of the outstanding voting stock at any time within the
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prior three-year period. A "business combination" includes a merger,
consolidation, sale or other disposition of assets having an aggregate value in
excess of 10% of the consolidated assets of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. This provision does not apply where: (a) the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder is approved by the corporation's board of
directors prior to the time the interested stockholder acquired such 15%
interest; (b) upon the consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding, for
the purpose of determining the number of shares outstanding, shares held by
persons who are directors and officers and by employee stock plans in which
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered; (c) the business combination is
approved by a majority of the board of directors and the affirmative vote of
two-thirds of the outstanding votes entitled to be cast by disinterested
stockholders at an annual or special meeting; (d) the corporation does not have
a class of voting stock that is listed on a national securities exchange,
authorized for quotation on NASDAQ, or held of record by more than 2,000
stockholders unless any of the foregoing results from action taken, directly or
indirectly, by an interested stockholder or from a transaction in which a person
becomes an interested stockholder; (e) the corporation has opted out of this
provision; or (f) in certain other limited circumstances. Fountain has not opted
out of this provision, but the Transaction would not be subject to this
provision even if there is an "interested stockholder" at the conclusion of the
Transaction because the Fountain Board has approved the Transaction.
The OBCA does not contain a comparable provision with respect to
business combinations. However, policies of certain Canadian securities
regulatory authorities, including Policy 9.1 of the OSC ("Policy 9.1"), contain
requirements in connection with related party transactions. A related party
transaction means generally any transaction by which an issuer directly or
indirectly acquires or transfers an asset, acquires or issues treasury
securities or assumes or transfers a liability from or to, as the case may be, a
related party by any means in any one or any combination of transactions.
"Related party" is defined in Policy 9.1 to include directors, senior officers
and holders of at least 10% of the voting securities of the issuer. Policy 9.1
requires more detailed disclosure in the proxy material sent to security holders
in connection with a related party transaction, and, subject to certain
exceptions, the preparation of a formal valuation of the subject matter of the
related party transaction and any non-cash consideration offered therefor and
the inclusion of a summary of the valuation in the proxy material.
DISSENTING SHAREHOLDERS' RIGHTS
CANARGO
A holder of CanArgo Common Shares is entitled to be paid the fair value
of such shares in accordance with Section 184 of the ABCA if the shareholder
dissents to the Continuance of CanArgo under the OBCA and if such Continuance
becomes effective. A holder of CanArgo Common Shares is not entitled to dissent
with respect to the Continuance if such holder votes any of such shares in favor
of the required resolution authorizing the Continuance.
A holder of CanArgo Common Shares is entitled to be paid the fair value
of such shares in accordance with Section 185 of the OBCA if the shareholder
dissents to the Arrangement and the Arrangement becomes effective. The rights of
dissent in accordance with the OBCA are being granted pursuant to the Interim
Order. A holder of CanArgo Common Shares is not entitled to dissent with respect
to the Arrangement if such holder votes any of such shares in favor of the
required resolution authorizing the Arrangement. The execution or exercise of a
proxy does not constitute a written objection for purposes of the ABCA or the
OBCA.
Brief summaries of the provisions of Section 184 of the ABCA and Section
185 of the OBCA are set out below and the text of such sections are set out in
full as Annex K of the Joint Proxy Statement/Prospectus. The following summaries
do not purport to provide comprehensive statements of the procedures to be
followed by a dissenting shareholder who seeks payment of the fair value of his
CanArgo Common Shares.
Dissent to Continuance under Section 184 of the ABCA
Under Section 184 of the ABCA, a holder of CanArgo Common Shares who
wishes to exercise that holder's right to dissent respecting the Continuance of
CanArgo under the OBCA is required to send a written objection (the "Objection
Notice") to the special resolution to CanArgo at the address hereafter set out
under
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"Addresses for Notices" at or prior to the CanArgo Meeting. The Objection Notice
may also be delivered to the Chairman of the CanArgo Meeting at or before the
CanArgo Meeting.
A vote against the special resolution respecting the Continuance under
the OBCA, an abstention or the execution or exercise of a proxy to vote against
such special resolution does not constitute such written objection, but a
shareholder need not vote its CanArgo Common Shares against such special
resolution in order to dissent.
A dissenting shareholder may claim under Section 184 of the ABCA only
with respect to all of the CanArgo Common Shares held by the dissenting
shareholder or on behalf of any one beneficial owner and registered in the said
dissenting shareholder's name. SHAREHOLDERS WHO WISH TO DISSENT IN RESPECT OF
CANARGO COMMON SHARES BENEFICIALLY OWNED BY THEM BUT NOT REGISTERED IN THEIR
NAME MUST MAKE ARRANGEMENTS TO HAVE SUCH SHARES REGISTERED IN THEIR NAME OR
INSTRUCT THE BROKER IN WHOSE NAME THE CANARGO COMMON SHARES ARE REGISTERED TO
DISSENT ON SUCH SHAREHOLDER'S BEHALF SO AS TO PROVIDE FOR A VALID DISSENT. The
filing of an Objection Notice does not deprive the dissenting shareholder of its
right to vote on the special resolution respecting the Continuance.
After the adoption of the special resolution respecting the Continuance,
CanArgo or a dissenting shareholder of CanArgo may make an application to the
Court of Queen's Bench of Alberta to fix the fair value of the shares held by
the dissenting shareholder determined as at the close of business on the last
business day before the day on which the special resolution from which it
dissents was adopted. If an application is made to the Court, unless the Court
otherwise orders, CanArgo must send to each dissenting shareholder a written
offer to pay it an amount considered by the board of directors of CanArgo to be
the fair value of the CanArgo Common Shares. The offer to each dissenting
shareholder of CanArgo must be made on the same terms as for other dissenting
shareholders of CanArgo and contain or be accompanied by a statement showing how
the fair value was determined. The offer, unless the Court otherwise orders,
must be sent to the dissenting shareholder at least ten days before the date on
which the application is returnable if CanArgo is the applicant or within ten
days after CanArgo is served with notice of the application if a dissenting
shareholder is the applicant. A dissenting shareholder may make an agreement
with CanArgo for the purchase of its CanArgo Common Shares in the amount of the
offer provided by CanArgo or otherwise at any time before the Court pronounces
an order fixing the fair value of the CanArgo Common Shares. On an application
under Section 184 of the ABCA, the Court shall make an order with respect to
CanArgo fixing the fair value of the CanArgo Common Shares of all dissenting
shareholders of such corporation who are parties to the application, giving
judgment in that amount against CanArgo in favor of each of the dissenting
shareholders and fixing the time within which CanArgo must pay the judgment
amount to those dissenting shareholders.
The Court may, in its discretion, allow a reasonable rate of interest on
the amount payable to each dissenting shareholder from the date on which the
dissenting shareholder ceases to have any rights as a dissenting shareholder
until the date of payment. A dissenting shareholder is not required to give
security for costs in respect of an application to the Court to fix the fair
value of its shares and except in special circumstances shall not be required to
pay the costs of the application or appraisal.
A dissenting shareholder ceases to have any rights as a shareholder
other than the right to be paid the fair value of its CanArgo Common Shares on
the earliest of the date on which the Continuance under the OBCA is effective,
the making of an agreement between CanArgo and the dissenting shareholder as to
the payment to be made for the CanArgo Common Shares held by the dissenting
shareholder or the pronouncement of an order of the Court fixing the fair value
of the CanArgo Common Shares. Until any of the foregoing events occur, the
dissenting shareholder may withdraw its dissent or CanArgo may rescind the
resolution in question, and in either event, proceedings under Section 184 shall
be discontinued.
CanArgo shall not make a payment to a dissenting shareholder under
Section 184 of the ABCA if there are reasonable grounds for believing that such
corporation is, or would be after the payment to the dissenting shareholder,
unable to pay its liabilities as they become due or that the realizable value of
its assets would thereby be less than the aggregate of its liabilities. In such
event, CanArgo shall notify within ten days each dissenting shareholder that it
is lawfully unable to pay the dissenting shareholder for its CanArgo Common
Shares, in which case the dissenting shareholder may withdraw its Objection
Notice, by written notice to CanArgo within 30 days after receipt of such
notice.
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Dissent to Arrangement under Section 185 of the OBCA
Section 185 of the OBCA provides shareholders with the right to dissent
from certain resolutions of a corporation which effect extraordinary corporate
transactions or fundamental corporate changes. The Interim Order and the Final
Order provide CanArgo shareholder with the right to dissent from the Arrangement
Resolution pursuant to Section 185 of the OBCA and the Plan of Arrangement.
Any CanArgo shareholder who dissents from the Arrangement Resolution in
compliance with Section 185 of the OBCA and the Plan of Arrangement will be
entitled, in the event the Arrangement becomes effective, to be paid by CanArgo
the fair value of the CanArgo Common Shares held by such dissenting CanArgo
shareholder determined as of the close of business on the day before the
Arrangement Resolution is adopted.
A CanArgo shareholder who wishes to dissent must send to CanArgo, no
later than the termination of the CanArgo Shareholders Meeting (or any
adjournment thereof), written objection to the Arrangement Resolution (a
"Dissent Notice"). The filing of a Dissent Notice does not deprive a CanArgo
shareholder of the right to vote; however, the OBCA provides, in effect, that a
CanArgo shareholder who has submitted a Dissent Notice and who votes in favor of
the Arrangement Resolution will no longer be considered a dissenting CanArgo
shareholder with respect to that class of shares voted in favor of the
Arrangement Resolution. The OBCA does not provide, and CanArgo will not assume,
that a vote against the Arrangement Resolution or an abstention constitutes a
Dissent Notice but a CanArgo shareholder need not vote his or her CanArgo Common
Shares against the Arrangement Resolution in order to dissent. Similarly, the
revocation of a proxy conferring authority on the proxy holder to vote in favor
of the Arrangement Resolution does not constitute a Dissent Notice; however, any
proxy granted by a CanArgo shareholder who intends to dissent, other than a
proxy that instructs the proxy holder to vote against the Arrangement
Resolution, should be validly revoked (see "THE MEETINGS -- GENERAL PROXY
INFORMATION -- CanArgo") in order to prevent the proxy holder from voting such
CanArgo Common Shares in favor of the Arrangement Resolution and thereby causing
the CanArgo shareholder to forfeit his or her right to dissent. Under the OBCA,
there is no right of partial dissent and, accordingly, a dissenting CanArgo
shareholder may only dissent with respect to all CanArgo Common Shares held by
him or her on behalf of any one beneficial owner and which are registered in the
name of the dissenting CanArgo shareholder.
CanArgo is required, within ten days after the CanArgo shareholders
adopt the Arrangement Resolution, to notify each CanArgo shareholder who has
filed a Dissent Notice that the Arrangement Resolution has been adopted, but
such notice is not required to be sent to any CanArgo shareholder who voted for
the Arrangement Resolution or who has withdrawn his or her Dissent Notice.
A dissenting CanArgo shareholder who has not withdrawn his or her
Dissent Notice must then, within 20 days after receipt of notice that the
Arrangement Resolution has been adopted or, if the dissenting CanArgo
shareholder does not receive such notice, within 20 days after he or she learns
that the Arrangement Resolution has been adopted, send to CanArgo a written
notice (a "Payment Demand") containing his or her name and address, the number
of CanArgo Common Shares in respect of which he or she dissents, and a demand
for payment of the fair value of such CanArgo Common Shares. Within 30 days
after sending a Payment Demand, the dissenting CanArgo shareholder must send to
the CanArgo transfer agent the certificates representing the CanArgo Common
Shares in respect of which he or she dissents. A dissenting CanArgo shareholder
who fails to send certificates representing the CanArgo Common Shares in respect
of which he or she dissents forfeits his or her right to make a claim under
Section 185 of the OBCA. The CanArgo transfer agent will endorse on share
certificates received from a dissenting CanArgo shareholder a notice that the
holder is a dissenting CanArgo shareholder and will forthwith return the share
certificates to the dissenting CanArgo shareholder.
At the Effective Time, a dissenting CanArgo shareholder ceases to have
any rights as a CanArgo shareholder notwithstanding the provisions of Section
185 of the OBCA, and holders who duly exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for their
CanArgo Common Shares shall (i) be deemed to have transferred their
CanArgo Common Shares to CanArgo for cancellation at the Effective Time
and (ii) not be entitled to any other payment or consideration including
any payment that would be payable under the Arrangement had such holder
not exercised their right of dissent; or
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(b) are ultimately not entitled, for any reason, to be paid fair
value for their CanArgo Common Shares shall be deemed to have
participated in the Arrangement on the same basis as any non-dissenting
holder of CanArgo Common Shares, including receiving Exchangeable Shares
pursuant to Section 2.4.
CanArgo is required, not later than seven days after the later of the
Effective Date of the Arrangement or the date on which CanArgo received the
Payment Demand of a dissenting CanArgo shareholder, to send to each dissenting
CanArgo shareholder who has sent a Payment Demand a written offer to pay ("Offer
to Pay") for his of her CanArgo Common Shares in an amount considered by the
CanArgo Board of Directors to be the fair value thereof, accompanied by a
statement showing the manner in which the fair value was determined. Every Offer
to Pay must be on the same terms. CanArgo must pay for the CanArgo Common Shares
of a dissenting CanArgo shareholder within ten days after an offer made as
aforesaid has been accepted by a dissenting CanArgo shareholder, but any such
offer lapses if CanArgo does not receive an acceptance thereof within 30 days
after the Offer to Pay has been made.
If CanArgo fails to make an Offer to Pay for a dissenting CanArgo
shareholder's CanArgo Common Shares, or if a dissenting CanArgo shareholder
fails to accept an offer which has been made, CanArgo may, within 50 days after
the Effective Date of the Arrangement or within such further period as a court
may allow, apply to a court to fix a fair value for the CanArgo Common Shares of
dissenting CanArgo shareholders. If CanArgo fails to apply to a court, a
dissenting CanArgo shareholder may apply to a court for the same purpose within
a further period of 20 days or within such further period as a court may allow.
A dissenting CanArgo shareholder is not required to give security for costs in
such an application.
Upon an application to a court, all dissenting CanArgo shareholders
whose CanArgo Common Shares have not been purchased by CanArgo will be joined as
parties and bound by the decision of the court, and CanArgo will be required to
notify each affected dissenting CanArgo shareholder of the date, place and
consequences of the application and of his or her right to appear and be heard
in person or by counsel. Upon any such application to a court, the court may
determine whether a person is a dissenting CanArgo shareholder who should be
joined as a party, and the court will then fix a fair value for the CanArgo
Common Shares of all dissenting CanArgo shareholders. The final order of a court
will be rendered against CanArgo in favor of each dissenting CanArgo shareholder
and for the amount of the fair value of his or her CanArgo Common Shares as
fixed by the court. The court may, in its discretion, allow a reasonable rate of
interest on the amount payable to each dissenting CanArgo shareholder from the
Effective Date of the Arrangement until the date of payment.
Section 184 of the ABCA and Section 185 of the OBCA require strict
adherence to the procedures established therein, and failure to do so may result
in the loss of all dissenters' rights. It is suggested that any CanArgo
shareholder wishing to avail himself or herself of his or her rights under those
provisions seek his or her own legal advice as failure to comply strictly with
the provisions of the OBCA may prejudice his or her right of dissent. For a
general summary of certain income tax implications to a dissenting CanArgo
shareholder, see "TAX CONSIDERATIONS -- Canadian Federal Tax Considerations to
CanArgo Shareholders -- Dissenting Shareholders" and "TAX CONSIDERATIONS --
United States Federal Tax Considerations to CanArgo Shareholders -- Dissenting
Shareholders."
Address for Notices
All notices to CanArgo pursuant to Section 184 of the ABCA and Section
185 of the OBCA should be addressed to the Secretary of CanArgo at 1580 Guinness
House, 727 7th Avenue S.W., Calgary, Alberta T2P 0Z5.
FOUNTAIN
Under the DGCL, holders of Fountain Common Stock who vote against the
Fountain Stock Issuance Proposal or the Fountain Charter Changes will not be
entitled to demand appraisal of, or to receive payment for, their Fountain
Common Stock.
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ADDITIONAL MATTERS FOR CONSIDERATION
OF FOUNTAIN STOCKHOLDERS
In addition to consideration and voting on the Fountain Stock Issuance
Proposal, Fountain's stockholders will be asked to vote on the following
additional matters at the Fountain Stockholders Meeting.
PROPOSAL TO APPROVE CHANGE OF NAME
Subject to the approval of the Fountain stockholders, Fountain has
agreed in the Combination Agreement to change its name to "CanArgo Energy
Corporation" upon consummation of the Transaction. The Fountain Board has
adopted a resolution setting forth the proposed amendment, declaring its
advisability, and directing that such amendment be considered at the Fountain
Stockholders Meeting. The Fountain Board is hereby seeking stockholder approval
of an amendment to the Fountain Certificate to effect such name change. If
approved by Fountain's stockholders, the name change will be effected by the
filing of a Certificate of Amendment to the Fountain Certificate with the
Secretary of State of the State of Delaware. The proposed form of the
Certificate of Amendment to effect the name change is set forth as Annex L to
this Joint Proxy Statement/Prospectus. The name change will only occur if the
Transaction is consummated.
The Fountain Board unanimously recommends that the stockholders vote FOR
this proposal. Approval of the name change proposal is NOT a condition to the
consummation of the Transaction.
PROPOSAL TO APPROVE THE REVERSE SPLIT
General
Fountain has also agreed in the Combination Agreement, subject to the
approval of Fountain's stockholders so to amend the Fountain Certificate, to
effect the Reverse Split. The Fountain Board has adopted a resolution setting
forth the proposed amendment, declaring its advisability, and directing that
such amendment be considered at the Fountain Stockholders Meeting. The Fountain
Board is hereby seeking stockholder approval of an amendment to the Fountain
Certificate to effect the Reverse Split. The Fountain Board unanimously
recommends that the stockholders vote FOR this proposal.
The Reverse Split will be effected by the filing of a Certificate of
Amendment of the Fountain Certificate with the Secretary of State of the State
of Delaware. The proposed form of the Certificate of Amendment to effect the
Reverse Split, is set forth as Annex M to this Joint Proxy Statement/Prospectus.
If this proposal is approved by Fountain's stockholders, the Certificate of
Amendment to effect the Reverse Split will be filed in connection with the
consummation of the Transaction, although the Fountain Board may determine to
proceed with the Reverse Split even if the Transaction is not consummated in
order to obtain certain of the benefits described below.
The Reverse Split will result in the combination of each two issued and
outstanding shares of Fountain Common Stock into one share of Fountain Common
Stock. The Reverse Split will not reduce the 50,000,000 authorized shares of
Fountain Common Stock, change the par value of the Fountain Common Stock or
affect the number of authorized shares of Fountain Preferred Stock. As a result
of the Reverse Split, the interests of Fountain's stockholders will be
represented by approximately one-half as many shares as before the Reverse
Split, but the Reverse Split will not affect any stockholder's proportionate
equity interest in Fountain (except for the impact of the cash payment for
fractional shares) or the relative rights, preferences, privileges or priorities
of any stockholder.
The Combination Agreement provides that if Fountain effects the Reverse
Split, then the Exchange Ratio will be adjusted appropriately so as to maintain
the relative proportionate interests of the holders of CanArgo Common Shares and
the holders of Fountain Common Stock. Accordingly, if the Reverse Split is
effected, the Exchange Ratio will be adjusted so that each CanArgo Common Share
will be exchanged for 0.8 Exchangeable Shares, rather than 1.6 Exchangeable
Shares. Pursuant to the terms of Fountain's 1995 Long-Term Incentive Plan and
certain stock option agreements, the number of shares issuable upon exercise of
outstanding options, and the exercise price per share, will be proportionately
adjusted to reflect the Reverse Split.
Fractional shares of Fountain Common Stock will not be issued as a
result of the Reverse Split. Stockholders entitled to receive one-half (1/2) of
a share of Fountain Common Stock as a consequence of the
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Reverse Split will instead receive a cash payment equal to the fair market value
of one share of Fountain Common Stock as of the business day immediately
preceding the effective date of the Reverse Split. For this purpose, fair market
value shall be deemed to be the mean between the high and low prices at which
Fountain Common Stock trades on NASDAQ on the trading day immediately preceding
such effective date, or if it does not so trade, then the price determined by
the Fountain Board based upon recent trades and bid and asked prices.
Reasons for the Reverse Split
The Fountain Board believes that it is in the best interests of Fountain
and its stockholders to adjust Fountain's capitalization in conjunction with the
Transaction in a manner conducive to providing Fountain with the flexibility to
consider future issuances of Fountain Common Stock for various corporate
purposes and maintaining an efficient, stable and liquid trading market for the
Fountain Common Stock.
Fountain is presently authorized to issue 50,000,000 shares of Fountain
Common Stock, of which 22,447,489 shares were outstanding on the Fountain Record
Date, 1,154,332 shares were reserved for issuance in connection with outstanding
options and an additional 375,000 shares were reserved for issuance in
connection with other contingent rights to acquire Fountain Common Stock. In
connection with the Transaction, Fountain will reserve an aggregate of
24,448,860 shares of Fountain Common Stock for future issuance in exchange for
the Exchangeable Shares and upon the exercise of options granted by CanArgo.
Without the Reverse Split, Fountain would have available after completion of the
Transaction only approximately 1,575,000 shares of Fountain Common Stock which
will be neither issued nor subject to reservation.
Because the Reverse Split will not affect the number of shares which
Fountain is authorized to issue, Fountain would have approximately 25,787,000
shares available after the Reverse Split and completion of the Transaction for
future issuance. The Reverse Split will thus provide a sufficient reserve of
such shares for the future growth and needs of Fountain. While except as
otherwise noted herein Fountain has no present plans, agreements, or commitments
for the reservation or issuance of additional shares of Fountain Common Stock,
the Fountain Board believes that the availability of such shares will afford
Fountain greater flexibility in considering possible future issuances of such
shares for various corporate purposes. Such purposes might include, without
limitation, payment of part or all of the consideration required in connection
with the acquisition of interests in oil and gas properties, on-going businesses
or other assets; obtaining additional equity capital to strengthen Fountain's
financial condition and permit the expansion or development of business
opportunities; establishment of employee benefit programs to enable Fountain to
retain and attract qualified personnel; and satisfaction of various obligations
of Fountain.
Any issuance of additional shares of Fountain Common Stock would be in
the discretion of the Fountain Board, as it has the authority to determine,
subject to applicable law and NASDAQ regulations (which require stockholder
approval for the issuance of shares in certain circumstances), whether, when and
on what terms to issue shares of Fountain Common Stock. The additional shares
will thus be available for issuance from time to time without further action by
the stockholders, thereby enabling Fountain to avoid the delays and expenses
attendant to obtaining further stockholder approval and providing Fountain with
the flexibility needed to act promptly when business opportunities or propitious
market conditions for financing present themselves. The Fountain Board may issue
Fountain Common Stock without first offering such shares to the Fountain
stockholders, since stockholders do not have preemptive rights with respect to
the Fountain Common Stock. Except where shares are issued on a pro-rata basis to
all stockholders (such as in a stock dividend or stock split), the issuance of
additional shares of Fountain Common Stock, including issuance upon conversion
of securities convertible into Fountain Common Stock, would reduce the
proportionate ownership interests in Fountain held by current stockholders not
parties to such issuances.
The availability for issuance of additional shares of Fountain Common
Stock could enable the Fountain Board to render more difficult or discourage an
attempt to obtain control of Fountain. For example, the issuance of shares of
Fountain Common Stock in a public or private sale, merger or similar transaction
would increase the number of outstanding shares, thereby diluting the
proportionate ownership interest of a party interested in obtaining control of
Fountain. This effect would be particularly pronounced if the shares were issued
to a party or parties supportive of the then current management. Fountain has no
present intention to issue shares of Fountain Common Stock to deter a change in
control.
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The Fountain Board also believes that the current low per share price of
the Fountain Common Stock could have a negative effect on the marketability of
existing shares and the potential ability of Fountain to raise capital by
issuing additional shares. On February 27, 1998, the closing price for the
Common Stock on NASDAQ was US$1.00. Some investors view low-priced stocks as
unduly speculative and certain institutional investors have internal policies
preventing the purchase of low-priced stocks. Many brokers are reluctant to deal
in low-priced stocks because of the time consuming procedures that make the
handling of such stocks unattractive from an economic standpoint. Maintaining a
bid price of at least US$1.00 is a requirement for continued listing on NASDAQ.
See "RISK FACTORS -- Continued Listing on NASDAQ; Application of the Penny Stock
Rules." In addition, the structure of trading commissions tends to have an
adverse impact upon holders of lower-priced stocks because the brokerage
commission on such stocks generally represents a higher percentage of the sales
price than the commission on higher-priced stocks.
The Fountain Board is hopeful that the decrease in the number of
outstanding shares of Fountain Common Stock as a consequence of the Reverse
Split, and the resulting anticipated increased price level, will promote greater
liquidity for stockholders of Fountain by, among other things, enabling Fountain
to satisfy NASDAQ's standards for continued listing which require, among other
things, a US$1.00 minimum bid price. Although any increase in the market price
of the Fountain Common Stock resulting from the Reverse Split may be
proportionately less than the decrease in the number of shares outstanding, the
Reverse Split could result in a higher market price for the shares that will
help overcome the reluctance of brokers and investors to trade in the shares.
This higher market price could also promote liquidity since broker commissions
on the sale of the Fountain Common Stock may constitute a smaller percentage of
the sales price than they did prior to the Reverse Split.
THERE CAN BE NO ASSURANCE, HOWEVER, THAT THE MARKET PRICE OF FOUNTAIN
COMMON STOCK IMMEDIATELY AFTER THE REVERSE SPLIT OR THE TRANSACTION WILL EITHER
EXCEED OR REMAIN IN EXCESS OF THE CURRENT MARKET PRICE OR THAT ANY RESULTING
REDUCTION IN BROKERAGE COMMISSIONS WILL NOT BE OFFSET IN WHOLE OR PART BY
INCREASED BROKERAGE COMMISSIONS THAT MUST BE PAID BY FOUNTAIN STOCKHOLDERS
SELLING "ODD LOTS" CREATED BY THE REVERSE SPLIT.
Approval of the Reverse Split proposal is NOT a condition to the
consummation of the Transaction.
Exchange of Certificates
After the Reverse Split is effective, each certificate representing
shares of Fountain Common Stock will, until surrendered and exchanged as
described herein, be deemed, for all corporate purposes, to evidence ownership
of the whole number of shares of Fountain Common Stock into which the shares
evidenced by such certificate have been combined as a result of the Reverse
Split and the right to receive from Fountain the amount of cash for any
fractional shares. As soon as practicable after the Reverse Split is effective,
Fountain's transfer agent will mail a transmittal form to each holder of record
of certificates representing pre-split shares of Fountain Common Stock. After
receipt of such transmittal form, each holder should complete and return the
transmittal form together with his certificates representing pre-split shares of
Fountain Common Stock. Such holder will then receive new certificates
representing the whole number of shares of Fountain Common Stock to which he is
entitled as a result of the Reverse Split together with any cash which may be
payable in lieu of any fractional share. The transmittal forms will be
accompanied by instructions specifying other details of the exchange.
Stockholders who hold their shares in "street name" or through a nominee will
not receive a transmittal form. Although stockholders are encouraged to exchange
their stock certificates promptly after receipt of the transmittal form,
certificates representing pre-split shares will constitute "good delivery" in
connection with sales, through a broker or otherwise, of Fountain Common Stock.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
ADDITIONAL MATTERS FOR CONSIDERATION OF CANARGO SHAREHOLDERS
In addition to consideration of and voting on the Continuance Resolution
and the Arrangement Resolution, the CanArgo shareholders will be asked to vote
on the following additional matters at the CanArgo Shareholders Meeting.
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ELECTION OF DIRECTORS
The CanArgo Articles provide that the CanArgo Board may not consist of
less than three nor more than 15 directors and that such directors are to be
elected annually. An ordinary resolution will be presented to the Meeting to set
the number of directors at five.
The persons named in the enclosed form of proxy intend to vote for the
election of David Robson, Michael Binnion, Russell Hammond and Bob Moffat as
directors of CanArgo. Certain information regarding these individuals is set out
above under "INFORMATION CONCERNING CANARGO -- Directors and Officers."
It is not anticipated that any of the nominees will be unable to serve
as directors but if that should occur for any reason prior to the CanArgo
Shareholders Meeting, the persons named in the enclosed form of proxy shall be
entitled to vote for any other nominees in their discretion.
Each director elected will hold office until the next annual meeting of
the shareholders or until a successor is duly elected or appointed. It is
anticipated that those directors who are currently members of the Compensation
Committee and/or Audit Committee of CanArgo Board of Directors will continue in
those positions.
APPOINTMENT OF AUDITORS
The persons designated in the enclosed form of proxy intend to vote for
the appointment of Ernst & Young, Chartered Accountants, as independent auditors
of CanArgo and to authorize the directors to fix their remuneration.
EXPERTS
The consolidated financial statements of Fountain for the year ended
December 31, 1997, the four month period ended December 31, 1996, and the years
ended August 31, 1996 and 1995 included in this Joint Proxy Statement/Prospectus
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report appearing herein, and have been so included in reliance
upon the report of such firm, given upon the authority of such firm as experts
in accounting and auditing. A representative of Coopers & Lybrand L.L.P. will be
present at the Fountain Stockholders Meeting and will have an opportunity to
make statements if he so desires and will be available to respond to appropriate
questions.
The consolidated financial statements of CanArgo for the six month
period ended December 31, 1997 included in this Joint Proxy Statement/Prospectus
have been audited by Ernst & Young, Chartered Accountants, as set forth in their
report appearing herein, and have been so included in reliance upon the report
of such firm, given upon the authority of such firm as experts in accounting and
auditing. A representative of Ernst & Young, Chartered Accountants will be
present at the CanArgo Shareholders Meeting and will have an opportunity to make
statements if he so desires and will be available to respond to appropriate
questions.
The financial statements of NOC for the period ended December 31, 1996,
included in this Joint Proxy Statement/Prospectus have been audited by Ernst &
Young, Chartered Accountants, as set forth in their report appearing herein, and
have been so included in reliance upon the report of such firm, given upon the
authority of such firm as experts in accounting and auditing.
The AMH Report was prepared by AMH, a firm of independent petroleum
consultants, and information from such evaluation have been included herein in
reliance upon the evaluation, given upon the authority of such firm as experts
in the evaluation of oil and gas reserves. The AMH Report will be available for
inspection at the corporate head office of CanArgo in Calgary, Alberta, and at
the offices of Lang Michener at Suite 2500, 181 Bay Street, Toronto, Ontario,
during regular business hours until the date of the CanArgo Shareholders
Meeting.
LEGAL MATTERS
The validity of the shares of Fountain Common Stock to be issued in
connection with the Transaction and certain of the United States federal tax
consequences to Fountain stockholders and CanArgo shareholders will be
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passed upon by Gibson, Dunn & Crutcher LLP. See "TAX CONSIDERATIONS -- United
States Federal Tax Considerations."
Certain of the Canadian tax consequences to CanArgo shareholders will be
passed upon by Lang Michener. See "TAX CONSIDERATIONS -- Canadian Federal Income
Tax Considerations to CanArgo Shareholders," "-- Canadian Federal Income Tax
Considerations to Holders of CanArgo Warrants" and "-- Shareholders Not Resident
in Canada."
FUTURE STOCKHOLDER PROPOSALS
Fountain expects that it will hold its next annual meeting of
stockholders in approximately the month of June 1999. According to the SEC's
rules, any stockholder who intends to submit a proposal for inclusion in the
proxy materials for such 1999 annual meeting must submit such proposal to
Fountain a reasonable time before the solicitation for such annual meeting is
made, which is generally considered to be not less than 120 calendar days in
advance of the expected release date of the proxy solicitation materials. If the
next annual meeting is held in June 1999, Fountain expects that the release of
the proxy solicitation materials will occur in the month of April 1999. Fountain
will advise its stockholders by press release or other appropriate public
communication when it has determined the date of its next annual meeting of
stockholders.
INCORPORATIONS BY REFERENCE
The following documents are incorporated herein by this reference:
(i) Fountain's Annual Report on Form 10-K for the year ended
December 31, 1997, as filed with the SEC;
(ii) Fountain's Annual Report on Form 10-K for the transition period
ended December 31, 1996, as filed with the SEC;
(iii) Fountain's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1997, June 30, 1997, and September 30,
1997, as filed with the SEC; and
(iv) The description of Fountain Common Stock already registered
under Section 12 of the Exchange Act which is contained in a
registration statement on Form 8-B, as filed with the SEC on
February 14, 1995.
All documents subsequently filed with the SEC by Fountain pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering shall be deemed to be incorporated herein by this reference.
ADDITIONAL INFORMATION
All information in this Joint Proxy Statement/Prospectus relating to
Fountain has been supplied by Fountain, and all information relating to CanArgo
has been supplied by CanArgo.
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy Statement/Prospectus and, if
given or made, such information or representation should not be relied upon as
having been authorized. This Joint Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, any
securities, or the solicitation of a proxy, by any person in any jurisdiction in
which such an offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such an offer or solicitation of an offer or proxy
solicitation. Neither delivery of this Joint Proxy Statement/Prospectus nor any
distribution of the securities referred to in this Joint Proxy
Statement/Prospectus shall, under any circumstances, create an implication that
there has been no change in the information set forth herein since the date of
this Joint Proxy Statement/Prospectus.
Fountain is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
SEC. The reports and other information filed by Fountain with the SEC can be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048 and at Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of
140
<PAGE> 151
such material also can be obtained from the Public Reference Section of the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such information may also be accessed electronically by means of the
SEC's internet address: http:\\www.sec.gov.
Any person, including any beneficial owner, to whom this Joint Proxy
Statement/Prospectus is delivered may receive, without charge, a copy of any and
all documents incorporated herein by reference (other than exhibits thereto
which are not specifically incorporated herein) but not delivered herewith by
submitting a written or oral request to, in the case of documents related to
Fountain, Susan E. Palmer, Secretary, Fountain Oil Incorporated, 1400 Broadfield
Boulevard, Suite 100, Houston, Texas, U.S.A. 77084, (281) 492-6992, and, in the
case of documents related to CanArgo, Maria Rees, Controller, CanArgo Energy
Inc., 1580 Guinness House, 727 - 7th Avenue S.W., Calgary, Alberta, Canada, T2P
0Z5, (403) 777-1574.
141
<PAGE> 152
APPROVAL OF PROXY STATEMENT BY CANARGO BOARD OF DIRECTORS
The contents of this Joint Management Information Circular and Proxy
Statement/Prospectus and the sending thereof to the shareholders of CanArgo have
been approved by the CanArgo Board of Directors.
By Order of the CanArgo Board of Directors
David Robson
President and Chief Executive Officer
____________, 1998
142
<PAGE> 153
FOUNTAIN OIL INCORPORATED
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
________________________, 1998
The undersigned hereby constitutes and appoints ROBERT A. HALPIN and
NILS N. TRULSVIK, and each of them, the attorneys and proxies of the undersigned
with full power of substitution to appear and to vote all of the shares of
Common Stock of Fountain Oil Incorporated held of record by the undersigned on
_________________, 1998 at the Special Meeting of Stockholders to be held on
___________________, 1998, or any adjournment or postponement thereof, as
designated below:
(1) To approve the issuance of Special Voting Stock and Common Stock
pursuant to the terms of a Combination Agreement with CanArgo
Energy Inc.
[ ] For [ ] Against [ ] Abstain
(2) To approve an amendment to the Certificate of Incorporation to
change Fountain's name to "CanArgo Energy Corporation."
[ ] For [ ] Against [ ] Abstain
(3) To approve an amendment to the Certificate of Incorporation to
effect a 1-for-4 reverse stock split of the outstanding Common
Stock.
[ ] For [ ] Against [ ] Abstain
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FOUNTAIN
OIL INCORPORATED. IF NO VOTE IS INDICATED, THIS PROXY WILL BE VOTED "FOR" EACH
OF THE PROPOSALS.
YOU ARE URGED TO DATE, SIGN AND RETURN PROMPTLY THIS PROXY IN THE
ENVELOPE PROVIDED. IT IS IMPORTANT FOR YOU TO BE REPRESENTED AT THE MEETING. THE
EXECUTION OF YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ARE
PRESENT AT THE MEETING.
Dated: ____________________, 1998
----------------------------------
Signature(s)
IMPORTANT: please sign exactly as your name or names appear on this proxy, and
when signing as an attorney, executor, administrator, trustee or guardian, give
your full title as such. If the signatory is a corporation, sign the full
corporate name by duly authorized officer, or if a partnership, sign in
partnership name by authorized person.
<PAGE> 154
CANARGO ENERGY INC.
1580 GUINNESS HOUSE
727-7TH AVENUE S.W.
CALGARY, ALBERTA
T2P 0Z5
This proxy is solicited by the management of CANARGO ENERGY INC. (the
"Company") for the Annual and Special Meeting of its shareholders (the
"Meeting") to be held on _________________, 1998.
The undersigned hereby appoints David Robson, Chairman of the Company, or
failing him Michael Binnion, Chief Financial Officer of the Company, or instead
of either of the foregoing, (insert name) ____________________, as nominee of
the undersigned, with full power of substitution, to attend and vote on behalf
of the undersigned at the Meeting to be held at ____________________, Calgary,
Alberta, on ____________________, 1998 at 11:00 a.m., local time, and at any
adjournments thereof, and directs the nominee to vote or abstain from voting the
shares of the undersigned in the manner indicated below:
1. CONTINUANCE RESOLUTION
Vote FOR [ ] AGAINST [ ] the special resolution, a copy of which is
attached as Annex A to the Joint Proxy Statement/Prospectus (the
"Proxy Statement") for the Meeting, authorizing the Company to
continue under the Business Corporations Act (Ontario) (the "OBCA").
2. ARRANGEMENT RESOLUTION
Vote FOR [ ] AGAINST [ ] the special resolution, a copy of which is
attached as Annex B to the Proxy Statement, approving the entering
into by the Company of an arrangement agreement with Fountain Oil
Incorporated and the arrangement under Section 182 of the OBCA
described therein.
3. ELECTION OF DIRECTORS
Vote FOR [ ] WITHHOLD [ ] the resolution of the four Directors named
in the accompanying Proxy Statement.
4 AUDITOR
Vote FOR [ ] WITHHOLD [ ] the resolution to appoint Ernst & Young,
Chartered Accountants, as auditor of the Company at a remuneration
to be fixed by the board of directors.
Upon any permitted amendment to or variation of any matter
identified in the Notice of Meeting.
Upon any other matter that properly comes before the Meeting.
THE UNDERSIGNED HEREBY REVOKES ANY PRIOR PROXY OR PROXIES.
DATED: , 1998
------------------------------------
-------------------------------------------------------------
Signature of Shareholder
-------------------------------------------------------------
(Please print name here)
A PROXY WILL NOT BE VALID UNLESS THE COMPLETED, SIGNED AND
DATED FORM OF PROXY IS DELIVERED TO THE OFFICE OF MONTREAL
TRUST COMPANY OF CANADA BY MAIL OR BY HAND AT SUITE 710,
530-8TH AVENUE S.W., CALGARY, ALBERTA, T2P 358 NOT LESS THAN
48 HOURS (EXCLUDING SATURDAYS, SUNDAYS AND HOLIDAYS) BEFORE
THE MEETING OR THE THE ADJOURNMENT THEREOF AT WHICH THE PROXY
IS TO BE USED.
<PAGE> 155
Any one of the joint holders of a share may sign a form of
proxy in respect of the share but, if more than one of them is
present at the meeting or represented by a proxyholder, that
one of them whose name appears first in the register of
members in respect of the share, or that one's proxyholder,
will alone be entitled to vote in respect thereof. Where the
form of proxy is signed by a corporation, a copy of a
resolution of its directors or other governing body naming a
person as its representative must accompany the form of proxy.
Such representative, subject to any restrictions contained in
the resolution, shall be entitled to exercise the same powers
on behalf of the corporation as the corporation could exercise
if it were an individual member. If the corporation is a
subsidiary of the Company its shares may not be voted and its
proxyholder or representative or the proxyholder of the
representative may not be counted to make a quorum.
A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON, WHO NEED NOT
BE A SHAREHOLDER, TO ATTEND AND ACT FOR THE SHAREHOLDER AND ON
THE SHAREHOLDER'S BEHALF AT THE MEETING OTHER THAN EITHER OF
THE NOMINEES DESIGNATED IN THIS FORM OF PROXY, AND MAY DO SO
BY INSERTING THE NAME OF THAT OTHER PERSON IN THE BLANK SPACE
PROVIDED FOR THAT PURPOSE IN THE FORM OF PROXY OR BY
COMPLETING ANOTHER SUITABLE FORM OF PROXY.
The shares represented by the proxy will be voted for or
against or withheld from voting in accordance with the
instructions of the shareholder on any ballot, and where a
choice with respect to a matter to be acted on is specified
the shares will be voted on a ballot in accordance with that
specification. This proxy confers discretionary authority with
respect to matters, other than the election of directors and
appointment of audit, identified or referred to in the
accompanying Notice of Meeting for which no instruction is
given, and with respect to other matters that may properly
come before the Meeting. In respect of a matter so identified
or referred to for which no instruction is given, the nominees
named in this proxy will vote shares represented thereby for
the approval of such matter.
2
<PAGE> 156
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
FOUNTAIN OIL INCORPORATED:
Consolidated Balance Sheet as of December 31, 1997, December 31,
1996 and August 31, 1996 ...................................................... F-2
Consolidated Statement of Operations for the years ended December 31,
1997 and August 31, 1996 and 1995 ............................................. F-3
Consolidated Statement of Operations for the four months ended
December 31, 1996 and 1995 .................................................... F-4
Consolidated Statement of Stockholders' Equity for the Period
August 31, 1994 through December 31, 1997 ..................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1997 and August 31, 1996 and 1995 ............................................. F-7
Consolidated Statement of Cash Flows for the four months ended
December 31, 1996 and 1995 .................................................... F-8
Notes to Consolidated Financial Statements ......................................... F-9
Supplemental Financial Information: Supplemental Oil and Gas
Disclosures - Unaudited ....................................................... F-32
CANARGO ENERGY INC.:
Consolidated Balance Sheet as at December 31, 1997 ................................. F-38
Consolidated Statement of Operations and Deficit for the six months
ended December 31, 1997 ....................................................... F-39
Consolidated Statement of Cash Flows for the six months ended
December 31, 1997 ............................................................. F-40
Notes to Consolidated Financial Statements ......................................... F-41
Supplemental Disclosures About Oil and Gas Production Activities
(Unaudited) ................................................................... F-49
NINOTSMINDA OIL COMPANY LIMITED:
Balance Sheet as of June 30, 1997 and December 31, 1996 ............................ F-55
Statement of Operations and Retained Earnings for the six months
ended June 30, 1997 and the period October 24, 1995 to
December 31, 1996 ............................................................. F-56
Statement of Cash Flows for the six months ended June 30, 1997
and the period October 24, 1995 to December 31, 1996 .......................... F-57
Notes to Financial Statements ...................................................... F-58
</TABLE>
F-i
<PAGE> 157
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Fountain Oil Incorporated:
We have audited the accompanying consolidated balance sheets of Fountain
Oil Incorporated and subsidiaries (the "Company") as of December 31, 1997 and
1996 and August 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997 and
August 31, 1996 and 1995 and the four month period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1997 and 1996 and August 31, 1996 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and August 31, 1996 and 1995 and the four month period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Notes 3 and 6 to the consolidated financial statements, the Company
will require substantial capital in order to finance the development of its oil
and gas interests. In addition, the Company and its oil and gas ventures must
produce and market oil and gas in sufficient quantities and at sufficient prices
to provide positive cash flow to the Company. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 6 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 9, 1998
F-1
<PAGE> 158
FOUNTAIN OIL INCORPORATED
CONSOLIDATED BALANCE SHEET
As of December 31, 1997, December 31, 1996, and August 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, December 31, August 31,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 14,164,177 $ 31,424,064 $ 17,329,237
Accounts receivable - affiliated entities -- 259,040 7,210
Restricted cash 9,700,000 -- --
Other current assets 761,904 622,411 649,107
------------ ------------ ------------
Total current assets 24,626,081 32,305,515 17,985,554
Restricted cash -- 5,400,000 --
Notes receivable -- 190,186 190,186
Property and equipment, net 5,942,273 7,766,479 6,577,565
Oil and gas properties, net, full cost method
(including unevaluated amounts of $324,500,
$257,407 & $257,407, respectively) 1,478,974 259,338 287,788
Investments in and advances to oil and gas
ventures - net 5,386,707 8,567,563 6,876,327
Other assets -- 885,980 171,121
------------ ------------ ------------
TOTAL ASSETS 37,434,035 55,375,061 32,088,541
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 328,171 $ 799,985 $ 731,532
Accrued liabilities 10,326,608 1,124,425 297,513
Notes payable -- -- 31,156
------------ ------------ ------------
Total current liabilities $ 10,654,779 $ 1,924,410 $ 1,060,201
8% Convertible subordinated debentures -- -- 300,000
Minority interest in subsidiaries -- 205,380 223,350
Commitments and contingencies (Notes 6 and 9) -- -- --
Stockholders' equity:
Preferred stock, par value $0.10 per share,
5,000,000 shares authorized: no shares
issued or outstanding -- -- --
Common Stock, par value $0.10 per share,
50,000,000 shares authorized: 22,447,489,
22,168,489, and 17,376,610 shares issued
and outstanding respectively
2,244,749 2,216,849 1,737,661
Capital in excess of par value 82,040,156 80,851,120 55,985,572
Accumulated deficit (57,505,649) (29,822,698) (27,218,243)
------------ ------------ ------------
Total stockholders' equity $ 26,779,256 $ 53,245,271 $ 30,504,990
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,434,035 $ 55,375,061 $ 32,088,541
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-2
<PAGE> 159
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 1997 and August 31, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues:
Oil and gas sales $ 313,301 $ 26,562 $ --
Other -- 8,615 625,457
------------ ------------ ------------
Total revenues 313,301 35,177 625,457
------------ ------------ ------------
Operating expenses:
Cost of sales -- 31,991 479,224
Lease operating expenses 200,321 10,988 --
Direct project costs 1,753,166 1,267,555 --
General and administrative 3,903,446 3,853,972 4,012,510
Loss from investments in unconsolidated
subsidiaries 3,778,287 13,272 --
Depreciation, depletion and amortization 344,666 77,253 1,156,772
Employee stock compensation -- -- 152,038
Impairment of notes receivable 186,611 -- --
Impairment property and equipment 3,243,997 -- 175,450
Impairment of intangibles and other assets -- -- 1,924,202
Impairment of oil and gas properties 257,407 419,835 608,181
Impairment of oil and gas ventures 15,735,592 -- --
------------ ------------ ------------
Total operating expenses 29,403,493 5,674,866 8,508,377
------------ ------------ ------------
OPERATING LOSS (29,090,192) (5,639,689) (7,882,920)
------------ ------------ ------------
Other (expense) income:
Interest income 1,615,066 332,071 251,276
Interest expense (69,286) (1,016,465) (28,475)
Other (72,714) 12,551 89,108
Loss on disposition of equipment and property (271,205) (182,020) --
------------ ------------ ------------
TOTAL OTHER (EXPENSE) INCOME 1,201,861 (853,863) 311,909
------------ ------------ ------------
Net loss before income tax expense (27,888,331) (6,493,552) (7,571,011)
Income tax expense -- -- (28,600)
------------ ------------ ------------
NET LOSS BEFORE MINORITY INTEREST (27,888,331) (6,493,552) (7,599,611)
Minority interest in loss of consolidated subsidiary 205,380 -- --
NET LOSS $(27,682,951) $ (6,493,552) $ (7,599,611)
------------ ------------ ------------
NET LOSS PER COMMON SHARE - BASIC $ (1.24) $ (.52) $ (.91)
------------ ------------ ------------
NET LOSS PER COMMON SHARE - DILUTED $ (1.24) $ (.52) $ (.91)
------------ ------------ ------------
Weighted average number of common
shares outstanding 22,413,013 12,495,137 8,341,783
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-3
<PAGE> 160
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS - continued
For the Four Month Periods Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Unaudited
Operating Revenues:
Oil and gas sales $ 16,980 $ 6,440
Other income -- 1,908
------------ ------------
TOTAL REVENUES 16,980 8,348
------------ ------------
Operating expenses:
Cost of sales 4,052 4,581
Lease operating expenses 1,550 2,536
Direct project costs 314,100 120,268
General and administrative 1,281,821 1,303,048
Loss from investments in unconsolidated subsidiaries 1,359,246 4,424
Depreciation, depletion and amortization 39,578 43,643
------------ ------------
TOTAL OPERATING EXPENSES 3,000,347 1,478,500
------------ ------------
OPERATING LOSS (2,983,367) (1,470,152)
------------ ------------
Other (expense) income:
Interest income 423,681 54,992
Interest expense (12,744) (3,006)
Other (49,995) (24,016)
------------ ------------
TOTAL OTHER (EXPENSE) INCOME 360,942 27,970
------------ ------------
Net loss before income tax expense (2,622,425) (1,442,182)
Income tax expense -- --
------------ ------------
NET LOSS BEFORE MINORITY INTEREST (2,622,425) (1,442,182)
Minority interest in loss of consolidated subsidiary 17,970 --
------------ ------------
NET LOSS $ (2,604,455) $ (1,442,182)
------------ ------------
NET LOSS PER COMMON SHARE - BASIC $ (.14) $ (.13)
------------ ------------
NET LOSS PER COMMON SHARE - DILUTED $ (.14) $ (.13)
------------ ------------
Weighted average number of common
shares outstanding 18,696,212 10,834,063
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-4
<PAGE> 161
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period August 31, 1994 through December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1994 5,974,310 $ 597,431 $ 16,708,442 $(13,125,080) $ 4,180,793
Sale of common stock,
net of offering expenses
of $1,033,118 3,958,998 395,900 10,900,930 -- 11,296,830
Issuance of common
stock as employee
compensation and
for other obligations 900,755 90,075 1,639,803 -- 1,729,878
Net loss -- -- -- (7,599,611) (7,599,611)
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1995
10,834,063 $ 1,083,406 $ 29,249,175 $(20,724,691) $ 9,607,890
------------ ------------ ------------ ------------ ------------
Sale of common stock,
net of offering expenses
of $1,539,646 5,000,000 500,000 20,460,354 -- 20,960,354
Issuance of common stock for purchase of
interests in oil and
gas ventures 450,000 45,000 2,308,125 -- 2,353,125
Issuance of common stock upon conversion
of debentures 997,324 99,733 3,834,605 -- 3,934,338
Issuance of common stock upon exercise of
warrants and options 95,223 9,522 133,313 -- 142,835
Net loss -- -- -- (6,493,552) (6,493,552)
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1996 17,376,610 $ 1,737,661 $ 55,985,572 $(27,218,243) $ 30,504,990
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-5
<PAGE> 162
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - continued
For the Period August 31, 1994 through December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock upon
conversion of debentures 59,125 5,913 274,481 -- 280,394
Issuance of common stock upon
exercise of warrants and options 4,732,754 473,275 24,591,067 -- 25,064,342
Net loss -- -- -- (2,604,455) (2,604,455)
------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1996 22,168,489 $ 2,216,849 $ 80,851,120 $(29,822,698) $ 53,245,271
------------ ------------ ------------ ------------ ------------
Issuance of common stock for
purchase of interest in oil and gas
venture 175,000 17,500 1,043,436 -- 1,060,936
Issuance of common stock upon
exercise of warrants and options 104,000 10,400 145,600 -- 156,000
Net loss -- -- -- (27,682,951) (27,682,951)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 22,447,489 $ 2,244,749 $ 82,040,156 $(57,505,649) $ 26,779,256
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-6
<PAGE> 163
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1997 and
August 31, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss $(27,682,951) $ (6,493,552) $ (7,599,611)
Depreciation and amortization 344,666 77,253 1,156,772
Gain on settlement of liabilities -- -- (58,230)
Loss on disposition of equipment and property 271,205 182,020 --
Impairment of notes receivable 186,611 -- --
Impairment of property and equipment 3,243,997 -- 175,450
Impairment of intangibles -- -- 1,924,202
Impairment of oil and gas properties 257,407 419,835 608,181
Impairment of oil and gas ventures 15,735,592 -- --
Issuance of common stock for services and expenses -- -- 1,482,664
Amortization of debt issuance costs and discount -- 866,666 --
Loss in investments in unconsolidated subsidiaries 3,778,287 13,272 --
Minority interest in loss of unconsolidated subsidiary (205,380) -- --
Changes in assets and liabilities:
Accounts receivable 259,040 53,905 65,977
Other assets (139,493) (211,222) (325,289)
Accounts payable (471,814) 62,638 394,784
Accrued liabilities 246,920 (116,766) 217,022
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (4,175,913) (5,145,951) (1,958,078)
------------ ------------ ------------
Investing activities:
Restricted cash (4,300,000) -- --
Investments in oil and gas properties (1,318,492) (155,938) (2,458,596)
Investments in and advances to oil and gas ventures (6,280,613) (2,644,837) --
Capital expenditures (1,573,507) (3,728,770) (404,822)
Proceeds from disposition of assets 232,638 104,000 --
Issuance of notes receivable -- (135,186) (2,980,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (13,239,974) (6,560,731) (5,843,418)
------------ ------------ ------------
Financing activities:
Proceeds from issuance of debentures, net of expenses -- 3,346,723 --
Proceeds from sales of common stock, net of expenses -- 21,103,189 11,296,830
Proceeds from exercise of options 156,000 -- --
Proceeds from issuance of short-term borrowings -- 4,848,476 47,813
Principal payments on short-term borrowings -- (5,054,114) (271,563)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 156,000 24,244,274 11,073,080
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,259,887) 12,537,592 3,271,584
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 31,424,064 4,791,645 1,520,061
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,164,177 $ 17,329,237 $ 4,791,645
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-7
<PAGE> 164
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS - continued
For the Four Month Periods Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Unaudited
Operating activities:
Net loss $ (2,604,455) $ (1,442,182)
Depreciation and amortization 39,578 43,643
Amortization of debt issuance costs and discount 1,375 --
Loss in investments in unconsolidated subsidiaries 1,359,246 4,424
Minority interest in loss of unconsolidated subsidiary (17,970) --
Changes in assets and liabilities:
Accounts receivable (251,828) (114,236)
Other assets 26,687 88,344
Accounts payable 68,453 (305,580)
Accrued liabilities 149,069 (242,037)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,229,845) (1,967,624)
------------ ------------
Investing activities:
Restricted cash (5,400,000) --
Investments in and advances to oil and gas ventures (3,108,472) (1,369,767)
Capital expenditures (1,200,042) (746,810)
Proceeds from disposition of assets -- (73,900)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (9,708,514) (2,190,477)
------------ ------------
Financing activities:
Proceeds from exercise of warrants and options 25,064,342 --
Proceeds from issuance of short-term borrowings -- 122,153
Principal payments on short-term borrowings (31,156) (25,108)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,033,186 97,045
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,094,827 (4,061,056)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,329,237 4,791,645
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 31,424,064 $ 730,589
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-8
<PAGE> 165
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS - The principal activities of Fountain Oil
Incorporated and its consolidated subsidiaries (collectively the
"Company") have involved the acquisition of interests in and development
of oil and gas fields with a productive history that indicate the
potential for increased production through rehabilitation and
utilization of modern production techniques and enhanced oil recovery
processes. The Company has typically acquired its interests in oil and
gas properties through interests in joint ventures, partially owned
corporate and other entities, and joint operating arrangements. While
the Company has acquired interests representing 50% or less of the
equity in various oil and gas projects, it has generally sought
operational responsibility for the substantial oil and gas projects in
which it has interests. Accordingly, certain of the activities in which
the Company has interests are conducted through unconsolidated entities.
The Company has acquired less than majority interests in entities
developing or seeking to develop oil and gas properties in Eastern
Europe including the Russian Federation. These entities are accounted
for as unconsolidated subsidiaries.
On February 2, 1998, the Company entered into a Combination
Agreement with CanArgo Energy Inc. ("CanArgo") pursuant to which CanArgo
would become a subsidiary of the Company and each of the outstanding
CanArgo Common Shares would be converted into the right to receive 1.6
shares of the Company's Common Stock. Consummation of the business
combination is subject to satisfaction of a number of conditions,
including approvals by the stockholders of the Company and the
shareholders of CanArgo. It is expected that following the business
combination the former shareholders of CanArgo would have the right to
receive approximately 47% of the Company's Common Stock. The business
combination could result in a change in the Company's ownership as
defined in Section 382 of the Internal Revenue Code. See Note 13, Income
Taxes, of Notes to Consolidated Financial Statements. Upon consummation
of the business combination, current management of CanArgo will hold a
majority of the Company's management positions.
The Company elected to change its fiscal year from August 31 to
December 31 effective December 31, 1996 in order to conform to the
calendar year accounting which is required for most of the significant
oil and gas projects in which the Company participates. Accordingly, the
accompanying consolidated financial statements include information for
the four-month transition period ended December 31, 1996. The comparable
statements of operations and cash flows for the four month period ended
December 31, 1995 and all related footnote disclosures are unaudited.
Such unaudited information includes all adjustments necessary in the
opinion of the management of the Company for a fair statement of the
results of operations and cash flows. Results for the four month period
may not be indicative of results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The financial statements and notes thereto are
prepared in accordance with U.S. generally accepted accounting
principles. All amounts are in U.S. dollars.
CONSOLIDATION - The consolidated financial statements include the
accounts of Fountain Oil Incorporated and its majority owned
subsidiaries. The majority owned subsidiaries at December 31, 1997 are
Electromagnetic Oil Recovery International Inc., Focan Ltd., Fountain
Oil Adygea Incorporated, Fountain Oil Boryslaw Incorporated, Fountain
Oil Boryslaw Ltd., Fountain Oil Norway AS, Fountain Oil Production
Incorporated, Fountain Oil Services Ltd., Fountain Oil Ukraine Ltd.,
Fountain Oil U.S. Inc., Gastron International Limited, Uentech
Corporation and UK-RAN Oil Corporation. All significant intercompany
transactions and accounts have been eliminated. The Company's
investments in certain oil and gas ventures are proportionately
consolidated. Investments in less than majority-owned corporations and
corporate-like entities are accounted for using the equity method of
accounting.
F-9
<PAGE> 166
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUASI-REORGANIZATION - The Board of Directors of the Company approved a
quasi-reorganization effective October 31, 1988. As of the date of the
quasi-reorganization, the accumulated deficit of $39,952,292 was
eliminated against capital in excess of par value.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION - Certain items in the consolidated financial
statements have been reclassified to conform to the current year
presentation. There was no effect on net loss as a result of these
reclassifications.
CASH AND CASH EQUIVALENTS - The Company considers unrestricted
short-term, highly liquid investments with maturities of three months or
less at the time of purchase to be cash equivalents.
INVESTMENTS - The Company's investments in cash equivalents are
classified as held to maturity and are carried at amortized cost which
approximates fair value due to their short-term nature.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost unless
the carrying amount is viewed as not recoverable in which case the
carrying value of the assets is reduced to the estimated recoverable
amount. See "Impairment of Long-Lived Assets" below. Expenditures for
major renewals and betterments, which extend the original estimated
economic useful lives of applicable assets, are capitalized.
Expenditures for normal repairs and maintenance are charged to expense
as incurred. The cost and related accumulated depreciation of assets
sold or retired are removed from the accounts and any gain or loss
thereon is reflected in operations. Depreciation of property and
equipment is computed using the straight-line method over the estimated
useful lives of the assets ranging from three to ten years.
OIL AND GAS PROPERTIES - The Company and the unconsolidated entities for
which it accounts using the equity method account for oil and gas
properties and interests under the full cost method. Under this
accounting method, costs, including a portion of internal costs
associated with property acquisition and exploration for and development
of oil and gas reserves, are capitalized within cost centers established
on a country-by-country basis. Capitalized costs within a cost center,
as well as the estimated future expenditures to develop proved reserves
and estimated net costs of dismantlement and abandonment, are amortized
using the unit-of-production method based on estimated proved oil and
gas reserves. All costs relating to production activities are charged to
expense as incurred.
Capitalized oil and gas property costs, less accumulated
depreciation, depletion and amortization and related deferred income
taxes, are limited to an amount (the ceiling limitation) equal to (a)
the present value (discounted at 10%) of estimated future net revenues
from the projected production of proved oil and gas reserves, calculated
at prices in effect as of the balance sheet date (with consideration of
price changes only to the extent provided by fixed and determinable
contractual arrangements), plus (b) the lower of cost or estimated fair
value of unproved and unevaluated properties, less (c) income tax
effects related to differences in the book and tax basis of the oil and
gas properties.
REVENUE RECOGNITION - The Company recognizes revenues when goods have
been delivered, when services have been performed, or when hydrocarbons
have been produced and delivered.
FOREIGN CURRENCY TRANSLATION - The U.S. dollar is the functional
currency for all of the Company's operations. Accordingly, all monetary
assets and liabilities denominated in foreign currency are translated
into U.S. dollars at the rate of exchange in effect at the balance sheet
date and the resulting unrealized translation gains or losses are
reflected in operations. Non-monetary assets are translated at
F-10
<PAGE> 167
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
historical exchange rates. Revenue and expense items (excluding
depreciation and amortization which are translated at the same rates as
the related assets) are translated at the average rate of exchange for
the year. Foreign currency translation amounts recorded in operations
for years ended December 31, 1997 and August 31, 1996 and the four
months ended December 31, 1996 and 1995 were not material.
INCOME TAXES - The Company follows the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax bases of assets
and liabilities using enacted rates in effect for the years in which the
differences are expected to reverse. Valuation allowances are
established, when appropriate, to reduce deferred tax assets to the
amount expected to be realized.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews all of its
long-lived assets, except for its oil and gas assets, for impairment in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121 Accounting for the Impairment of Long-Lived Assets and Assets to
be Disposed Of. Prior to the adoption of SFAS No. 121, all long-lived
assets including intangible assets, other than oil and gas properties,
were reviewed for impairment by comparing the carrying value of such
assets to future expected net cash flows undiscounted. The Company
evaluates its oil and gas properties and its carrying value of
investments in unconsolidated entities conducting oil and gas operations
in accordance with the full cost ceiling limitation.
STOCK-BASED COMPENSATION PLANS - The Company has adopted only the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, and has elected to continue to record stock-based
compensation expense using the intrinsic-value approach prescribed by
Accounting Principles Board ("APB") Opinion 25. Accordingly, the Company
computes compensation cost for each employee stock option granted as the
amount by which the quoted market price of the Company's Common Stock on
the date of grant exceeds the amount the employee must pay to acquire
the stock. The amount of compensation costs, if any, is charged to
operations over the vesting period.
RECENTLY ISSUED PRONOUNCEMENTS - In 1997, the Financial Accounting
Standards Board issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, both of which have been adopted in the fourth quarter of
1997 without having any material effect on the Company's financial
statements.
3. GOING CONCERN ASSUMPTION
The Company has incurred recurring operating losses, and its
current operations are not generating positive cash flows. The ability
of the Company to continue as a going concern and to pursue its
principal activities of acquiring interest in and developing oil and gas
fields is highly dependent upon generating funds from external sources
and, ultimately, achieving sufficient positive cash flows from operating
activities.
Without sufficient cash from external sources, the Company's
ability to finance its ongoing operations and continue as a going
concern is doubtful. However, the Company's management believes that it
may be able to access external sources of funds through a merger or
other business combination with another company followed by equity or
debt financing by the surviving entity or by the farm out of interests
in certain oil and gas projects. See Note 6, Oil and Gas Properties and
Investments, of Notes to Consolidated Financial Statements.
The consolidated financial statements do not give effect to any
additional impairment of its investments in oil and gas ventures or
other adjustments which would be necessary should the Company be unable
to obtain sufficient funds from external sources or continue as a going
concern.
F-11
<PAGE> 168
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRICTED CASH
Through December 31, 1997 and 1996, the Company has pledged an
aggregate of $9,700,000 and $5,400,000, respectively, to collateralize
bank letters of credit. Letters of credit supported by the restricted
cash have been used primarily to assure repayment of borrowings under a
line of credit established by Kashtan Petroleum Ltd. ("Kashtan"), which
operates the Lelyaki Field project, under which $8,150,000 and
$1,400,000 was outstanding at December 31, 1997 and 1996, respectively.
Kashtan has utilized such borrowings to pay Lelyaki Field project
operating costs, including repayment of costs advanced by the Company on
behalf of Kashtan. If beneficiaries of such collateralized bank letters
of credit were to draw on the letters of credit as a result of
non-performance by ventures of their obligations to the beneficiaries or
otherwise, the banks would, in turn, draw against the restricted cash to
reimburse themselves for amounts paid on the letters of credit. Based on
its analysis of initial Lelyaki Field development efforts, the Company
has concluded that the Lelyaki Field will not support a successful
commercial development. As a result, the Company has written off any
remaining investments relating to the Lelyaki Field project and has
accrued a liability of $8,280,000 with respect to Kashtan indebtedness
supported by the Company's restricted cash deposits. The liability is
included within accrued liabilities on the Company's balance sheet as of
December 31, 1997. See Note 6, Oil and Gas Properties and Investments,
of Notes to Consolidated Financial Statements.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment and the related accumulated depreciation
at December 31, 1997 included the following:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
EEOR equipment $ 562,953 $ (284,909) $ -- $ 278,044
Oil and gas related equipment $ 8,348,309 $ -- $ (2,843,997) $ 5,504,312
Office furniture, fixtures and
equipment and other $ 1,014,263 $ (454,346) $ (400,000) $ 159,917
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET $ 9,925,525 $ (739,255) $ (3,243,997) $ 5,942,273
------------ ------------ ------------ ------------
</TABLE>
Property and equipment and the related accumulated depreciation
at December 31, 1996 included the following:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
EEOR equipment $ 504,085 $ (273,673) -- $ 230,412
EEOR construction-in-progress $ 60,764 -- -- 60,764
Oil and gas related equipment $ 6,956,709 $ -- -- $ 6,956,709
Office furniture, fixtures and
equipment and other $ 850,031 $ (331,437) -- $ 518,594
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET $ 8,371,589 $ (605,110) -- $ 7,766,479
------------ ------------ ------------ ------------
</TABLE>
Property and equipment and the related accumulated depreciation
at August 31, 1996 included the following:
F-12
<PAGE> 169
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
EEOR equipment $ 504,085 $ (268,011) -- $ 236,074
EEOR construction-in-progress 60,764 -- -- 60,764
Oil and gas related equipment 5,818,871 -- -- 5,818,871
Office furniture, fixtures and
equipment and other 759,448 (297,592) -- 461,856
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET $ 7,143,168 $ (565,603) -- $ 6,577,565
------------ ------------ ------------ ------------
</TABLE>
Oil and gas related equipment includes new or refurbished
drilling rigs and related equipment including lease and well equipment
which the Company originally planned to transfer to Intergas JSC
("Intergas"), an entity in which the Company holds a 37% interest, to
use in the Maykop Field, Republic of Adygea, Russian Federation. Such
rigs and equipment have not yet been placed in service and therefore are
not being depreciated. Because it has experienced extended delays in
resolving operating arrangements and other Intergas matters including
corporate formalities, the Company has concluded that under present
circumstances it cannot pursue commercial activities and develop the
Maykop Field through Intergas. As a result, the Company has written off
its investment in and advances to Intergas at December 31, 1997. See
Note 6, Oil and Gas Properties and Investments, of Notes to Consolidated
Financial Statements. Since the rigs and equipment are now expected to
be employed for application other than those for which they were
specifically intended, the Company recorded an impairment of $2,844,000
at December 31, 1997, which represents the difference between the book
value of the rigs and related equipment and their estimated fair value.
As a result of the Company's decision to close down or
significantly reduce its various corporate offices, the Company recorded
an impairment of $400,000 to reduce the carrying value of furniture,
fixtures and equipment to their estimated fair value.
6. OIL AND GAS PROPERTIES AND INVESTMENTS
Oil and Gas Properties
The Company has acquired interests in oil and gas properties
through joint ventures and other joint operating arrangements. A summary
of the Company's oil and gas properties as of December 31, 1997 and 1996
and August 31, 1996 are set out below:
<TABLE>
<CAPTION>
OIL AND GAS PROPERTIES 12/31/97 12/31/96 8/31/96
- --------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
United States and Canada
Proved properties $ 2,650,327 $ 1,029,947 $ 1,058,397
Unproved properties 324,500 257,407 257,407
Less: accumulated depreciation, depletion,
amortization and impairment (1,495,853) (1,028,016) (1,028,016)
----------- ----------- -----------
TOTAL OIL AND GAS PROPERTIES, NET $ 1,478,974 $ 259,338 $ 287,788
----------- ----------- -----------
</TABLE>
During the fiscal years ended December 31, 1997 and August 31,
1996, the Company recognized impairments of $257,407 and $419,835
respectively, on its oil and gas properties as a result of applying the
full cost ceiling limitation. The impairments related to previously
unproved properties.
During the first quarter of 1997, the Company purchased a 60%
interest in a heavy oil property in the Sylvan Lake area in Alberta,
Canada for approximately $1,009,000. One new well was successfully
drilled during the 1997 third quarter, and was prepared for installation
of the Company's electrically enhanced oil recovery ("EEOR") equipment.
The Sylvan Lake project includes a total of four producing wells.
F-13
<PAGE> 170
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unproved properties and associated costs not currently being
amortized and included in oil and gas properties in Canada at December
31, 1997 were $324,500, substantially all of which relates to the Sylvan
Lake Field. Such properties are expected to be evaluated over the next
24 months, and if no proved reserves are added, those properties could
result in additional impairment.
Investments
The Company has acquired interests in oil and gas ventures
through less than majority interests in corporate and corporate-like
entities. A summary of the Company's oil and gas ventures as of December
31, 1997 and 1996 and August 31, 1996 is set out below:
<TABLE>
<CAPTION>
INVESTMENTS IN AND ADVANCES TO OIL AND GAS VENTURES 12/31/97 12/31/96 8/31/96
- ------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Ukraine - Lelyaki Field, Pryluki Region
through an effective 40.5% ownership of Kashtan
Petroleum Ltd. $ 2,435,725 $ 2,398,566 $ 2,163,564
Adygea, Russian Federation - Maykop Field
through 37% ownership in Intergas JSC 6,710,874 4,439,213 2,780,263
Canada - Inverness Unit
through 50% ownership in Focan Ltd. -- 106,646 106,646
Albania - Gorisht-Kocul Field
through 50% ownership of the joint venture 2,202,922 1,326,581 517,885
Ukraine - Stynawske Field, Boryslaw
through 45% ownership of Boryslaw Oil
Company 5,800,407 1,655,803 1,321,241
- ------------------------------------------------------------- ----------------------------------------------------------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $ 17,149,928 $ 9,926,809 $ 6,889,599
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY IN PROFIT (LOSS) OF OIL AND GAS VENTURES 12/31/97 12/31/96 8/31/96
- ------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Ukraine - Lelyaki Field, Pryluki Region $ (2,435,725) $ (355,684) $ --
Adygea, Russian Federation - Maykop Field (1,452,510) (601,366) --
Canada - Inverness Unit -- (2,407) (13,272)
Albania - Gorisht-Kocul Field (833,191) (399,789) --
Ukraine - Stynawske Field, Boryslaw (413,700) -- --
------------ ------------ ------------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS VENTURES $ (5,135,126) $ (1,359,246) $ (13,272)
------------ ------------ ------------
Impairment - Maykop Field $ (5,258,364) $ -- $ --
Impairment - Gorisht-Kocul Field (1,369,731) -- --
------------ ------------ ------------
TOTAL IMPAIRMENT $ (6,628,095) $ -- $ --
------------ ------------ ------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS VENTURES,
NET OF EQUITY LOSS AND IMPAIRMENT $ 5,386,707 $ 8,567,563 $ 6,876,327
------------ ------------ ------------
</TABLE>
During the fourth quarter of 1997, the Company recognized
impairment losses totalling $15,736,000 related to the Lelyaki Field,
Maykop Field and Gorisht-Kocul Field projects. In addition, aggregate
losses of $3,365,000 were recorded in 1997 reflecting the Company's
equity in the losses of Kashtan, Intergas and the Gorisht-Kocul joint
venture.
F-14
<PAGE> 171
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on its analysis of initial Lelyaki Field development
efforts completed in the fourth quarter of 1997, the Company concluded
that the Lelyaki Field will not support a successful commercial
development. As a result, the Company recorded an impairment charge
totalling $9,108,000. The impairment charge consisted of $137,000 which
represented the carrying value of an investment related to Kashtan,
$8,280,000 of debt and accrued interest of Kashtan on which Kashtan has
defaulted or is expected to default and which was effectively guaranteed
by the Company through restricted cash deposits, and $691,000 of
estimated liabilities for severance and related costs associated with
closing down Kashtan's operations. Such costs are expected to be paid
during 1998. In addition, the Company recognized a loss in 1997 of
$2,080,000 reflecting its equity in the loss of Kashtan.
Because it has experienced extended delays in resolving
operating arrangements and other Intergas matters including completion
of corporate formalities, the Company has concluded that under present
circumstances it cannot pursue commercial activities and develop the
Maykop Field through Intergas. As a result, the Company during the
fourth quarter of 1997 recorded an impairment for the entire amount of
its investment in and advances to Intergas of $5,258,000. In addition,
the Company recognized a loss in 1997 of $851,000, reflecting its equity
in the loss of Intergas.
In March 1997, the Company declared the political unrest in
Albania to be a force majeure with respect to the Gorisht-Kocul project,
and development activities related thereto have been suspended since the
declaration. In light of the extended period that the force majeure
condition has continued and in the absence of any indication of an
imminent termination of that condition, the Company during the fourth
quarter of 1997 recorded an impairment for the entire amount of its
investment in and advances to the Gorisht-Kocul joint venture of
$1,370,000. The Company also recognized a $433,000 loss in 1997 as its
equity in the loss of that joint venture.
The Company has made advances to Boryslaw Oil Company totalling
$1,508,000 at December 31, 1997, which are included within investments
in and advances to oil and gas ventures. Such advances may be
recoverable only from future revenue of or payments from future
participants in the venture.
Since none of the Company's oil and gas interests outside of
Canada are being amortized, the Company's investments in and advances to
oil and gas ventures are essentially unevaluated properties. At December
31, 1997, there were no material operations or assets (other than
unevaluated properties) of entities being accounted for using the equity
method. Accordingly, no separate financial information has been
presented.
As a result of the events described above relating to Kashtan,
Intergas and the Gorisht-Kocul joint venture, the Company may be subject
to contingent liabilities in the form of claims from those ventures and
other participants therein. Fountain has been advised that Intergas and
another shareholders of Intergas are considering asserting such claims.
Management is unable to estimate the range that such claims, if any,
might total. However, if any claims were determined to be valid, they
could have a material adverse effect on the financial position, results
of operations and cash flows of the Company.
Development of the oil and gas properties and ventures in which
the Company has interests involves multi-year efforts and substantial
cash expenditures. The Company had working capital of $13,971,000 at
December 31, 1997, which it considered inadequate to proceed with full
implementation of its program of developing its principal oil and gas
properties and ventures. Full development of these properties and
ventures would require the availability of substantial funds from
external sources. The Company believes that its ability to access
external financing is dependent upon the successful completion of a
business combination with, or the farm-out of a significant portion of
its interest in Boryslaw Oil Company and possibly other projects to an
entity that can provide or attract such financing. The Company generally
has the principal responsibility for arranging financing for the oil and
gas properties and ventures in which it has an interest. There can be no
assurance, however, that the Company or the entities that are developing
the oil and gas properties and ventures will be able to arrange the
financing necessary to
F-15
<PAGE> 172
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
develop the projects being undertaken or to support the corporate and
other activities of the Company or that such financing as is available
will be on terms that are attractive or acceptable to or are deemed to
be in the best interests of the Company, such entities or their
respective stockholders or participants.
As of December 31, 1997 the Company had remaining net
investments in oil and gas properties and ventures totalling $6,866,000.
Of this amount, $5,387,000 relates to a venture in Eastern Europe for
which development operations have not yet begun. Ultimate realization of
the carrying value of the Company's oil and gas properties and ventures
will require production of oil and gas in sufficient quantities and
marketing such oil and gas at sufficient prices to provide positive cash
flow to the Company, which is dependent upon, among other factors,
achieving significant production at costs that provide acceptable
margins, reasonable levels of taxation from local authorities, and the
ability to market the oil and gas produced at or near world prices. In
addition, the Company must mobilize drilling equipment and personnel to
initiate drilling, completion and production activities. The Company has
plans to mobilize resources and achieve levels of production and profits
sufficient to recover its carrying value. However, if one or more of the
above factors, or other factors, are different than anticipated, these
plans may not be realized, and the Company may not recover its carrying
value. The Company will be entitled to distributions from the various
properties and ventures in accordance with the arrangements governing
the respective properties and ventures.
The consolidated financial statements of the Company do not give
effect to any additional impairment in the value of the Company's
investment in oil and gas properties and ventures or other adjustments
that would be necessary if financing cannot be arranged for the
development of such properties and ventures or if they are unable to
achieve profitable operations. The Company's consolidated financial
statements have been prepared under the assumption of a going concern.
Failure to arrange such financing on reasonable terms or failure of such
properties and ventures to achieve profitability would have a material
adverse effect on the financial position, including realization of
assets, results of operations, cash flows and prospects of the Company
and ultimately its ability to continue as a going concern.
F-16
<PAGE> 173
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997, December 31, 1996 and
August 31, 1996 included the following:
<TABLE>
<CAPTION>
12/31/97 12/31/96 8/31/96
----------- ----------- -----------
<S> <C> <C> <C>
Compensation, including related taxes $ 337,767 $ 225,409 $ 209,283
Professional fees 276,500 104,150 --
Termination costs 405,833 -- --
Effective guarantee of Kashtan obligations 8,280,000 -- --
(Note 6)
Close down costs - Kashtan project 690,622 -- --
(Note 6)
Oilfield related equipment 268,000 677,843 --
Other 67,886 117,023 88,230
----------- ----------- -----------
$10,326,608 $ 1,124,425 $ 297,513
----------- ----------- -----------
</TABLE>
The accrual for termination costs represents the amount of costs
for employees receiving contractually required termination notices
during the fourth quarter of 1997. The costs involved represent salaries
and related taxes and have been reflected as general and administrative
expenses. The accrual includes the termination costs for 11 employees,
who were located in the Company's offices in Calgary and Asker, Norway.
Such costs are expected to be paid during 1998.
8. CONVERTIBLE SUBORDINATED DEBENTURES
During the quarter ended February 29, 1996, the Company
completed an offering of its 8% Convertible Subordinated Debentures (the
"Debentures") due December 31, 1997. The Company issued $3,750,000
principal amount of Debentures at par and received net proceeds of
$3,346,723 after commissions and expenses. The Debentures were
convertible into shares of the Company's Common Stock at a price equal
to 82 1/2% of the average closing price of such shares on the five
trading days preceding the date of conversion. A maximum of 309,500
shares of the Company's Common Stock was issuable upon conversion of
each $1,000,000 principal amount of the Debentures. At August 31, 1996,
$3,450,000 principal amount of the Debentures had been converted into
997,324 shares of Common Stock. During the four months ended December
31, 1996, the remaining $300,000 principal amount of Debentures was
converted into 59,125 shares of Common Stock.
In accordance with Securities and Exchange Commission guidance
published in early 1997, the August 31, 1996 Consolidated Statement of
Operations was restated to reflect a $795,500 charge to interest expense
related to the discount feature of the Debentures. The discount was
amortized from the date of issuance to the earliest conversion dates.
9. COMMITMENTS AND CONTINGENCIES
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES - The
Company has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring and developing oil
and gas properties and ventures. At December 31, 1997, the Company had
the contingent obligation to issue an aggregate of 375,000 shares of its
Common Stock, subject to the satisfaction of conditions related to the
achievement of specified performance standards by the Stynawske Field
project. Also see Note 6, Oil and Gas Properties and Investments, of
Notes to Consolidated Financial Statements.
F-17
<PAGE> 174
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEGAL PROCEEDINGS AND POTENTIAL CLAIMS - On February 20, 1998, Zhoda
Corporation ("Zhoda"), which sold to Fountain most of Fountain's
interest in UK-RAN, filed suit against Fountain and two of its
consolidated subsidiaries in the District Court of Harris County, Texas.
Zhoda alleges that Zhoda was, on several theories, wrongfully deprived
of the value of the UK-RAN shares it transferred to Fountain or the
contingent consideration it might have received under its agreement with
Fountain. Among the theories of Zhoda's complaint are breach of
contract, breach of fiduciary duty and duty of good faith and fair
dealing, fraud and constructive fraud, fraud in the inducement,
negligent misrepresentation, civil conspiracy, breach of trust, unjust
enrichment and rescission. Zhoda seeks damages in excess of $7.5
million, redelivery of the UK-RAN shares transferred to Fountain, fees,
expenses and costs and any further relief to which it may be entitled.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold
to Fountain the outstanding capital of Gastron International Limited
("Gastron"), which in turn owned 31% of the capital of Intergas, filed
suit against Fountain and one of its consolidated subsidiaries in the
Third Judicial District Court of Salt Lake County, Utah. In its
complaint, Ribalta alleges breach by Fountain of the contract governing
the sale of the outstanding capital of Gastron and failure of a
condition in that contract that should have resulted in its termination.
Ribalta seeks the return of all benefits conferred on Fountain pursuant
to the contract, including the shares of Gastron and any property
transferred by Gastron, or, alternatively, damages equal to the value of
such benefits, as well as fees, costs and such other relief as the court
deems proper.
The entity that sold to Fountain certain rights related to the
Stynawske Field project has indicated to Fountain that it is considering
an action seeking the contingent consideration payable with respect to
that sale on the grounds that the Transaction or other action by or
inaction of Fountain has unreasonably delayed or will unreasonably delay
the satisfaction of the conditions precedent to the issuance of such
contingent consideration.
As a result of the events associated with the impairment of
Fountain's investment in and advances to and other assets related to
Kashtan, Intergas and the Gorisht-Kocul joint venture, the Company may
be subject to contingent liabilities in the form of claims from those
ventures and other participants therein.
Management is unable to estimate the range that such potential
claims, if any, might total. However, if any asserted claims were
determined to be valid, they could have a material adverse effect on the
financial position, results of operations and cash flows of the Company.
LEASE COMMITMENTS - The Company leases office space under
non-cancellable operating lease agreements. The leases have remaining
terms ranging up to eight years, some of which may be renewed at the
Company's option. Rental expense for the years ended December 31, 1997
and August 31, 1996 and 1995 and for the four months ended December 31,
1996 was $293,855, $186,444, $119,133 and $87,872, respectively.
Future minimum rental payments for the Company's lease
obligations as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 388,235
1999 382,688
2000 306,966
2001 165,968
2002 165,968
Later years 331,968
----------
$1,741,793
----------
</TABLE>
F-18
<PAGE> 175
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has sublet office space representing $85,968,
$77,000 and $59,083 of the future minimum rental payments in 1998, 1999
and 2000, respectively, and expects that it will attempt to sublease a
substantial additional amount of its leased office space.
10. CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash
and cash equivalents and advances to oil and gas ventures. See Note 6,
Oil and Gas Properties and Investments, of Notes to Consolidated
Financial Statements. The Company has temporary cash on deposit at major
financial institutions, some of which are in excess of government
insured limits. At December 31, 1997, December 31, 1996, and August
31,1996, the Company had approximately $19,000,000, $27,000,000, and
$14,000,000 on deposit in four, four and two such institutions,
respectively.
11. STOCKHOLDERS' EQUITY
On February 12, 1996, at an Annual Meeting of Stockholders, the
stockholders of the Company approved an increase in the number of
authorized shares of Common Stock from 25,000,000 to 50,000,000 having
$0.10 par value per share. The number of authorized shares of preferred
stock of 5,000,000, also having a par value of $0.10 per share, remained
unchanged. As of December 31, 1997, 22,447,489 shares of Common Stock
were issued and outstanding. No shares of preferred stock have been
issued.
During the years ended August 31, 1995 and 1996, the four-month
period ended December 31, 1996, and the year ended December 31, 1997,
the following transactions regarding the Company's Common Stock and
warrants and options to purchase the Company's Common Stock were
consummated pursuant to authorization by the Company's Board of
Directors or duly constituted committees thereof.
FISCAL YEAR ENDED AUGUST 31, 1995
o The following are included in the sales or retirement of Common
Stock:
oo The issuance of 20,000 shares at a price of $0.25 per
share in a warrant exercise.
oo The issuance to investors of 3,244,000 shares and
warrants exercisable at $6.00 per share to purchase
3,244,000 shares, for aggregate proceeds of $10,320,882
net of $1,033,118 of related offering costs.
oo The issuance of 480,780 shares at a price of $1.50 per
share, 200,000 shares at a price of $1.125 per share and
14,286 shares at a price of $1.75 per share in a series
of warrant exercises.
oo The retirement of 68 shares recorded at an aggregate of
$223.14 to reflect the payment of cash for fractional
shares in connection with the December 1994 reverse
stock split.
o The following are included in the issuance of Common Stock as
employee compensation:
oo The adjustment to capital in excess of par in the amount
of $4,275 related to shares received by three employees
for stock issued at below par.
oo The issuance of 23,479 shares at a price of $3.09 per
share, 4,000 shares at a price of $4.38 per share, and
10,000 shares at a price of $5.77 per share to employees
resulting in aggregate compensation of $147,763.
F-19
<PAGE> 176
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The issuance of 790,000 restricted shares at a value of $1.64
per share for financial consulting services to be performed over
two years amounting to $1,296,000, of which $1,134,875 was
expensed in 1995 and the balance of $161,125 was expensed during
fiscal 1996.
o The issuance of 4,706 shares at a price of $4.25 per share for
legal services in the amount of $20,000.
o The issuance of 28,570 shares and warrants exercisable at $1.75
per share to purchase 28,572 shares upon conversion of notes
payable in an aggregate principal amount of $50,000.
o The issuance of warrants exercisable at $5.10 per share to
purchase 1,139,800 shares to firms that participated in the
distribution of the Company's securities.
o The issuance of 30,000 shares at a price of $5.88 per share for
consulting services in the amount of $176,250.
o The issuance of 10,000 restricted shares at a price of $3.56 per
share along with a cash payment of $60,000 for a paid-up
license.
No options were exercised during the fiscal year ended August 31, 1995.
FISCAL YEAR ENDED AUGUST 31, 1996
o The issuance to investors of 5,000,000 shares for aggregate
proceeds of $20,960,354 net of $1,539,646 of related offering
costs.
o The following are included in the issuance of Common Stock for
purchase of interests in oil and gas ventures:
oo The issuance of 150,000 shares at a price of $4.5625 per
share, along with other consideration, in exchange for
10% of the equity of UK-RAN Oil Corporation and 33% of
the equity of UK-RAN Energy Corporation
oo The issuance of 300,000 shares at a price of $5.5625 per
share in exchange for 6% of the equity of Intergas JSC,
a joint stock company incorporated in the Russian
Federation.
o The following are included in the issuance of Common Stock upon
conversion of debentures:
oo The issuance of 997,324 shares in a series of
conversions of an aggregate of $3,450,000 principal
amount of debentures convertible at various prices based
on 82 1/2% of market price at the time of conversion.
oo The adjustment to capital in excess of par in the amount
of $311,088 related to deferred costs incurred in the
issuance of debentures and $795,500 related to the
discount feature of the debentures.
o The following are included in the issuance of Common Stock upon
warrant and option exercises:
oo The issuance of 52,000 shares at a price of $1.50 per
share in a series of option exercises.
oo The issuance of 43,223 shares at a price of $1.50 per
share in a series of warrant exercises.
F-20
<PAGE> 177
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The issuance of options exercisable at $3.8375 per share to
purchase 30,000 shares granted to non-employee directors at
February 12, 1996 pursuant to the Company's 1995 Long-Term
Incentive Plan. See Note 16, Stock-Based Compensation Plans, of
Notes to Consolidated Financial Statements.
FOUR MONTH PERIOD ENDED DECEMBER 31, 1996
o The following are included in the issuance of Common Stock upon
conversion of debentures:
oo The issuance of 59,125 shares upon conversion of
$300,000 principal amount of debentures convertible at
82 1/2% of market price at the time of conversion.
oo The adjustment to capital in excess of par in the amount
of $19,599 related to deferred costs incurred in the
issuance of debentures.
o The following are included in the issuance of Common Stock upon
warrant and option exercises:
oo The issuance of 12,000 shares at a price of $1.50 per
share in a series of option exercises.
oo The issuance of 486,668 shares at a price of $1.50 per
share in a series of warrant exercises.
oo The issuance of 14,286 shares at a price of $1.75 per
share in a warrant exercise.
oo The issuance of 1,139,800 shares at a price of $5.10 per
share in a series of warrant exercises.
oo The issuance of 3,080,000 shares at a price of $6.00 per
share in a series of warrant exercises.
o The issuance of options exercisable at $7.25 per share to
purchase 381,500 shares granted to employees at December 31,
1996 pursuant to the Company's 1995 Long-Term Incentive Plan.
See Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
o The issuance of options exercisable at $8.99 per share to
purchase 445,000 shares granted to employees at December 31,
1996 pursuant to the Company's 1995 Long-Term Incentive Plan.
See Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1997
o The issuance of 175,000 shares at a price of $6.0625 per share
in connection with the acquisition of an interest in the
Stynawske Field, Ukraine.
o The issuance of 104,000 shares at a price of $1.50 per share in
a series of option exercises.
o The issuance of options exercisable at $4.50 per share to
purchase 30,000 shares granted to non-employee directors at June
3, 1997 pursuant to the Company's 1995 Long-Term Incentive Plan.
See Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
F-21
<PAGE> 178
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The issuance of options exercisable at $4.25 per share to
purchase 7,000 shares granted to employees at June 30, 1997
pursuant to the Company's 1995 Long-Term Incentive Plan. See
Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
o The issuance of options exercisable at $5.27 per share to
purchase 155,000 shares granted to employees at June 30, 1997
pursuant to the Company's 1995 Long-Term Incentive Plan. See
Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
o The cancellation of options to purchase an aggregate 126,168
shares which had been granted to employees pursuant to the
Company's 1995 Long-Term Incentive Plan. Of the options
cancelled, 119,168 were exercisable at $7.25, 5,000 were
exercisable at $8.99, and 2,000 were exercisable at $4.25. See
Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
F-22
<PAGE> 179
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes warrants to purchase the
Company's Common Stock, which were outstanding:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
OUTSTANDING AT : WARRANTS PRICE DATE
- --------------- --------- ------------- ------------------
<S> <C> <C> <C>
AUGUST 31, 1994 1,259,243 $.25 - $1.75 8/1/95 to 11/3/97
Issued 4,383,800 $5.10 - $6.00 2/28/97
Exercised (715,066) $.25 - $1.75 8/1/95 to 11/3/97
----------
AUGUST 31, 1995 4,927,977 $1.50 - $6.00 2/28/97 to 11/3/97
----------
Exercised (43,223) $1.50 11/3/97
----------
AUGUST 31, 1996 4,884,754 $1.50 - $6.00 2/28/97 to 11/3/97
----------
Exercised (4,720,754) $1.50 - $6.00 2/28/97 to 11/3/97
Redeemed (164,000) $6.00 2/28/97 to 11/3/97
----------
DECEMBER 31, 1996 0
----------
</TABLE>
During the four month period ended December 31, 1996, an
aggregate of 4,383,800 warrants were called for redemption by the
Company. If the average closing price of the Company's Common Stock
exceeded $6.10 and $7.00 per share for 10 consecutive trading days, upon
election of the Company and notice to the warrant holders, the holders
of 1,139,800 warrants and 3,244,000 warrants, respectively, were
required either to exercise their warrants within a specified period or
to have the warrants redeemed by the Company for a nominal redemption
price. All but 164,000 of the 4,383,800 warrants called for redemption
were exercised during the four month period ended December 31, 1996; the
164,000 warrants were redeemed. During the same period, an additional
500,954 warrants were also exercised by their holders. There were no
outstanding warrants at December 31, 1996 and 1997.
12. NET LOSS PER COMMON SHARE
Effective December 31, 1997 the Company adopted SFAS No. 128
Earnings Per Share, for all periods presented. Basic and diluted net
loss per common share for the years ended December 31, 1997 and August
31, 1996 and 1995 and the four month periods ended December 31, 1996 and
1995 were based on the weighted average number of common shares
outstanding during those periods. The weighted average number of shares
used was 22,413,103, 12,495,137, 8,341,783, 18,696,212 and 10,834,063,
respectively. The Debentures, which were convertible into a maximum of
309,500 shares of the Company's Common Stock per $1,000,000 principal
amount of the Debentures, were not included in the computation of
diluted net loss per common share for the four month period ended
December 31, 1996 and the fiscal year ended August 31, 1996 because the
effect of such inclusion would have been anti-dilutive. Additionally,
options to purchase the Company's Common Stock were outstanding during
the year ended December 31, 1997, the four month period ended December
31, 1996 and the fiscal years ended August 31, 1996 and 1995 and
warrants to purchase the Company's Common Stock were outstanding during
the four month period ended December 31, 1996, and the fiscal years
ended August 31, 1996 and 1995 but were not included in the computation
of diluted net loss per common share because the effect of such
inclusion would have been antidilutive.
F-23
<PAGE> 180
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
The Company and its domestic subsidiaries file U.S. consolidated
income tax returns. No benefit for U.S. income taxes has been recorded
in these consolidated financial statements because of the Company's
inability to recognize deferred tax assets under provisions of SFAS 109.
Due to the implementation of the quasi-reorganization as of October 31,
1988, future reductions of the valuation allowance relating to those
deferred tax assets existing at the date of the quasi-reorganization, if
any, will be allocated to capital in excess of par value. The provision
for income taxes for the year ended August 31, 1995 consisted of taxes
applicable to foreign operations.
A reconciliation of the differences between income taxes
computed at the U.S. federal statutory rate (34%) and the Company's
reported provision for income taxes is as follows:
<TABLE>
<CAPTION>
FOUR MONTH FOUR MONTH
PERIOD PERIOD
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1997 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income tax benefit at statutory
rate $ (9,412,203) $ (885,515) $ (490,342) $ (2,207,808) $ (2,574,144)
Benefit of losses not
recognized 9,412,203 876,629 490,342 2,197,879 2,566,836
Foreign tax provision
-- -- -- -- 28,600
Other, net -- 8,886 -- 9,929 7,308
------------ ------------ ------------ ------------ ------------
Provision for income taxes $ 0 $ 0 $ 0 $ 0 $ 28,600
------------ ------------ ------------ ------------ ------------
Effective tax rate 0% 0% 0% 0% 0.4%
</TABLE>
The components of the deferred tax assets as of December 31, 1997,
December 31, 1996 and August 31, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 13,372,000 $ 9,520,000 $ 8,906,000
Foreign net operating loss carryforwards
4,972,000 1,300,000 1,300,000
Impairments 6,817,000 -- --
Patent rights and related equipment
225,473 975,803 1,282,072
Bad debt allowance -- 35,776 35,776
Foreign tax credits -- 28,600 28,600
------------ ------------ ------------
25,386,473 11,860,179 11,552,448
Valuation allowance (25,386,473) (11,860,179) (11,552,448)
------------ ------------ ------------
Net deferred tax asset recognized in balance sheet $ -- $ -- $ --
------------ ------------ ------------
</TABLE>
F-24
<PAGE> 181
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 1991, and subsequently on August 17, 1994, the
Company experienced changes in the Company's ownership as defined in
Section 382 of the Internal Revenue Code ("IRC"). The effect of these
changes in ownership is to limit the utilization of certain existing net
operating loss carryforwards for income tax purposes to approximately
$1,375,000 per year on a cumulative basis. As of December 31, 1997,
total U.S. net operating loss carryforwards were approximately
$39,331,000. Of that amount, approximately $15,100,000 was incurred
subsequent to the ownership change in 1994, $19,531,000 was incurred
prior to 1994 and therefore is subject to the IRC Section 382 limitation
and $4,700,000 is subject to the separate return limitation rules. See
Note 1 of Notes to Consolidated Financial Statements. The net operating
loss carryforwards expire from 1998 to 2012. The net operating loss
carryforwards limited under the separate return limitation rules may
only be offset against the separate income of the respective
subsidiaries. The Company has also generated approximately $14,161,000
of foreign net operating loss carryforwards. A significant portion of
the foreign net operating loss carryforwards are subject to limitations
similar to IRC Section 382.
The Company's available net operating loss carryforwards may be
used to offset future taxable income, if any, prior to their expiration.
The Company may experience further limitations on the utilization of net
operating loss carryforwards and other tax benefits as a result of
additional changes in ownership.
The Company also has investment tax credit carryovers of
$46,546, which begin to expire in 1998.
14. SEGMENTS
During the year ended December 31, 1997 and the four months
ended December 31, 1996, the Company operated through one business
segment, oil and gas exploration and production, reflecting its decision
to use its electrically enhanced oil recovery ("EEOR") technology
primarily internally as a competitive advantage to obtain and exploit
interests in heavy oil fields and not to pursue external sales of goods
and services related to the EEOR technology. Since oil and gas
exploration and production activities were at a preliminary stage,
revenues for the periods ended December 31, 1997 and 1996 were minimal.
For the fiscal years ended August 31, 1996 and 1995, EEOR activities
were reported as a separate business segment. For the fiscal year ended
August 31, 1995 EEOR revenues related to contracts with one customer in
each of Canada and China, and for the fiscal year ended August 31, 1996,
EEOR revenues related to a contract with one customer in Canada.
F-25
<PAGE> 182
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating revenues for the years ended December 31, 1997 and
August 31, 1996 and 1995 and the four months ended December 31, 1996 by
business segment and geographical area were as follows:
<TABLE>
<CAPTION>
12/31/97 8/31/96 8/31/95 12/31/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OIL AND GAS ACQUISITION AND DEVELOPMENT
United States $ -- $ 2,624 $ -- $ --
Canada 313,301 23,938 -- 16,980
---------- ---------- ---------- ----------
TOTAL $ 313,301 $ 26,562 $ 0 $ 16,980
---------- ---------- ---------- ----------
EEOR PROCESS SALES AND SERVICE
United States $ -- $ -- $ -- $ --
Canada -- 8,615 255,457 --
China -- -- 370,000 --
Other -- -- -- --
---------- ---------- ---------- ----------
TOTAL $ 0 $ 8,615 $ 625,457 $ 0
---------- ---------- ---------- ----------
</TABLE>
Operating profit (loss) for the years ended December 31, 1997
and August 31, 1996 and 1995 and the four months ended December 31, 1996
by business segment and geographical area were as follows:
<TABLE>
<CAPTION>
12/31/97 8/31/96 8/31/95 12/31/96
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OIL AND GAS ACQUISITION AND DEVELOPMENT
United States $ (257,407) $ (3,262) $ (608,822) $ --
Canada (97,541) 18,836 -- 11,378
Eastern Europe (24,831,798) (1,770,434) -- (1,712,924)
------------ ------------ ------------ ------------
TOTAL $(25,186,746) $ (1,754,860) $ (608,822) $ (1,701,546)
------------ ------------ ------------ ------------
EEOR PROCESS SALES AND SERVICE
United States $ -- $ -- $ (25) $ --
Canada -- (30,857) (3,208,144) --
China -- -- 116,915 --
Other -- -- (18,296) --
------------ ------------ ------------ ------------
$ -- $ (30,857) $ (3,109,550) $ --
------------ ------------ ------------ ------------
CORPORATE EXPENSES $ (3,903,446) $ (3,853,972) $ (4,164,548) $ (1,281,821)
------------ ------------ ------------ ------------
TOTAL $(29,090,192) $ (5,639,689) $ (7,882,920) $ (2,983,367)
------------ ------------ ------------ ------------
</TABLE>
The Company's loss from investments in unconsolidated
subsidiaries pertains primarily to operations in Eastern Europe.
Identifiable Assets as of December 31, 1997 and 1996 and August
31, 1996 by business segment and geographical area were as follows:
F-26
<PAGE> 183
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
12/31/97 12/31/96 8/31/96
----------- ----------- -----------
<S> <C> <C> <C>
CORPORATE (1)
United States $ 212,536 $ 7,580,219 $10,239,148
Canada -- -- --
Western Europe 24,263,223 29,049,022 7,517,066
----------- ----------- -----------
TOTAL $24,475,759 $36,629,241 $17,756,214
----------- ----------- -----------
OIL AND GAS ACQUISITION AND DEVELOPMENT
United States $ -- $ 6,786,714 $ 5,705,663
Canada 2,067,257 831,930 642,451
Eastern Europe 5,386,707 11,127,176 7,984,213
Western Europe 5,504,312 -- --
----------- ----------- -----------
TOTAL $12,958,276 $18,745,820 $14,332,327
----------- ----------- -----------
IDENTIFIABLE ASSETS - TOTAL $37,434,035 $55,375,061 $32,088,541
----------- ----------- -----------
</TABLE>
(1) Principally cash and cash equivalents.
The percentage of operating revenues for the years ended
December 31, 1997 and August 31, 1996 and 1995 and the four months ended
December 31, 1996 by business segment and geographical area are as
follows:
<TABLE>
<CAPTION>
12/31/97 8/31/96 8/31/95 12/31/96
-------- ------- ------- --------
<S> <C> <C> <C> <C>
OIL AND GAS ACQUISITION AND DEVELOPMENT
United States -- 10% -- --
Canada 100% 90% -- 100%
EEOR PROCESS SALES AND SERVICE
Canada -- 100% 41% --
China -- -- 59% --
</TABLE>
15. SUPPLEMENTAL CASH FLOW INFORMATION AND NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for
the years ended December 31, 1997, and August 31, 1996 and 1995 and for
the four-month periods ended December 31, 1996 and 1995:
F-27
<PAGE> 184
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
All amounts in 000'$
YEARS ENDED 4 MONTHS ENDED
-------------------------------- --------------------
12/31/97 8/31/96 8/31/95 12/31/96 12/31/96
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid during the year $ -- $ 146 $ 28 $ 17 $ 3
-------- -------- -------- -------- --------
Supplemental schedule of non-cash activities: Acquisition of
common stock of subsidiaries resulting in elimination upon
consolidation and cancellation of notes receivable of
$2,450,000 and $530,000, respectively $ -- $ 2,980 $ -- $ -- $ 2,450
-------- -------- -------- -------- --------
Issuance of Common Stock upon conversion of convertible debentures
and notes $ -- $ 3,934 $ 50 $ 280 $ --
-------- -------- -------- -------- --------
Issuance of Common Stock in connection with investments in oil and
gas ventures $ 1,060 $ 2,353 $ -- $ -- $ --
-------- -------- -------- -------- --------
Issuance of Common Stock in connection with compensation earned
and third party services provided $ -- $ -- $ 1,730 $ -- $ --
-------- -------- -------- -------- --------
Accruals recorded applicable to effective guaranty of Kashtan
obligation and Lelyaki Field close-down costs $ 8,971 $ -- $ 59 $ 678 $ --
-------- -------- -------- -------- --------
</TABLE>
F-28
<PAGE> 185
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. STOCK-BASED COMPENSATION PLANS
On August 17, 1994, options to purchase 400,000 shares of the
Company's Common Stock were issued to various individuals who were
serving or were expected in the future to serve the Company as officers,
directors, employees, consultants and advisors (the "1994 Plan"). The
options are exercisable at an exercise price of $1.50 and are only
exercisable at the time or within six months after services are rendered
by such individuals. All of these options expire August 16, 1999.
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan")
adopted by the Company in February 1996, 1,500,000 shares of the
Company's Common Stock have been authorized for possible issuance under
the 1995 Plan. The purpose of the 1995 Plan is to further the interest
of the Company by enabling employees, directors, consultants and
advisors of the Company to acquire an interest in the Company by
ownership of its stock through the exercise of stock options and stock
appreciation rights granted under the 1995 Plan. Stock options granted
under the 1995 Plan may be either incentive stock options or
non-qualified stock options. Options expire on such date as is
determined by the committee administering the 1995 Plan, except that
incentive stock options may expire no later than 10 years from the date
of grant. Pursuant to the 1995 Plan, a specified number of stock options
exercisable at the then market price are granted annually to
non-employee directors of the Company, which become 100% vested six
months from the date of grant. Stock appreciation rights entitle the
holder to receive payment in cash or Common Stock equal in value to the
excess of the fair market value of a specified number of shares of
Common Stock on the date of exercise over the exercise price of the
stock appreciation right. No stock appreciation rights have been granted
through December 31, 1997. The exercise price and vesting schedule of
stock appreciation rights are determined at the date of grant.
A summary of the status of stock options granted under the 1994
and 1995 Plans is as follows:
<TABLE>
<CAPTION>
SHARES SHARES ISSUABLE WEIGHTED
AVAILABLE UNDER OUTSTANDING AVERAGE
FOR ISSUE OPTIONS EXERCISE PRICE
--------- ----------------- --------------
<S> <C> <C> <C>
BALANCE AT AUGUST 31, 1995 0 400,000
1995 Plan Authorization 1,500,000
Options:
Granted at market (30,000) 30,000 $ 3.84
Exercised -- (52,000) $ 1.50
--------- ---------
BALANCE AT AUGUST 31, 1996 1,470,000 378,000 $ 1.69
Options:
Granted at market (381,500) 381,500 $ 7.25
Granted at a premium (445,000) 445,000 $ 8.99
Exercised -- (12,000) $ 1.50
--------- ---------
BALANCE AT DECEMBER 31, 1996 643,500 1,192,500 $ 6.19
Options:
Granted at market (37,000) 37,000 $ 4.45
Granted at a premium (155,000) 155,000 $ 5.27
Exercised -- (104,000) $ 1.50
Cancelled 126,168 (126,168) $ 7.27
--------- ---------
BALANCE AT DECEMBER 31, 1997 577,668 1,154,332 $ 6.32
--------- ---------
</TABLE>
F-29
<PAGE> 186
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The shares issuable upon exercise of vested options and the
corresponding weighted average exercise price are as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE
UNDER WEIGHTED
EXERCISABLE AVERAGE
OPTIONS EXERCISE PRICE
--------------- --------------
<S> <C> <C>
August 31, 1995 344,000 $1.50
August 31, 1996 342,000 $1.71
December 31, 1996 330,000 $1.71
December 31, 1997 355,664 $3.56
</TABLE>
The weighted average fair value of options granted at market was
$1.46, $3.65 and $1.01 for the year ended December 31, 1997, the four
month period ended December 31, 1996 and the fiscal year ended August
31, 1996, respectively. The weighted average fair value of options
granted at a premium was $0.92 and $1.73 for the year ended December 31,
1997 and the four month period ended December 31, 1996, respectively; no
options were granted at a premium for the fiscal year ended August 31,
1996. The weighted average fair value of all options granted during the
year ended December 31, 1997, the four month period ended December 31,
1996 and the fiscal year ended August 31, 1996 was $1.03, $2.52 and
$1.01, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- -----------------------------------
NUMBER WEIGHTED NUMBER
OF SHARES AVERAGE WEIGHTED OF SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 TERM EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.50 to $3.84 262,000 1.57 $1.77 226,000 $1.81
$3.85 to $5.30 190,000 1.92 $5.12 30,000 $4.50
$5.31 to $8.99 702,332 2.95 $8.34 99,664 $7.25
- -------------- --------- --------
$1.50 to $8.99 1,154,332 355,664
- -------------- --------- --------
</TABLE>
As discussed in Note 2, Summary of Significant Accounting
Policies, under "Stock-Based Compensation Plans," of Notes to
Consolidated Financial Statements, the Company accounts for its
stock-based compensation plans under APB Opinion 25. Accordingly, no
compensation cost has been recognized for those stock options with
exercise prices equal to or greater than the market price of the stock
on the date of grant. Under SFAS No. 123, compensation cost is measured
at the grant date based on the fair value of the awards and is
recognized over the service period, which is usually the vesting period.
Had compensation cost for those stock options been determined consistent
with SFAS No. 123, the Company's net loss and net loss per common share
would have been approximately $28,600,000 and $1.28, respectively, for
the fiscal year ended December 31, 1997 and approximately $6,500,000 and
$0.52, respectively, for the year ended August 31, 1996. Stock options
had no effect on net loss for the four months ended December 31, 1996.
This effect is not likely to be representative of future pro forma
amounts because of the exclusion of costs of grants before 1995 and the
addition of awards to be granted in future years. The fair value of each
stock option granted by the Company was calculated using the
Black-Scholes option-pricing model applying the following
weighted-average assumptions for the year ended December 31, 1997, the
four month period ended December 31, 1996, and the fiscal year ended
August 31, 1996: dividend yield of 0.00%; risk-free interest rates are
different for each grant and range from 6.08% to 6.36% for the year
ended December 31, 1997, 5.79% to 6.16% for the four month period ended
December
F-30
<PAGE> 187
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31, 1996, and during the fiscal year ended August 31, 1996, only one
grant was made with a risk-free interest rate of 4.79%; the average
expected lives of options of 2.1 years, 3.1 years and 1.5 years,
respectively; and volatility of 44.7% for the year ended December 31,
1997 and 49% for the four month period ended December 31, 1996 and the
fiscal year ended August 31, 1996.
F-31
<PAGE> 188
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES
Users of this information should be aware that the process of
estimating quantities of "proved" and "proved developed" natural gas and
crude oil reserves is very complex, requiring significant subjective
decisions in the evaluation of all available geological, engineering and
economic data for each reservoir. The data for a given reservoir may
also change substantially over time as a result of numerous factors
including, but not limited to, additional development activity, evolving
production history and continual reassessment of the viability of
production under varying economic conditions. Consequently, material
revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
significance of the subjective decisions required and variances in
available data for various reservoirs make these estimates generally
less precise than other estimates presented in connection with financial
statement disclosures.
Proved reserves are estimated quantities of natural gas, crude
oil and condensate that geological and engineering data demonstrate,
with reasonable certainty, to be recoverable in future years from known
reservoirs with existing equipment under existing economic and operating
conditions.
Proved developed reserves are proved reserves that can be
expected to be recovered through existing wells with existing equipment
and under existing economic and operating conditions.
No major discovery or other favorable or adverse event
subsequent to December 31, 1997 is believed to have caused a material
change in the estimates of proved or proved developed reserves as of
that date.
The following table sets forth the Company's net proved
reserves, including the changes therein, and proved developed reserves
(all within Canada) at December 31, 1997, as estimated by the Company's
petroleum engineering staff:
<TABLE>
<CAPTION>
Oil (Bbls)
----------
<S> <C>
December 31, 1996
Purchase of properties 115,500
Revisions of previous estimates (33,000)
Extensions, discoveries and other additions
267,300
Production (16,000)
---------
December 31, 1997 333,800
---------
PROVED DEVELOPED
December 31, 1997 155,000
---------
</TABLE>
F-32
<PAGE> 189
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
Costs incurred for oil and gas property acquisition, exploration
and development activities for the year ended December 31, 1997, the
four months ended December 31, 1996 and the years ended August 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997
- ----
<S> <C>
Canada
------
Property acquisition:
Unproved* $ 324,500
Proved 684,500
Exploration --
Development 680,974
----------
Total costs incurred $1,689,974
----------
December 31, 1996 United States
- ----------------- -------------
Property acquisition:
Unproved* $ 259,338
Proved 0
Exploration --
Development --
----------
Total costs incurred $ 259,338
----------
August 31, 1996 United States
- --------------- -------------
Property acquisition:
Unproved* $ 287,788
Proved 0
Exploration --
Development --
----------
Total costs incurred $ 287,788
----------
August 31, 1995 United States
- --------------- -------------
Property acquisition:
Unproved* $ 519,304
Proved 32,381
Exploration --
Development --
----------
Total costs incurred $ 551,685
----------
</TABLE>
*These amounts represent costs incurred by the Company and excluded from
the amortization base until proved reserves are established or
impairment is determined.
F-33
<PAGE> 190
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES
The following information has been developed utilizing
procedures prescribed by SFAS No. 69 Disclosure about Oil and Gas
Producing Activities ("SFAS 69") and based on crude oil reserve and
production volumes estimated by the Company's engineering staff. It may
be useful for certain comparative purposes, but should not be solely
relied upon in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should
the Standardized Measure of Discounted Future Net Cash Flows be viewed
as representative of the current value of the Company.
The Company believes that the following factors should be taken
into account in reviewing the following information: (1) future costs
and selling prices will probably differ from those required to be used
in these calculations; (2) actual rates of production achieved in future
years may vary significantly from the rate of production assumed in the
calculations; (3) selection of a 10% discount rate is arbitrary and may
not be reasonable as a measure of the relative risk inherent in
realizing future net oil and gas revenues; and (4) future net revenues
may be subject to different rates of income taxation.
Under the Standardized Measure, future cash inflows were
estimated by applying period-end oil prices adjusted for fixed and
determinable escalations to the estimated future production of
period-end proven reserves. Future cash inflows were reduced by
estimated future development, abandonment and production costs based on
period-end costs in order to arrive at net cash flow before tax. Future
income tax expenses have been omitted due to the fact that the Company's
net operating loss carryforwards are greater than expected future net
revenues. Use of a 10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information
in making investment and operating decisions. Such decisions are based
upon a wide range of factors, including estimates of probable as well as
proven reserves and varying price and cost assumptions considered more
representative of a range of possible economic conditions that may be
anticipated.
The standardized measure of discounted future net cash flows
relating to proved oil and gas reserves (all within Canada) is as
follows:
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------
<S> <C>
Future cash inflows $5,469,000
Less related future:
Production costs 2,090,000
Development and abandonment costs 840,000
Income taxes --
----------
Future net cash flows 2,539,000
10% annual discount for estimating timing of cash flows 1,296,000
----------
Standardized measure of discounted future net cash flows before income taxes $1,243,000
----------
</TABLE>
F-34
<PAGE> 191
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
A summary of the changes in the standardized measure of
discounted future net cash flows applicable to proved oil and gas
reserves (all within Canada) is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------
<S> <C>
Beginning of period $ --
Purchase of reserves in place 551,000
Revisions of previous estimates:
Changes in prices and costs 67,000
Changes in quantities (208,000)
Changes in future development costs --
Development costs incurred during the period --
Additions to proved reserves resulting from extensions, discoveries and improved
recovery, less related costs
745,000
Accretion of discount 55,000
Sales of oil and gas, net of production costs (113,000)
Net change in income taxes --
Production timing and other 146,000
Net increase 1,243,000
End of the period $ 1,243,000
</TABLE>
F-35
<PAGE> 192
CONSOLIDATED FINANCIAL STATEMENTS
CANARGO ENERGY INC.
DECEMBER 31, 1997
F-36
<PAGE> 193
AUDITORS' REPORT
To the Directors of
CANARGO ENERGY INC.
We have audited the consolidated balance sheet of CANARGO ENERGY INC. as
at December 31, 1997 and the consolidated statements of operations and deficit
and cash flows for the six month period then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Corporation as at
December 31, 1997 and the results of its operations and the changes in its
financial position for the six month period then ended in accordance with
accounting principles generally accepted in Canada.
Calgary, Canada Ernst & Young
February 18, 1998 Chartered Accountants
F-37
<PAGE> 194
CANARGO ENERGY INC.
CONSOLIDATED BALANCE SHEET
(SEE BASIS OF PRESENTATION - NOTE 1)
As at December 31 (Stated in U.S. dollars)
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
ASSETS
Current
Cash $ 1,833,448
Accounts receivable 514,513
Prepaid expenses 53,668
Inventory 20,405
-----------
$ 2,422,034
Oil and gas properties [note 5] 7,061,457
-----------
$ 9,483,491
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 957,725
Taxes payable 61,000
-----------
$ 1,018,725
Long term debt [note 6] 895,500
Non-controlling interest 1,885,351
-----------
$ 3,799,576
-----------
CONTINGENCIES [NOTES 7 AND 8]
SHAREHOLDERS' EQUITY
Share capital and special warrants [note 7] $ 5,939,742
Deficit (255,827)
-----------
$ 5,683,915
-----------
$ 9,483,491
===========
</TABLE>
See accompanying notes
F-38
<PAGE> 195
CANARGO ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
Six months ended December 31 (Stated in U.S. dollars)
<TABLE>
<CAPTION>
1997
------------
<S> <C>
REVENUE
Oil $ 1,324,114
Interest 22,681
------------
$ 1,346,795
------------
EXPENSES
Operating costs $ 790,287
General and administration 386,397
Depletion 555,960
Interest 34,410
------------
$ 1,767,054
------------
Loss before non-controlling interest $ (420,259)
Non-controlling interest 164,432
------------
LOSS FOR THE PERIOD AND DEFICIT AT DECEMBER 31, 1997 $ (255,827)
============
BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.03)
------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING PERIOD 10,210,641
============
</TABLE>
See accompanying notes
F-39
<PAGE> 196
CANARGO ENERGY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended December 31 (Stated in U.S. Dollars)
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period $ (255,827)
Items not requiring cash
Depletion 555,960
Non-controlling interest (164,432)
-----------
Funds from operations $ 135,701
Net change in non-cash working capital related to
operating activities 480,454
-----------
$ 616,155
-----------
INVESTING ACTIVITIES
Contribution of NOC assets, net of cash $(2,694,705)
Acquisition of Money Works Inc., net of cash (29,249)
Additions to capital assets (2,868,995)
-----------
$(5,592,949)
-----------
FINANCING ACTIVITIES
Issue of share capital on contribution of NOC assets
$ 3,187,000
Issue of share capital to acquire Money Works Inc. 31,975
Initial share capital issued 100
Contribution from non-controlling interest 650,000
Long term debt 220,500
Issue of share capital 698,390
Issuance of special warrants, net of issue costs 2,022,277
-----------
$ 6,810,242
-----------
INCREASE IN CASH $ 1,833,448
Cash position, beginning of period --
-----------
CASH POSITION, END OF PERIOD $ 1,833,448
===========
</TABLE>
See accompanying notes
F-40
<PAGE> 197
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
1. BASIS OF PRESENTATION
Prior to July 1, 1997, CanArgo Energy Inc. carried on business under the
name Money Works Inc. Money Works Inc. was incorporated under the Alberta
Business Corporations Act. Effective July 1, 1997, Money Works Inc. acquired all
of the outstanding common shares of CanArgo Ltd. by issuing a total of 8,276,250
common shares from treasury (see note 4), and changed its name to CanArgo Energy
Inc. ("the Corporation"). This resulted in the former shareholders of CanArgo
Ltd. acquiring control of Money Works Inc. Accordingly, this transaction has
been accounted for as a reverse takeover of the Corporation and the Consolidated
Balance Sheet includes the assets and liabilities of CanArgo Ltd. at their
carrying values together with the net assets of Money Works Inc. acquired at
their ascribed fair values. The financial statements of the Corporation are a
continuation of the financial statements of CanArgo Ltd., the acquirer, for
accounting purposes.
CanArgo Ltd. was incorporated on March 4, 1997 with nominal share
capital for the purpose of holding certain shareholders' interest aggregating
55.9% of the shares of Ninotsminda Oil Company Limited ("NOC"). There was no
change in the individual shareholders' effective interest in NOC as a result of
the formation of CanArgo Ltd. These consolidated financial statements reflect
the operations of the Corporation from July 1, 1997, the date of commencement of
operations which also coincides with the date of the reverse takeover, when the
series of transactions resulting in achieving control over the principal
operating asset was culminated.
NOC is a Cypriot company specializing 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 February 15, 1996 between
NOC and the Republic of Georgia represented by the state oil company, Georgian
Oil. Under the terms of the PSC, NOC is responsible for the costs associated
with the project, which is operated on behalf of NOC by the local operating
company, Georgian British Oil Company ("Georgian Oil"). Georgian Oil is
responsible for the costs associated with site restoration and abandonment,
royalties and all state taxes. The PSC expires in December 2019 and provides for
a five year extension. While areas containing field developments are not subject
to relinquishment, other areas are subject to relinquishment after 5, 10, 15 and
20 years after the date of issue of the license. Currently, the Ninotsminda
field is the only producing field in this license.
Production from the Ninotsminda field commenced in the early part of
1996, and during 1996 approximately 515,000 barrels of oil were produced. Under
the terms of the PSC, Georgian Oil currently takes the first 750 barrels per day
("determined production") of production, after which all production is shared.
The level of determined production will change in accordance with the terms of
the agreement. After determined production, NOC receives up to 50% of production
for cost recovery. Remaining production after cost recovery is then allocated as
to 30% to NOC and as to 70% to Georgian Oil.
F-41
<PAGE> 198
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
To date, NOC has sold all of its production to one international buyer
at prices related to the world market price for Brent crude, with payment in US
dollars into NOC's bank account in Cyprus.
NOC is in an early stage of operations and is facing challenges typical
of doing business in the former Soviet Union. Neither NOC nor the Corporation
are currently in a position to finance all working capital or capital investment
requirements through their own operations and therefore will require additional
external financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Corporation follows accounting principles generally accepted in
Canada. The significant accounting policies are noted below.
a) PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Corporation's wholly owned subsidiaries CanArgo Ltd. and CanArgo Nazvrevi
Limited and its 55.9% owned subsidiary, NOC. The Corporation's interest in NOC
was contributed by the CanArgo Ltd. shareholders. As there was no substantive
change in the ownership of the NOC shares arising from the transfer, the
Corporation has recorded its investment at the historic costs of NOC to the
shareholders.
b) INVENTORY
Materials, supplies and spare parts held for use in the oil field and
inventories of petroleum products held for sale are recorded at the lower of
average cost and net realizable value.
c) OIL AND GAS PROPERTIES
The Corporation follows the full cost method of accounting for
exploration and development expenditures wherein all costs related to the
exploration for and the development of oil and gas reserves are capitalized.
These costs include lease acquisition costs, geological and geophysical
expenses, carrying charges of non-producing properties, costs of drilling and
completing wells and oil and gas production equipment and that portion of
general and administrative expense applicable to these activities. Proceeds
received from the disposal of properties are normally credited against
accumulated costs unless this would result in a change in the depletion rate by
more than 20%, in which case a gain or loss is computed and reflected in the
statement of operations.
F-42
<PAGE> 199
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
Depletion of exploration and development costs and production equipment
is provided on the unit-of-production method based upon estimated proved oil and
gas reserves, as determined by independent engineers.
The Corporation carries its oil and gas properties at the lower of
capitalized cost and net recoverable amount. Net recoverable amount is future
net revenues from proved reserves plus unproved properties at cost less any
impairment. Future net revenues are determined using unit prices and production
and overhead costs, financing charges and income taxes that will be incurred in
earning these revenues.
d) FOREIGN CURRENCY TRANSLATION
These financial statements are presented in United States dollars.
Monetary amounts denominated in a foreign currency are translated to United
States dollars at the exchange rate in effect at the balance sheet date. Revenue
and expense items are translated at the average exchange rate for the period.
Exchange gains and losses resulting from the translation of foreign currency
amounts are included in or charged to income for the year.
e) FINANCIAL INSTRUMENTS
Financial instruments of the Corporation consist of cash, accounts
receivable, accounts payable and long term debt. As at December 31, 1997 there
are no significant differences between their carrying values and their estimated
market values.
f) INCOME TAXES
Georgian Oil is responsible for all state taxes in the Republic of
Georgia. The undistributed earnings of foreign investees are considered to be
permanently invested for their continuing operations; accordingly, no provisions
are made for taxes which would become payable upon the distribution of such
earnings to the parent company.
g) MEASUREMENT UNCERTAINTY
The amount recorded for depletion of oil and gas properties is based on
estimates. The ceiling test calculation is based on estimates of proved
reserves, production rates, oil prices, future costs and other relevant
assumptions. By their nature, these estimates are subject to measurement
uncertainty and the effect on the financial statements of changes in such
estimates in future years could be significant.
F-43
<PAGE> 200
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
3. CONTRIBUTING OF SHARES OF NOC
Effective June 30, 1997, the shareholders of CanArgo Ltd. contributed
their collective 55.9% interest in NOC for shares in a common control
transaction. The contribution is summarized as follows:
<TABLE>
<S> <C>
NET ASSETS CONTRIBUTED:
Current assets, including $492,295 cash $ 1,291,195
Capital assets 4,748,422
Current liabilities (777,834)
Long term debt (675,000)
Non-controlling interest (1,399,783)
-----------
$ 3,187,000
===========
SHARES ISSUED:
8,275,250 common shares $ 3,187,000
===========
</TABLE>
4. ACQUISITION OF CANARGO LTD.
Effective July 1, 1997, the Corporation acquired all of the outstanding
shares of CanArgo Ltd., a privately owned company. This transaction has been
accounted for as a reverse takeover as described in Note 1.
The acquisition is summarized as follows:
<TABLE>
<S> <C>
NET ASSETS OF CANARGO ENERGY INC. (FORMERLY
MONEY WORKS INC.) ACQUIRED:
Current assets, including $2,726 cash $ 44,108
Current liabilities (12,133)
--------
$ 31,975
--------
CONSIDERATION:
1,708,640 common shares $ 31,975
--------
</TABLE>
F-44
<PAGE> 201
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
5. OIL AND GAS PROPERTIES
<TABLE>
1997
-----------
<S> <C>
Oil and gas properties $ 7,617,417
Accumulated Depletion (555,960)
-----------
$ 7,061,457
===========
</TABLE>
General and administrative expenses of $637,993 were capitalized during
the six months ended December 31, 1997.
6. LONG TERM DEBT
<TABLE>
<S> <C>
Advance $220,500
Loan 675,000
--------
$895,500
========
</TABLE>
The advance from non-controlling interest to NOC, bears no interest
unless it is not repaid by June 30, 2000, at which time it would bear interest
at 15% until repayment.
The loan from non-controlling interest to NOC bears interest at a rate
of 10% and is repayable out of surplus funds of NOC as and when available.
F-45
<PAGE> 202
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
7. SHARE CAPITAL AND SPECIAL WARRANTS
AUTHORIZED
Unlimited number of voting common shares
Unlimited number of first preferred shares
Unlimited number of second preferred shares
ISSUED
<TABLE>
<CAPTION>
COMMON SHARES NUMBER AMOUNT
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Balance on incorporation, opening balance 1,000 $ 100
Issued upon contribution of an interest in NOC [note 3] 8,275,250 3,187,000
Issued to CanArgo Ltd. [note 4] 1,708,641 31,975
Issued for cash 453,500 698,390
----------- -----------
Balance, December 31, 1997 10,438,391 $ 3,917,465
----------- -----------
SPECIAL WARRANTS
Special warrants issued 1,636,597 $ 2,520,359
Issue costs -- (498,082)
----------- -----------
Balance, December 31, 1997 1,636,597 $ 2,022,277
----------- -----------
WARRANTS ISSUED AND BALANCE, DECEMBER 31, 1997 681,760 $ --
----------- -----------
TOTAL SHARE CAPITAL AND SPECIAL WARRANTS $ 5,939,742
===========
</TABLE>
On June 30, 1997, the shareholders approved a 40 for 1 consolidation of
all the outstanding common shares. The record date of the stock consolidation
was July 2, 1997. Accordingly, all references to number of shares and per share
information prior to July 2, 1997 have been adjusted to reflect the share
consolidation retroactively.
On November 3, 1997, the Corporation closed a private placement of
1,636,597 special warrants at a price of Canadian $2.20 per special warrant.
Each special warrant is convertible into one common share of the Corporation and
one half of one warrant. Each full warrant is exercisable into one common share
at a price of Canadian $2.60 per share through to November 1, 1999.
In conjunction with the special warrants placement, 681,760 warrants
were issued. Each warrant is exercisable into one common share with 455,010
being exercisable at a price of Canadian $2.20,
F-46
<PAGE> 203
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
250,000 warrants of which expire on June 30, 1998 and 205,010 warrants of which
expire April 30, 1999, and 226,750 being exercisable at a price of Canadian
$2.60 and expiring on November 1, 1999.
If the Corporation has not obtained a receipt for a final prospectus
indicating the qualification of these securities in each relevant jurisdiction
by February 28, 1998 then each special warrant will entitle the holder to
receive an additional 0.1 common share and 0.05 warrant without payment of
additional consideration.
INCENTIVE STOCK OPTION PLAN
During the period ended December 31, 1997, 1,035,000 common share
options were granted; none were exercised. At December 31, 1997, options
exercisable between 1998 and 2002 were outstanding to purchase 1,035,000 common
shares at a price of $2.20 per share.
8. CONTINGENCIES
The non-controlling shareholder in NOC has initiated legal proceedings
in Cyprus claiming that a share offer in NOC had not been accepted by the
majority shareholder in the time limits set out and accordingly the share
issuance to the majority shareholder was invalid. If the non-controlling
shareholder is successful in its application before the Cyprus courts, the
interest of the Corporation in NOC could be reduced to 49%. The Corporation has
obtained a legal opinion from Cypriot counsel confirming the appropriate
acceptance of the subscriptions to the share offer. Subsequent to December 31,
1997, the non-controlling shareholder withdrew its legal action without
prejudice. Accordingly, the Corporation continues to maintain that the legal
proceedings are without merit and consolidates its 55.9% share holding.
9. SUBSEQUENT EVENTS
On February 2, 1998, the Corporation entered into an agreement with
Fountain Oil Incorporated ("Fountain") under which a business combination would
be effected through an exchange of shares. Each common share of the Corporation
is exchangeable into 1.6 common shares of Fountain. This business combination is
subject to regulatory and shareholder approval.
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES
The Corporation's consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in Canada, which in
the case of the Corporation at December 31, 1997, conforms in all material
respects with United States GAAP, except as set forth below.
(a) Adjustments to consolidated loss per share
F-47
<PAGE> 204
CANARGO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Stated in U.S. dollars)
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Loss in accordance with Canadian and U.S. GAAP $ (255,827)
------------
Loss per share in accordance with U.S. GAAP $ (0.02)
------------
Weighted average number of common shares outstanding
during period in accordance with U.S. GAAP 10,757,176
============
</TABLE>
(b) Adjustments to consolidated statements of cash flows in respect of
non-cash investing and financing activities.
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
INVESTING ACTIVITIES
In accordance with Canadian GAAP $(5,592,949)
Add:
Contribution of NOC assets, net of cash 2,694,705
Acquisition of Money Works, net of cash 29,249
-----------
INVESTING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP $(2,868,995)
===========
FINANCING ACTIVITIES
$ 6,810,242
In accordance with Canadian GAAP
Less:
Issue of share capital on contribution of NOC assets (3,187,000)
Issue of share capital on contribution of Money Works (31,975)
Add:
Contribution of NOC assets, net of cash 492,295
Acquisition of Money Works, net of cash 2,726
-----------
FINANCING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP $ 4,086,288
===========
</TABLE>
F-48
<PAGE> 205
CANARGO ENERGY INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS PRODUCTION
ACTIVITIES (UNAUDITED)
December 31, 1997 (Stated in U.S. dollars)
The following information about the Corporation's oil producing
activities is presented in accordance with United States Statement of Financial
Accounting Standards No. 69: Disclosures About Oil and Gas Producing Activities.
OIL RESERVES
Proved oil reserves are the estimated quantities of crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic
conditions.
Proved developed oil reserves are reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Estimates of oil reserves are subject to uncertainty and will change as
additional information regarding the producing fields and technology becomes
available and as economic conditions change.
Reserves presented in this section represent NOC's working interest
share of reserves net of royalties. The Corporation has a 55.9% beneficial
interest in the reserves of NOC. Reserves at December 31, 1997 are based on
estimates by the independent petroleum engineering firm, AMH Group Ltd. and are
all located in the Republic of Georgia.
The Corporation's net proved and net proved developed oil reserves were
as follows:
F-49
<PAGE> 206
CANARGO ENERGY INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS PRODUCTION
ACTIVITIES (UNAUDITED)
December 31, 1997 (Stated in U.S. dollars)
<TABLE>
<CAPTION>
NOC
(THOUSANDS OF
NET PROVED RESERVES BARRELS)
- ------------------- -------------
<S> <C>
Crude oil
Net proved reserves, June 30, 1997(1) 5,675
Production (112)
Reserve additions(1) 5,452
--------
NET PROVED RESERVES, DECEMBER 31, 1997 11,015
========
NET PROVED DEVELOPED RESERVES
June 30, 1997(1) 994
December 31, 1997 1,929
</TABLE>
(1) Estimated by management as the first reserve report prepared for the
Corporation was as of December 31, 1997.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL RESERVES
The following standardized measure of discounted future net cash flows
from proved oil reserves has been computed using period end prices and costs and
period end statutory tax rates. A discount rate of 10% has been applied in
determining the standardized measure of discounted future net cash flows.
This information does not necessarily reflect the fair market value of
its oil properties. Actual future net cash flows will differ from the presented
estimated future net cash flows in that:
(i) future production from proved reserves will differ from estimated
production;
(ii) future production will also include production from probable and
potential reserves;
(iii) future rather than year end prices and costs will apply; and
(iv) existing economic, operating and regulatory conditions are subject to
change.
F-50
<PAGE> 207
CANARGO ENERGY INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS PRODUCTION
ACTIVITIES (UNAUDITED)
December 31, 1997 (Stated in U.S. dollars)
The standardized measure of discounted future net cash flows is as
follows:
<TABLE>
<CAPTION>
NOC
(IN THOUSANDS)
--------------
<S> <C>
DECEMBER 31, 1997
Future cash inflows $113,567
Future production, development and restoration costs 73,664
--------
Future net cash flows $ 39,903
Ten percent annual discount 14,255
--------
Standardized measure $ 25,648
========
</TABLE>
The changes in the standardized measure of discounted future net cash
flows for the period is as follows:
<TABLE>
<CAPTION>
NOC
(IN THOUSANDS)
--------------
<S> <C>
JULY 1, 1997(1) $ 12,951
Oil sales net of production costs (534)
Oil discoveries(1) 16,100
Development costs incurred 2,869
--------
DECEMBER 31, 1997 $ 25,648
========
</TABLE>
(1) Estimated by management as the first reserve report prepared for the
Corporation was as of December 31, 1997.
COSTS INCURRED IN OIL PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES
<TABLE>
<CAPTION>
NOC
(IN THOUSANDS)
--------------
<S> <C>
SIX MONTHS ENDED DECEMBER 31, 1997
Property acquisition
Proved --
Unproved --
Development $2,869
Exploration --
------
$2,869
======
</TABLE>
F-51
<PAGE> 208
CANARGO ENERGY INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS PRODUCTION
ACTIVITIES (UNAUDITED)
December 31, 1997 (Stated in U.S. dollars)
Depletion per unit of net production:
<TABLE>
<CAPTION>
NOC
($ PER BOE)
-----------
<S> <C>
Six months ended December 31, 1997 $4.98
</TABLE>
Results of operations for oil producing activities:
<TABLE>
<CAPTION>
NOC
(IN THOUSANDS)
--------------
<S> <C>
SIX MONTHS ENDED DECEMBER 31, 1997
Sales $ 1,324
Royalty and production expense (790)
Depletion (556)
-------
Loss before tax $ (22)
Income tax --
-------
RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES $ (22)
=======
</TABLE>
F-52
<PAGE> 209
FINANCIAL STATEMENTS
NINOTSMINDA OIL COMPANY LIMITED
(FORMERLY JKX (NINOTSMINDA) LIMITED)
JUNE 30, 1997 AND DECEMBER 31, 1996
F-53
<PAGE> 210
AUDITORS' REPORT
To the Directors of
NINOTSMINDA OIL COMPANY LIMITED
(FORMERLY "JKX (NINOTSMINDA) LIMITED")
We have audited the financial statements of NINOTSMINDA OIL COMPANY
LIMITED and have obtained all the information and explanations we considered
necessary. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with International Standards on
Auditing. These standards are substantially in accordance with United States
generally accepted auditing standards. Those Standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, proper books of account have been kept by the Company
and the financial statements, which are in agreement therewith give a true and
fair view of the state of affairs of NINOTSMINDA OIL COMPANY LIMITED for the six
months ended June 30, 1997 and the year ended December 31, 1996 and of its
profit and cash flows for the periods then ended in accordance with
International Accounting Standards and comply with the provisions of the
Companies Law, Chapter 113.
Limassol, Cyprus Ernst & Young
February 18, 1998 Chartered Accountants
F-54
<PAGE> 211
NINOTSMINDA OIL COMPANY LIMITED
BALANCE SHEET
<TABLE>
<CAPTION>
(Stated in U.S. dollars)
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 492,300 $1,565,800
Accounts receivable 716,300 373,500
Inventory 82,600 49,600
---------- ----------
1,291,200 $1,988,900
Oil and gas properties [note 6] 4,081,700 2,069,900
---------- ----------
$5,372,900 $4,058,800
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT
Accounts payable $ 67,500 $ 25,600
Taxes payable 61,000 61,000
Due to shareholders [note 7] 783,800 188,800
---------- ----------
$ 912,300 $ 275,400
Long term debt [note 8] 1,350,000 2,411,600
---------- ----------
$2,262,300 $2,687,000
---------- ----------
SHAREHOLDERS' EQUITY
Retained earnings $1,291,300 $1,367,500
Share premium [note 9] 1,814,300 --
Share capital [note 9] 5,000 4,300
---------- ----------
$3,110,600 $1,371,800
---------- ----------
$5,372,900 $4,058,800
========== ==========
</TABLE>
See accompanying notes
F-55
<PAGE> 212
NINOTSMINDA OIL COMPANY LIMITED
STATEMENT OF OPERATIONS
AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(Stated in U.S. dollars)
PERIOD OCTOBER 24,
SIX MONTHS ENDED 1995 TO
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
REVENUE
Oil $ 1,500,000 $ 3,058,900
Other 17,400 16,000
----------- -----------
$ 1,517,400 $ 3,074,900
----------- -----------
EXPENSES
Operating $ 638,200 $ 962,500
General and administrative [note 10] 216,400 415,900
Interest [note 4] 76,000 188,900
Depletion 663,000 $ 79,100
----------- -----------
$ 1,593,600 $ 1,646,400
----------- -----------
(LOSS) INCOME BEFORE TAXES $ (76,200) $ 1,428,500
Provision for income taxes -- $ 61,000
----------- -----------
(LOSS) NET INCOME FOR THE PERIOD $ (76,200) $ 1,367,500
Retained earnings, beginning of period 1,367,500 --
----------- -----------
RETAINED EARNINGS, END OF PERIOD $ 1,291,300 $ 1,367,500
=========== ===========
</TABLE>
See accompanying notes
F-56
<PAGE> 213
NINOTSMINDA OIL COMPANY LIMITED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Stated in U.S. dollars)
PERIOD OCTOBER 24,
SIX MONTHS ENDED 1995 TO DECEMBER
JUNE 30, 1997 31, 1996
---------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
(Loss) income before taxes $ (76,200) $ 1,428,500
Adjustments to reconcile net income to net cash
provided by operating activities
Depletion 663,000 79,100
----------- -----------
Funds from operations $ 586,800 $ 1,507,600
Changes in non-cash working capital relating to operations
261,100 (208,700)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 847,900 $ 1,298,900
----------- -----------
INVESTING ACTIVITIES
Capital asset additions $(2,674,800) $(2,149,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $(2,674,800) $(2,149,000)
----------- -----------
FINANCING ACTIVITIES
Issuance of shares $ 700 $ 4,300
Share premium 1,814,300 --
Increase in due to shareholders -- 2,500,000
Repayment of due to shareholders (1,061,600) (88,400)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 753,400 $ 2,415,900
----------- -----------
Net (decrease) increase in cash $(1,073,500) $ 1,565,800
Cash, beginning of period 1,565,800 --
----------- -----------
CASH, END OF PERIOD $ 492,300 $ 1,565,800
=========== ===========
</TABLE>
See accompanying notes
F-57
<PAGE> 214
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 1997 and
Year ended December 31, 1996
(Stated in U.S. dollars)
1. INCORPORATION
The Company was incorporated in Cyprus on October 24, 1995 with minimal
share capital and changed its name to Ninotsminda Oil Company Limited ("NOC")
effective January 16, 1998.
2. DESCRIPTION OF BUSINESS
The primary purpose of the Company is the exploration for and production
of hydrocarbons in the Republic of Georgia.
NOC operates under the terms of a Production Sharing Contract ("PSC")
signed February 15, 1996 between NOC and the Republic of Georgia represented by
the state oil company, Georgian Oil. Under the terms of the PSC, NOC is
responsible for the costs associated with the project, which is operated on
behalf of NOC by the local operating company, Georgian British Oil Company
("Georgian Oil"). Georgian Oil is responsible for the costs associated with site
restoration and abandonment, royalties and all state taxes. The PSC expires in
December 2019 and provides for a five year extension. While areas of the license
containing field developments are not subject to relinquishment, other areas are
subject to relinquishment after 5, 10, 15 and 20 years after the date of issue
of the license. Currently the Ninotsminda field is the only producing field in
this license.
Production from the Ninotsminda field commenced in the early part of
1996, and during 1996 approximately 515,000 barrels of oil were produced. Under
the terms of the PSC, Georgian Oil currently take the first 750 barrels per day
("determined production") of production, after which all production is shared.
The level of determined production will change in accordance with the terms of
the agreement. After determined production, NOC receives up to 50% of production
for cost recovery. Remaining production after cost recovery is then allocated as
to 30% to NOC and as to 70% to Georgian Oil.
To date, NOC has sold all of its production to one international buyer
at prices related to the world market price for Brent crude, with payment in US
dollars into NOC's bank account in Cyprus.
NOC is in an early stage of operations and is effectively dealing with
challenges typical of doing business in the former Soviet Union. NOC is
currently not in a position to finance all its working capital and capital
investment requirements through its own operations and therefore will require
additional external financing.
3. ACCOUNTING POLICIES
The Company follows international accounting standards. The significant
accounting policies are noted below.
F-58
<PAGE> 215
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 1997 and
Year ended December 31, 1996
(Stated in U.S. dollars)
ACCOUNTING CONVENTION
The financial statements are drawn up under the historical cost
convention.
EXCHANGE RATES
The financial statements are presented in United States dollars. The
Company's revenues and exploration and production costs are denominated in U.S.
dollars.
Transactions in other currencies are translated to United States dollars
at the rates in effect on the transaction date. Balances are translated to
United States dollars at the exchange rate in effect at the balance sheet date.
Any resulting exchange gains or losses are recognized as income or expense in
the year they are incurred.
OIL AND GAS PROPERTIES
The Company accounts for oil and gas expenditures under the full cost
method of accounting, whereby all costs associated with the exploration for and
development of crude oil and natural gas reserves are capitalized as capital
assets within one global amortized cost pool.
Costs related to evaluated properties, including an estimate for future
costs to develop proved reserves, are amortized through depletion charges using
the unit of production method based on commercial proved crude oil reserves.
INVENTORY
Inventory is comprised of crude oil and is carried at the lower of cost
and net realizable value.
F-59
<PAGE> 216
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 1997 and
Year ended December 31, 1996
(Stated in U.S. dollars)
4. INTEREST PAYABLE
The following amounts are included in the due to shareholder:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
CanArgo Energy Inc. $134,500 $ 97,800
JKX Nederland BV 125,400 91,100
-------- --------
$259,900 $188,900
======== ========
</TABLE>
5. PROFITS TAX
The Company is subject to Cyprus corporation tax on its taxable profits
at the rate of 4.25%.
6. OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
COST
Opening balance $2,149,000 $ --
Additions during the period 2,674,800 2,149,000
---------- ----------
At December 31 $4,823,800 $2,149,000
---------- ----------
DEPLETION
Opening balance $ 79,100 $ --
Charge for the period 663,000 79,100
---------- ----------
At December 31 $ 742,100 $ 79,100
---------- ----------
NET BOOK VALUE
At December 31 $4,081,700 $2,069,900
========== ==========
</TABLE>
F-60
<PAGE> 217
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 1997 and
Year ended December 31, 1996
(Stated in U.S. dollars)
7. DUE TO SHAREHOLDERS
Amounts falling due within one year:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
CanArgo Energy Inc. $134,500 $ 97,800
JKX Nederland BV 649,300 91,100
-------- --------
$783,800 $188,900
======== ========
</TABLE>
8. LONG TERM DEBT
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Shareholder loans
CanArgo Energy Inc. $ 675,000 $1,500,000
JKX Nederland BV 675,000 911,600
---------- ----------
$1,350,000 $2,411,600
========== ==========
</TABLE>
The shareholder loans bear interest at the rate of 10% per annum and are
repayable out of surplus funds as and when available.
9. SHARE CAPITAL
AUTHORIZED
10,000 shares at a par value of pound sterling each
<TABLE>
<CAPTION>
Issued Number Value
- -------------------------------- ------ ------
<S> <C> <C>
Issued during 1996 2,000 $4,300
----- ------
Balance, December 31, 1996 2,000 $4,300
Issued for cash 363 700
----- ------
Balance, June 30, 1997 2,363 $5,000
===== ======
</TABLE>
F-61
<PAGE> 218
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 1997 and
Year ended December 31, 1996
(Stated in U.S. dollars)
During 1997, the Company issued 203 shares to CanArgo and 160 shares to
JKX Nederland B.V. at a price of $5,000 per share. The amount paid in excess of
the nominal value of the shares is recorded as share premium.
10. RELATED PARTY TRANSACTIONS
During 1997, members of the JKX Oil & Gas plc ("JKX") group of
companies, including JKX Nederland B.V. [44.1% shareholder in NOC at December
31, 1997] performed services and procured goods and services on behalf of NOC.
These goods and services recharged by JKX to NOC, excluding interest expense,
totalled $531,300 for the six month period ended June 30, 1997 (period ended
December 31, 1996 - $743,000) of which $381,900 has not yet been agreed to by
NOC.
11. SHAREHOLDER DISPUTES
There are disputes between shareholders as to their relative ownership
interests in NOC. The resolution of these disputes may result in a reallocation
of amounts between contributed surplus and due to shareholders.
12. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED STATES
The Company's financial statements have been prepared in accordance with
international generally accepted accounting principles, which in the case of the
Company conform in all material respects with United States GAAP.
F-62
<PAGE> 219
ANNEX A
SPECIAL RESOLUTION OF THE SHAREHOLDERS OF
CANARGO ENERGY INC.
CONTINUANCE UNDER THE BUSINESS CORPORATIONS ACT (ONTARIO)
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. the Corporation be and is hereby authorized to make application pursuant to
section 182 of the Business Corporations Act (Alberta) for the approval of
the Registrar of Corporations of the proposed continuance of the Corporation
under the Business Corporations Act (Ontario) (the "OBCA") and to apply,
pursuant to section 180 of the OBCA, to the Director under the OBCA for a
Certificate of Continuance continuing the Corporation as if it had been
incorporated under the laws of Ontario (the "Continuance");
2. the articles of continuance are in the form of the articles of the
Corporation, with such additions and deletions as may be prescribed under
the Business Corporations Act (Ontario) (the "Articles of Continuance") be,
and they are hereby, approved;
3. upon the Continuance becoming effective and without affecting the validity
or existence of the Corporation or of any act done under its articles, the
existing articles of the Corporation be hereby amended by substituting for
all of the provisions of its existing articles, the provisions set out in
the Articles of Continuance;
4. notwithstanding that this resolution has been duly passed by its
shareholders of the Corporation, the directors of the Corporation be, and
they are hereby, authorized and empowered to revoke this resolution and to
abandon the application for the Certificate of Continuance at any time prior
to the issue thereof without further approval of the shareholders of the
Corporation;
5. any one director or any one officer of the Corporation be and is hereby
authorized and empowered, acting for, in the name of and on behalf of the
Corporation, to execute, under the seal of the Corporation or otherwise, and
to deliver articles of continuance substantially in the form of the Articles
of Continuance, in duplicate, to the Director under the OBCA; and
6. any one director or any one officer of the Corporation be and is hereby
authorized and empowered, acting for, in the name of and on behalf of the
Corporation, to execute or to cause to be executed, under the seal of the
Corporation or otherwise, and to deliver or to cause to be delivered, all
such other documents and instruments, and to do or to cause to be done, such
other acts and things as in the opinion of such director or officer may be
necessary or desirable in order to carry out the intent of this resolution.
<PAGE> 220
ANNEX B
SPECIAL RESOLUTION OF THE SHAREHOLDERS OF
CANARGO ENERGY INC.
ARRANGEMENT UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. the arrangement (the "Arrangement") involving CanArgo Energy Inc. (the
"Corporation") and Fountain Oil Incorporated pursuant to section 182 of the
Business Corporations Act (Ontario) (the "OBCA") and the Combination
Agreement attached as Annex C to the joint management proxy circular
accompanying the notice of annual and special meeting of shareholders at
which the Arrangement is to be considered be, and they are hereby,
authorized and approved;
2. notwithstanding that this resolution has been duly passed by the
shareholders of the Corporation, the directors of the Corporation be, and
they are hereby, authorized and empowered to revoke this resolution at any
time prior to the issue of a Certificate of Arrangement giving effect to the
Arrangement and to determine not to proceed with the Arrangement without
further approval of the shareholders of the Corporation;
3. any one director or any one officer of the Corporation be and is hereby
authorized and empowered, acting for, in the name of and on behalf of the
Corporation, to execute, under the seal of the Corporation or otherwise, and
to deliver Articles of Arrangement, in duplicate, to the Director under the
OBCA; and
4. any one director or any one officer of the Corporation be and is hereby
authorized and empowered, acting for, in the name of and on behalf of the
Corporation, to execute or to cause to be executed, under the seal of the
Corporation or otherwise, and to deliver or to cause to be delivered, all
such other documents and instruments, and to do or to cause to be done, such
other acts and things as in the opinion of such director or officer may be
necessary or desirable in order to carry out the intent of this resolution.
<PAGE> 221
ANNEX C
================================================================================
AMENDED AND RESTATED COMBINATION AGREEMENT
BETWEEN
FOUNTAIN OIL INCORPORATED
AND
CANARGO ENERGY INC.
DATED AS OF FEBRUARY 2, 1998
================================================================================
<PAGE> 222
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
ARTICLE 1 THE ARRANGEMENT AND RELATED MATTERS............................................ 1
1.1 (A) THE ARRANGEMENT.................................................................. 1
1.2 ADJUSTMENTS FOR CAPITAL CHANGES...................................................... 3
1.3 DISSENTING SHARES.................................................................... 3
1.4 CANARGO OPTIONS...................................................................... 3
1.5 OTHER EFFECTS OF THE ARRANGEMENT..................................................... 4
1.6 SHAREHOLDERS' MEETINGS............................................................... 4
1.7 JOINT MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT, REGISTRATION STATEMENT........ 5
1.8 REORGANIZATION....................................................................... 5
1.9 CURRENCY............................................................................. 6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF FOUNTAIN..................................... 6
2.1 ORGANIZATION AND QUALIFICATION....................................................... 6
2.2 CAPITALIZATION....................................................................... 6
2.3 SUBSIDIARIES......................................................................... 6
2.4 AUTHORITY RELATIVE TO THIS COMBINATION AGREEMENT..................................... 7
2.5 REPORTS AND FINANCIAL STATEMENTS..................................................... 7
2.6 ABSENCE OF CERTAIN CHANGES OR EVENTS................................................. 8
2.7 LITIGATION........................................................................... 8
2.8 INFORMATION IN DISCLOSURE DOCUMENTS.................................................. 8
2.9 EMPLOYEE BENEFIT PLANS............................................................... 9
2.10 ERISA............................................................................... 9
2.11 OIL AND GAS PROPERTIES.............................................................. 9
2.12 COMPLIANCE WITH APPLICABLE LAWS..................................................... 10
2.13 LIABILITIES......................................................................... 11
2.14 TAXES............................................................................... 11
2.15 CERTAIN AGREEMENTS.................................................................. 11
2.16 PATENTS, TRADEMARKS, ETC............................................................ 11
2.17 PRODUCT AND OTHER LIABILITY......................................................... 12
2.18 ENVIRONMENT......................................................................... 12
2.19 TITLE TO ASSETS; LIENS.............................................................. 12
2.20 FOUNTAIN ACTION..................................................................... 12
2.21 FINANCIAL ADVISORS.................................................................. 13
2.22 [INTENTIONALLY OMITTED]............................................................. 13
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF CANARGO...................................... 13
3.1 ORGANIZATION AND QUALIFICATION....................................................... 13
3.2 CAPITALIZATION....................................................................... 13
3.3 SUBSIDIARIES......................................................................... 14
3.4 AUTHORITY RELATIVE TO THIS COMBINATION AGREEMENT..................................... 14
3.5 REPORTS AND FINANCIAL STATEMENTS..................................................... 15
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS................................................. 15
3.7 LITIGATION........................................................................... 15
3.8 INFORMATION IN DISCLOSURE DOCUMENTS.................................................. 15
3.9 EMPLOYEE BENEFIT PLANS............................................................... 16
3.10 TAKEOVER PROVISIONS INAPPLICABLE.................................................... 16
3.11 CANARGO ACTION...................................................................... 16
3.12 OIL AND GAS PROPERTIES.............................................................. 16
3.13 FINANCIAL ADVISOR................................................................... 17
3.14 COMPLIANCE WITH APPLICABLE LAWS..................................................... 18
</TABLE>
<PAGE> 223
<TABLE>
<S> <C>
3.15 LIABILITIES......................................................................... 18
3.16 TAXES............................................................................... 18
3.17 CERTAIN AGREEMENTS.................................................................. 19
3.18 PATENTS, TRADEMARKS, ETC............................................................ 19
3.19 PRODUCT AND OTHER LIABILITY......................................................... 19
3.20 ENVIRONMENT......................................................................... 19
3.21 TITLE TO ASSETS; LIENS.............................................................. 19
ARTICLE 4 COVENANTS...................................................................... 20
4.1 CONDUCT OF BUSINESS PENDING THE ARRANGEMENT......................................... 20
4.2 NOTICE OF BREACH.................................................................... 21
4.3 SHAREHOLDER APPROVAL................................................................ 21
4.4 AFFILIATE AGREEMENTS................................................................ 22
4.5 JOINT PROXY STATEMENT............................................................... 22
4.6 REGULATORY APPROVALS................................................................ 22
4.7 NECESSARY CONSENTS.................................................................. 22
4.8 ACCESS TO INFORMATION AND PROPERTIES................................................ 22
4.9 SATISFACTION OF CONDITIONS PRECEDENT................................................ 23
4.10 NO SOLICITATION..................................................................... 23
4.11 LISTING............................................................................. 24
4.12 NOTIFICATION OF CERTAIN MATTERS..................................................... 24
4.13 INDEMNIFICATION..................................................................... 24
4.14 CLOSING............................................................................. 25
4.15 CONTINUED CANARGO OPERATIONS........................................................ 25
4.16 CERTAIN EMPLOYEE BENEFIT MATTERS.................................................... 25
4.17 BOARD COMPOSITION................................................................... 25
4.19 BRING DOWN CERTIFICATES-CANARGO..................................................... 26
ARTICLE 5 CONDITIONS PRECEDENT TO OBLIGATIONS OF CANARGO................................. 26
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.......................................... 26
5.2 COVENANTS........................................................................... 27
5.3 ABSENCE OF MATERIAL ADVERSE CHANGE.................................................. 27
5.4 COMPLIANCE WITH LAW................................................................. 27
5.5 GOVERNMENT CONSENTS................................................................. 27
5.6 SEC FILINGS......................................................................... 27
5.7 SHAREHOLDER APPROVAL................................................................ 27
5.8 FOUNTAIN APPROVALS.................................................................. 27
5.9 NO LEGAL ACTION..................................................................... 28
5.11 TAX OPINION......................................................................... 28
5.12 COURT APPROVAL...................................................................... 28
5.13 OSC, ETC............................................................................ 28
5.14 APPOINTMENT TO FOUNTAIN BOARD....................................................... 28
ARTICLE 6 CONDITIONS PRECEDENT TO OBLIGATIONS OF FOUNTAIN................................ 29
6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.......................................... 29
6.2 COVENANTS........................................................................... 29
6.3 ABSENCE OF MATERIAL ADVERSE CHANGE.................................................. 29
6.4 COMPLIANCE WITH LAW................................................................. 29
6.5 GOVERNMENT CONSENTS................................................................. 29
6.6 SEC FILINGS......................................................................... 30
6.7 STOCKHOLDER APPROVAL................................................................ 30
6.8 CANARGO APPROVALS................................................................... 30
6.9 NO LEGAL ACTION..................................................................... 30
6.10 AFFILIATE AGREEMENTS................................................................ 30
</TABLE>
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<TABLE>
<S> <C>
6.11 COURT APPROVAL...................................................................... 30
6.12 OSC, ETC............................................................................ 30
6.13 LEGAL OPINIONS...................................................................... 31
6.14 FAIRNESS OPINION.................................................................... 31
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER.............................................. 31
7.1 TERMINATION.......................................................................... 31
7.2 EFFECT OF TERMINATION................................................................ 32
7.3 AMENDMENT............................................................................ 32
7.4 WAIVER............................................................................... 32
ARTICLE 8 GENERAL PROVISIONS............................................................. 33
8.1 GOVERNING LAW........................................................................ 33
8.2 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS........................... 33
8.3 SEVERABILITY......................................................................... 33
8.4 COUNTERPARTS......................................................................... 33
8.6 AMENDMENT AND WAIVERS................................................................ 33
8.5 NOTICES.............................................................................. 33
8.7 FEES AND EXPENSES.................................................................... 35
8.8 PUBLIC ANNOUNCEMENT.................................................................. 35
8.9 SPECIFIC PERFORMANCE................................................................. 35
8.10 INTERPRETATION...................................................................... 35
8.11 THIRD PARTY BENEFICIARIES........................................................... 36
8.12 ENTIRE AGREEMENT.................................................................... 36
8.13 NO ASSIGNMENT....................................................................... 36
8.14 CURE PERIOD......................................................................... 36
</TABLE>
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AMENDED AND RESTATED COMBINATION AGREEMENT
THIS COMBINATION AGREEMENT (as amended and restated, the "COMBINATION
AGREEMENT") is entered into as of February 2, 1998 by and between Fountain Oil
Incorporated, a Delaware corporation ("FOUNTAIN") and CanArgo Energy Inc., an
Alberta corporation ("CANARGO").
RECITALS
A. The respective Boards of Directors of CanArgo and Fountain have
approved the transactions contemplated by this Combination Agreement. The Board
of Directors of CanArgo (the "CANARGO BOARD") has agreed to submit the Plan of
Arrangement (as defined in Section 1.1) and other transactions contemplated
hereby to its shareholders for approval, and the Board of Directors of Fountain
(the "FOUNTAIN BOARD") has agreed to submit the Stock Issuance Proposal and the
Fountain Charter Changes (both as hereinafter defined) to its stockholders for
approval.
B. The Arrangement (as hereinafter defined) is intended to be treated as
a reorganization of capital for purposes of section 86 of the Income Tax Act
(Canada) (the "ITA") to the extent that Exchangeable Shares (as defined below)
are received in exchange for CanArgo Common Shares (as hereinafter defined).
C. To permit the Arrangement to take place, CanArgo must be continued
under the OBCA (as hereinafter defined), which continuance must be authorized by
the shareholders of CanArgo voting at the CanArgo Meeting (as hereinafter
defined).
D. Fountain and CanArgo entered into a combination agreement on February
2, 1998 in respect of the Arrangement and related matters. As a result of
certain developments arising after the date of execution of the combination
agreement, it is desirable to amend and restate such combination agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE 1
THE ARRANGEMENT AND RELATED MATTERS
1.1 (a) The Arrangement.
As promptly as practicable after the execution of this
Combination Agreement, CanArgo will apply to the Ontario Court of
Justice (General Division) (the "COURT") pursuant to section 182
of the Business Corporations Act (Ontario) (the "OBCA") for an
interim order in form and substance satisfactory to Fountain
(such approval not to be unreasonably withheld or delayed) (the
"INTERIM ORDER") providing for, among other things, the calling
and holding of the CanArgo Meeting (as defined below) for the
purpose of considering and, if deemed advisable, approving the
arrangement (the "ARRANGEMENT") under section 182 of the OBCA and
pursuant to the Plan of Arrangement, substantially in the Form of
Schedule 1.1 hereto (the "PLAN OF ARRANGEMENT"). If the
shareholders of CanArgo have approved the Arrangement and the
stockholders of Fountain have approved the Stock Issuance
Proposal, CanArgo will promptly take the necessary steps to
submit the Arrangement to the Court and apply for a final order
of the Court approving the Arrangement in such fashion as the
Court may direct (the "FINAL ORDER"). At 2:00 p.m., Toronto time,
(the "EFFECTIVE TIME") on the date (the "EFFECTIVE DATE") shown
on the certificate of arrangement issued by the Director under
the OBCA giving effect to the Arrangement, the following
reorganization of capital and other transactions shall occur and
shall be deemed to occur in the following order without any
further act or formality:
<PAGE> 226
(i) the articles of incorporation of CanArgo shall be amended,
among other things, to (A) replace the rights, privileges,
restrictions and conditions attaching to CanArgo's Common
Shares ("CANARGO COMMON SHARES") with those set forth for
Common Shares in Appendix A to the Plan of Arrangement,
and (B) authorize 23,782,138 Exchangeable Shares
("EXCHANGEABLE Shares") having rights, privileges,
restrictions and conditions substantially as set forth for
Exchangeable Shares in Appendix A to the Plan of
Arrangement;
(ii) CanArgo shall issue to Fountain 100 CanArgo Common Shares
for which Fountain shall pay CanArgo $160;
(iii) the CanArgo Common Shares (other than the CanArgo Common
Shares held by Fountain and by holders who have exercised
their rights of dissent in accordance with Article 3 of
the Plan of Arrangement and who are ultimately entitled to
be paid fair value for such shares) shall be exchanged for
Exchangeable Shares in a ratio of 1.6 Exchangeable Shares
for each CanArgo Common Share as adjusted, if appropriate,
pursuant to Section 1.2 hereof, (the "EXCHANGE RATIO"). No
fractional Exchangeable Shares will be delivered. In lieu
thereof, each holder of CanArgo Common Shares who
otherwise would be entitled to receive a fraction of an
Exchangeable Share shall be paid by CanArgo an amount
determined in accordance with the Plan of Arrangement;
(iv) upon the exchange referred to in paragraph (iii) above,
each holder of CanArgo Common Shares whose shares shall
have been so exchanged shall cease to be a holder of
CanArgo Common Shares, shall have its name removed from
the register of holders of CanArgo Common Shares, and
shall become a holder of a number of fully paid
Exchangeable Shares to which he is entitled as above
described, and such holder's name shall be added to the
register of holders of Exchangeable Shares;
(v) the stated capital attributable to the Exchangeable Shares
will be as set out in the Plan of Arrangement; and
(vi) the names of the holders of CanArgo Common Shares who have
exercised their rights of dissent in accordance with
Article 3 of the Plan of Arrangement shall be deleted from
the register of holders of CanArgo Common Shares at the
Effective Time and shall thereafter only have the rights
set out in Article 3 of the Plan of Arrangement.
(b) Ancillary Agreement.
On or before the Effective Date:
(i) Fountain, CanArgo and Montreal Trust Company of Canada,
acting reasonably, shall execute and deliver a Voting,
Support and Exchange Trust Agreement substantially in the
form set forth in Schedule l.l(b)(i) hereto (the "VOTING,
SUPPORT AND EXCHANGE TRUST AGREEMENT");
(ii) Fountain shall file with the Secretary of State of the
State of Delaware amendments to its certificate of
incorporation pursuant to the Delaware General Corporation
Law (the "DGCL") which effect changes substantially as set
forth below (the "FOUNTAIN CHARTER CHANGES"), if and to
the extent adopted by the stockholders of Fountain. The
Fountain Charter Changes shall:
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<PAGE> 227
(A) effect a reverse stock split of Fountain Common
Stock (as defined below) so that each two shares of
Common Stock as presently constituted shall be
combined into one share of Common Stock; and
(B) change the name of Fountain to CanArgo Energy
Corporation;
(iii) Fountain shall file with the Secretary of State of the
State of Delaware a Certificate of Designation pursuant to
the DGCL setting forth the number of shares and the
powers, designation, preferences and relative,
participating, optional or other rights, or the
qualifications, limitations, or restrictions thereof, with
respect to the class of preferred stock from which the
shares of stock to be issued pursuant to the Voting,
Support and Exchange Trust Agreement shall be issued; and
(iv) Fountain shall authorize the issuance and delivery of
shares of Fountain Common Stock to be issued pursuant to
the Plan of Arrangement.
1.2 Adjustments for Capital Changes.
If, prior to the Effective Time, Fountain or CanArgo recapitalizes
through a subdivision of its outstanding shares into a greater number of shares
or a combination of its outstanding shares into a lesser number of shares, or
reorganizes, reclassifies or otherwise changes its outstanding shares into the
same or a different number of shares of other classes, or declares a dividend on
its outstanding shares payable in shares of its capital stock or securities
convertible into shares of its capital stock, including without limitation the
Fountain Reverse Split, then the Exchange Ratio will be adjusted appropriately
so as to maintain the relative proportionate interests of the holders of CanArgo
Common Shares and the holders of the shares of the common stock, par value $0.10
per share of Fountain ("FOUNTAIN COMMON STOCK").
1.3 Dissenting Shares.
Holders of CanArgo Common Shares may exercise rights of dissent with
respect to such shares in connection with the Arrangement pursuant to and in the
manner set forth in section 185 of the OBCA and Section 3.1 of the Plan of
Arrangement (such holders referred to as "DISSENTING SHAREHOLDERS"). CanArgo
shall give Fountain (i) prompt notice of any written demands of a right of
dissent, withdrawals of such demands, and any other instruments served pursuant
to the OBCA and received by CanArgo and (ii) the opportunity to participate in
all negotiations and proceedings with respect to such rights. CanArgo shall not,
except with the prior written consent of Fountain, voluntarily make any payment
with respect to any such rights or offer to settle or settle any such rights.
1.4 CanArgo Options.
(a) At the Effective Time after the actions described in Sections 1.1
(a) and (b) have been taken, each of the then outstanding options
granted by CanArgo to purchase CanArgo Common Shares under the
CanArgo Option Plan (collectively, the "CANARGO OPTIONS") will,
without any further action on the part of any holder thereof, be
converted into an option (a "FOUNTAIN OPTION") to purchase that
number of shares of Fountain Common Stock determined by
multiplying the number of CanArgo Common Shares subject to such
CanArgo Option at the Effective Time by the Exchange Ratio, at an
exercise price per share of Fountain Common Stock equal to the
exercise price per CanArgo Common Share of such CanArgo Option
immediately prior to the Effective Time divided by the Exchange
Ratio. If the foregoing calculation results in a converted
CanArgo Option being exercisable for a fraction of a share of
Fountain Common Stock then the number of shares of Fountain
Common Stock subject to such option will be rounded down to the
nearest
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<PAGE> 228
whole number of shares and the total exercise price for the
option will be reduced by the exercise price of the fractional
share. The term, exercisability, currency of payment, vesting
schedule and all other terms and conditions of the CanArgo
Options will otherwise continue with respect to the Fountain
Options. Continuous employment with CanArgo or any of the CanArgo
Subsidiaries (as hereinafter defined) will be credited to an
optionee of CanArgo for purposes of determining the number of
shares of Fountain Common Stock subject to exercise under a
converted CanArgo Option after the Effective Time.
(b) Fountain will cause the Fountain Common Stock issuable upon
exercise of the Fountain Options to be registered on Form S-8
promulgated by the Securities and Exchange Commission (the "SEC"
or the "COMMISSION") as soon as reasonably practicable after the
Effective Time and will use its reasonable best efforts to
maintain the effectiveness of such registration statement or
registration statements for so long as such Fountain Options
shall remain outstanding. Fountain will reserve a sufficient
number of shares of Fountain Common Stock for issuance upon
exercise of the Fountain Options pursuant to this Section.
(c) At the Effective Time, after the actions described in Section
1.1(a) and (b), each of the share purchase warrants of CanArgo
(the "Purchase Warrants") issued (i) pursuant to the warrant
indenture (the "Warrant Indenture") dated as of October 30, 1997
between CanArgo and Montreal Trust Company of Canada in respect
of 1,045,049 CanArgo Common Shares, (ii) to certain fiscal agents
in respect of 205,010 CanArgo Common Shares, and (iii) to certain
investors in respect 250,000 CanArgo Common Shares will, without
any action on the part of any holder thereof, have a right to
purchase that number of Exchangeable Shares determined in
accordance with the Warrant Indenture.
(d) At the Effective Time, after the actions described in Section
1.1(a) and (b), each of the special warrants (the "Special
Warrants") issued pursuant to the Special Warrant Indenture dated
as of October 30, 1997 between CanArgo and Montreal Trust Company
of Canada which are outstanding at the Effective Time will,
without any action on the part of any holder hereof, have a right
to acquire that number of Exchangeable Shares and Purchase
Warrants determined in accordance with the Special Warrant
Indenture.
1.5 Other Effects of the Arrangement.
At the Effective Time: (a) the bylaws of CanArgo immediately prior to
the Effective Time will continue as the bylaws of CanArgo, subject to later
amendment; (b) the directors of CanArgo will be as determined by CanArgo prior
to the Effective Time; (c) the officers of CanArgo will be as determined by
CanArgo prior to the Effective Time; (d) each CanArgo Common Share (other than
CanArgo Common Shares held by Fountain) and each CanArgo Option outstanding
immediately prior to the Effective Time will be exchanged as provided in
Sections 1.1 and 1.4; and (e) the Arrangement will, from and after the Effective
Time, have all of the effects provided by applicable law, including, without
limitation, the OBCA.
1.6 Shareholders' Meetings.
(a) Subject to the terms of the Interim Order, CanArgo shall take all
action necessary, in accordance with applicable law and its
articles of incorporation and bylaws, to convene a meeting of the
holders of CanArgo Common Shares (the "CANARGO MEETING") promptly
for the purpose of considering and taking action upon this
Combination Agreement. Subject to its fiduciary duties under
applicable law, the Board of Directors of CanArgo will recommend
that holders of CanArgo Common Stock vote in favour of and
approve the Arrangement and the adoption of the Combination
Agreement at the CanArgo Meeting.
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<PAGE> 229
(b) Fountain shall take all action necessary, in accordance with
applicable law and its certificate of incorporation and bylaws,
to convene a meeting of the holders of Fountain Common Stock (the
"FOUNTAIN MEETING") promptly for the purpose of considering and
acting upon a proposal (the "STOCK ISSUANCE PROPOSAL") to approve
the issuance of shares of Fountain Common Stock as provided by
this Combination Agreement and to approve the Fountain Charter
Changes. Subject to its fiduciary duties under applicable law,
the Board of Directors of Fountain will recommend that holders of
Fountain Common Stock vote in favour of and approve the Stock
Issuance Proposal and the Fountain Charter Changes at the
Fountain Meeting.
1.7 Joint Management Information Circular/Proxy Statement, Registration
Statement.
(a) As promptly as practicable after execution of this Combination
Agreement, Fountain and CanArgo shall prepare and file with the
SEC a preliminary joint management information circular and proxy
statement (the "JOINT PROXY STATEMENT"), together with any other
documents required by the Securities Act of 1933, as amended (the
"SECURITIES ACT"), or the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), in connection with the Arrangement.
The Joint Proxy Statement shall constitute (i) the management
information circular of CanArgo with respect to the CanArgo
Meeting and (ii) the proxy statement of Fountain for the Fountain
Meeting with respect to the Stock Issuance Proposal and the
Fountain Charter Changes. As promptly as practicable after
comments are received from the SEC thereon and after the
furnishing by Fountain and CanArgo of all information required to
be contained therein, Fountain and CanArgo shall cause the Joint
Proxy Statement to be mailed to each company's shareholders and
filed with the Ontario Securities Commission and the Alberta
Securities Commission. If Fountain determines on the advice of
its counsel that it is necessary to file a registration statement
(the "REGISTRATION STATEMENT") in order to register the Fountain
Common Stock to be issued from time to time after the Effective
Time upon exchange of the Exchangeable Shares, then Fountain
shall file the Registration Statement with the SEC and use its
reasonable best efforts to cause such Registration Statement to
be declared effective and to maintain the effectiveness of such
registration for such period as such Exchangeable Shares remain
outstanding.
(b) Each party hereto shall promptly furnish to the other party all
information concerning such party and its shareholders as may be
reasonably required in connection with any action contemplated by
this Section 1.7. The Joint Proxy Statement and, if required, the
Registration Statement, shall comply in all material respects
with all applicable requirements of law. Each of Fountain and
CanArgo will notify the other promptly of the receipt of any
comments from the SEC or its staff and of any request by the SEC
or its staff for amendments or supplements to the Joint Proxy
Statement or the Registration Statement or for additional
information, and will supply the other with copies of all
correspondence with the SEC or its staff with respect to the
Joint Proxy Statement or Registration Statement. Whenever any
event occurs which should be set forth in an amendment or
supplement to the Joint Proxy Statement or the Registration
Statement, Fountain or CanArgo, as the case may be, shall
promptly inform the other of such occurrence and cooperate in
filing with the SEC, its staff, and/or mailing to stockholders of
Fountain and CanArgo, such amendment or supplement.
1.8 Reorganization.
CanArgo intends to adopt the Plan of Arrangement as a reorganization of
capital of CanArgo under section 86 of the ITA to the extent that Exchangeable
Shares are received in exchange for CanArgo Common Shares.
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<PAGE> 230
1.9 Currency.
Unless otherwise specified, all references in this Combination Agreement
to "dollars" or "$" shall mean United States dollars.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF FOUNTAIN
Except (i) as set forth in a disclosure schedule delivered by Fountain
to CanArgo concurrently herewith (the "FOUNTAIN DISCLOSURE SCHEDULE") and
without regard to whether it is set forth pursuant to a reference herein to a
specific section of the Fountain Disclosure Schedule and (ii) for circumstances
that, taken in the aggregate, would not have a Fountain Material Adverse Effect
(as defined in Section 8.10) in the case of all representations and warranties
herein other than those set forth in the first sentence of Section 2.1, the
first four sentences of Section 2.4, and Sections 2.2, 2.6, and 2.7, Fountain
represents and warrants to the CanArgo as follows:
2.1 Organization and Qualification.
Fountain is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power to
carry on its business as it is now being conducted or currently proposed to be
conducted. Fountain is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities make such
qualification necessary. Complete and correct copies as of the date hereof of
the certificate of incorporation and bylaws of Fountain and each of its
Significant Subsidiaries (as defined in Section 2.3) have, to the extent
requested by CanArgo, heretofore been delivered to CanArgo as part of the
Fountain Disclosure Schedule.
2.2 Capitalization.
The authorized capital stock of Fountain consists of 50,000,000 shares
of Fountain Common Stock and 5,000,000 shares of Preferred Stock, par value $.10
per share ("FOUNTAIN PREFERRED STOCK"). As of December 31, 1997, 22,447,489
shares of Fountain Common Stock were validly issued and outstanding, fully paid
and nonassessable, and no shares of Fountain Common Stock were held in treasury.
As of December 31, 1997, no shares of Fountain Preferred Stock were issued and
outstanding. As of December 31, 1997, except for (i) stock options to acquire
1,154,332 shares of Fountain Common Stock at a weighted average exercise price
of $6.32 per share and (ii) contingent rights to acquire an additional 375,000
shares of Fountain Common Stock as set forth in Section 2.2 of the Fountain
Disclosure Schedule and as provided herein, there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating Fountain to issue, deliver or sell shares of its capital stock or
debt securities, or obligating Fountain to grant, extend or enter into any such
option, warrant, call or other such right, agreement or commitment. Since
December 31, 1997, Fountain has not issued any shares of Fountain Common Stock
or Fountain Preferred Stock, except for shares of Fountain Common Stock issued
pursuant to said options and contingent rights. Since December 31, 1997,
Fountain has not issued or obligated itself to issue any options, warrants,
calls or other rights, agreements or commitments obligating Fountain to issue,
deliver or sell shares of its capital stock or debt securities. All of the
shares of Fountain Common Stock issuable in accordance with this Combination
Agreement in exchange for CanArgo Common Stock at the Effective Date will be,
when so issued, duly authorized, validly issued, fully paid and nonassessable.
2.3 Subsidiaries.
The only "Significant Subsidiaries" (as such term is defined in Rule
1-02 of Regulation S-X of the Securities and Exchange Commission) ("SIGNIFICANT
SUBSIDIARIES") of Fountain are those set forth in Section 2.3 of the Fountain
Disclosure Schedule. Each Significant Subsidiary is a corporation duly
organized, validly existing
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<PAGE> 231
and in good standing under the laws of its jurisdiction of incorporation and has
the corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each Significant Subsidiary is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary. All
the outstanding shares of capital stock of each Significant Subsidiary are
validly issued, fully paid and nonassessable, and those owned by Fountain or by
a Significant Subsidiary of Fountain are owned free and clear of any liens,
claims or encumbrances. There are no existing options, warrants, calls or other
rights, agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of any of the Significant
Subsidiaries of Fountain. Except as set forth in Fountain's Report on Form 10-K
for the period ended December 31, 1996 and except for wholly owned subsidiaries
which are formed after the date hereof in the ordinary course of business,
Fountain does not directly or indirectly own any interests in any other
corporation, partnership, joint venture or other business association or entity
which are material to Fountain and its subsidiaries taken as a whole.
2.4 Authority Relative to this Combination Agreement.
Fountain has the corporate power to enter into this Combination
Agreement and to carry out its obligations hereunder. The execution and delivery
of this Combination Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Fountain's Board of Directors.
This Combination Agreement constitutes a valid and binding obligation of
Fountain enforceable in accordance with its terms except as enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought. No other
corporate proceedings on the part of Fountain are necessary to authorize the
Combination Agreement and the transactions contemplated hereby, other than the
approval of the Stock Issuance Proposal by the holders of Fountain Common Stock.
Fountain is not subject to or obligated under (i) any charter, by-law, indenture
or other loan document provision or (ii) any other contract, license, franchise,
permit, order, decree, concession, lease, instrument, judgment, statute, law,
ordinance, rule or regulation applicable to Fountain or any of its subsidiaries
or their respective properties or assets, which would be breached or violated,
or under which there would be a default (with or without notice or lapse of
time, or both), or under which there would arise a right of termination,
cancellation or acceleration of any obligation or the loss of a material
benefit, by its executing and carrying out this Combination Agreement other
than, in the case of clause (ii) only, the laws and regulations referred to in
the next sentence. Except as referred to herein or in connection, or in
compliance, with the provisions of the Securities Act, the Exchange Act, and
other governmental approvals required under the applicable laws of any foreign
jurisdiction ("FOREIGN LAWS") and the environmental, corporation, securities or
blue sky laws or regulations of the various states ("STATE LAWS") (all of which
required consents and approvals under Foreign Laws and State Laws are identified
in Section 2.4 of the Fountain Disclosure Schedule), no filing by Fountain or
registration by Fountain with any public body or authority is necessary for, nor
is any authorization, consent or approval of any public body or authority
required to be obtained by Fountain for, the consummation of the Arrangement and
the issuance of the Fountain Common Stock contemplated by this Combination
Agreement.
2.5 Reports and Financial Statements.
Fountain has, to the extent such documents were requested by CanArgo,
previously furnished CanArgo with true and complete copies of its (i) Reports on
Form 10-K or Form 10-KSB for the four months ended December 31, 1996 and for the
three fiscal years ended August 31, 1994, 1995 and 1996, as filed with the
Commission, (ii) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997, June 30, 1997, and September 30, 1997, as filed with the Commission, (iii)
proxy statements related to all meetings of its shareholders (whether annual or
special) since December 31, 1994, and (iv) all other reports or registration
statements filed by Fountain with the Commission since December 31, 1994, which
are all the documents (other than preliminary material) that Fountain was
required to file with the Commission since that date (clauses (i) through (iv)
being referred to herein collectively as the "FOUNTAIN SEC REPORTS"). As of
their respective dates, the Fountain SEC
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Reports complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such Fountain SEC
Reports. As of their respective dates, the Fountain SEC Reports did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of Fountain included in the Fountain SEC Reports comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto, and the
financial statements included in the Fountain SEC Reports have been prepared in
accordance with United States generally accepting accounting principles ("U.S.
GAAP") applied on a consistent basis (except as may be indicated therein or in
the notes thereto) and fairly present the financial position of Fountain and its
subsidiaries as at the dates thereof and the results of their operations and
changes in financial position for the periods then ended subject, in the case of
the unaudited interim financial statements, to normal year-end audit adjustments
and any other adjustments described therein.
2.6 Absence of Certain Changes or Events.
Except as disclosed in the Fountain SEC Reports, since September 30,
1997, there has not been (i) any event, condition, transaction, commitment,
dispute or other circumstance (financial or otherwise) of any character (whether
or not in the ordinary course of business), individually or in the aggregate,
having a Fountain Material Adverse Effect; (ii) any damage, destruction or loss,
whether or not covered by insurance, which, insofar as reasonably can be
foreseen, in the future would have a Fountain Material Adverse Effect; (iii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the capital stock of
Fountain; or (iv) any entry into any commitment or transaction material to
Fountain and its subsidiaries taken as a whole (including, without limitation,
any borrowing or sale of assets). Since September 30, 1997, Fountain and its
subsidiaries have conducted their respective businesses in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted.
2.7 Litigation.
Except as set forth in Section 2.7 of the Fountain Disclosure Schedule,
there is no suit, action or proceeding pending or, to the knowledge of Fountain,
threatened against or affecting Fountain or any of its subsidiaries which, alone
or in the aggregate, has, or is reasonably likely to have, a Fountain Material
Adverse Effect, nor is there any judgment, decree, injunction, rule or order of
any court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against Fountain or any of its subsidiaries having, or
reasonably likely to have, either alone or in the aggregate, any such Fountain
Material Adverse Effect.
2.8 Information in Disclosure Documents.
None of the information with respect to Fountain to be included or
incorporated by reference in the Joint Proxy Statement and Registration
Statement, if any, will, in the case of the Joint Proxy Statement or any
amendments or supplements thereto, at the time of the mailing of the Joint Proxy
Statement and any amendments or supplements thereto, and at the times of the
CanArgo Meeting and the Fountain Meeting, or, in the case of the Registration
Statement, at the time it becomes effective, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Registration
Statement and Joint Proxy Statement will comply as to form in all material
respects with the provisions of the Securities Act and Exchange Act,
respectively, and the rules and regulations promulgated thereunder.
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2.9 Employee Benefit Plans.
Except as disclosed in the Fountain SEC Reports or as set forth in
Section 2.9 of the Fountain Disclosure Schedule, there are no employee benefit,
compensation or severance plans, agreements or arrangements, including "employee
benefit plans," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and including, but not limited to,
plans, agreements or arrangements relating to former employees maintained by
Fountain or any of its subsidiaries or collective bargaining agreements to which
Fountain or any of its subsidiaries is a party (together, the "BENEFIT PLANS").
To the knowledge of Fountain, no default exists with respect to the obligations
of Fountain or any of its subsidiaries under any such Benefit Plan. Since
January 1, 1996, there have been no disputes or grievances subject to any
grievance procedure, unfair labor practice proceedings, arbitration or
litigation under such Benefit Plans, which have not been finally resolved,
settled or otherwise disposed of, nor is there any default, or any condition
which, with notice or lapse of time or both, would constitute such a default,
under any such Benefit Plans, by Fountain or its subsidiaries or, to the
knowledge of Fountain and its subsidiaries, any other party thereto. Since
January 1, 1996, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the knowledge of Fountain and its subsidiaries, jurisdictional
disputes or organizing activity occurring or threatened with respect to the
business or operations of Fountain or its subsidiaries. Neither the execution of
the Combination Agreement nor the consummation of the transactions contemplated
hereby will (either alone or upon the occurrence of additional events or acts)
result in, cause the accelerated vesting or delivery of, or increase the amount
or value of, any payment or benefit to any employee of Fountain or any of its
subsidiaries. Without limiting the generality of the foregoing, no amount paid
or payable by Fountain or any of its subsidiaries (other than CanArgo) in
connection with the transactions contemplated hereby (either solely as a result
thereof or as a result of any such transactions in conjunction with any other
event) will be an "excess parachute payment" within the meaning of Section 280G
of the United States Internal Revenue Code of 1986, as amended (the "CODE").
2.10 ERISA.
Any Benefit Plans subject to ERISA have been administered in accordance,
and are in compliance with, the applicable provisions of ERISA. There does not
now exist, nor do any circumstances exist that could result in, any liability of
Fountain or any of its subsidiaries (or any entity, trade or business that is or
was at any time required to be aggregated with Fountain or any of its
subsidiaries under Section 414(b), (c), (m) or (o) of the Code) under Title IV
of ERISA, Section 302 of ERISA, Sections 412 and 4971 of the Code, to the
knowledge of Fountain, the continuation coverage requirements of Section 601 et
seq. of ERISA and Section 4980B of the Code, and, to the knowledge of Fountain,
similar provisions of foreign laws or regulations, other than such liabilities
that arise solely out of, or relate solely to, the Benefit Plans, that would be
a liability of Fountain or its subsidiaries following the Effective Date.
2.11 Oil and Gas Properties.
(a) Included within Section 2.11(a) of the Fountain Disclosure
Schedule is a listing of all properties ("FOUNTAIN OIL AND GAS
PROPERTIES") from which Fountain or any of its subsidiaries is
currently producing, proposing to produce, receiving the economic
benefit of production, or proposing to receive the economic
benefit of production of oil, gas, minerals, and other gaseous
and liquid hydrocarbons or any combination thereof
("HYDROCARBONS"). Also included within Section 2.11(a) of the
Fountain Disclosure Schedule is a listing of all agreements
pursuant to which Fountain and its subsidiaries directly or
indirectly hold or which in any material respect directly or
indirectly affect the rights of Fountain and its subsidiaries to
produce or enjoy the economic benefit of production of
Hydrocarbons from the Fountain Oil and Gas Properties including,
without limitation, leases, licenses, concessions, permits,
operating agreements, Hydrocarbon sales agreements,
transportation agreements, joint venture agreements and
partnership agreements ("FOUNTAIN OIL AND GAS AGREEMENTS").
Fountain has provided CanArgo with true and complete copies of
each of the Fountain Oil and Gas Agreements. Each of the Fountain
Oil
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and Gas Agreements is in full force and effect in accordance with
its terms, and there are currently pending no requests or demands
for payments, adjustments to payments or performance, revisions
or amendments in relation to the Fountain Oil and Gas Agreements.
The Fountain Oil and Gas Agreements are among the agreements
referred to in Section 2.15 hereof.
(b) Neither Fountain nor any of its subsidiaries has (i) sold forward
a material amount of Hydrocarbons, (ii) received any material
advance, "take-or-pay" or similar payment or entered into any
other arrangement that would entitle any third party to receive
deliveries of Hydrocarbons without paying at such time the
contract price or other fair consideration therefor, or (iii)
taken or received any material amount of Hydrocarbons under any
arrangement that would permit a third party hereafter to receive
any material amount of Hydrocarbons that would otherwise be
attributable to Fountain or its subsidiaries.
(c) Included within Section 2.1l(c) of the Fountain Disclosure
Schedule is a listing of the latest reports, if any, by
independent petroleum engineers with respect to each of the
Fountain Oil and Gas Properties ("FOUNTAIN RESERVE REPORTS").
Fountain has provided CanArgo with true and complete copies of
each of the Fountain Reserve Reports. Fountain and its
subsidiaries have provided no false or misleading information to
and have not withheld any material information from the petroleum
engineers preparing the Fountain Reserve Reports in connection
with their preparation thereof. Fountain is not aware of any
facts or circumstances that should reasonably cause Fountain to
conclude that any of the information that was supplied by
Fountain and its subsidiaries to such petroleum engineers or
otherwise relied upon by such petroleum engineers in connection
with their preparation of the Fountain Reserve Reports is not
currently correct in all material respects.
(d) Fountain and its subsidiaries have good and valid title to all of
the Fountain Oil and Gas Properties which entitles Fountain or
one of its subsidiaries to receive and retain, without
suspension, reduction or termination, the net revenue interest or
other interest in each of the Fountain Oil and Gas Properties
indicated in the relevant Fountain Oil and Gas Agreements or
otherwise indicated in Section 2.1l(d) of the Fountain Disclosure
Schedule. The Fountain Oil and Gas Agreements or Section 2.1l(d)
of the Fountain Disclosure Schedule set forth all obligations
under which Fountain or any of its subsidiaries are or may be
obligated to bear costs and expenses relating directly or
indirectly to the acquisition, maintenance, development and
operation of the Fountain Oil and Gas Properties.
2.12 Compliance with Applicable Laws.
(i) Fountain and its subsidiaries hold all material permits,
licenses, variances, exemptions, orders and approvals (the
"FOUNTAIN PERMITS") of all courts, administrative agencies or
commissions or other governmental authorities or
instrumentalities, domestic or foreign (each, a "GOVERNMENTAL
ENTITY") necessary for the operation of the businesses of
Fountain and its subsidiaries;
(ii) to the knowledge of Fountain, Fountain and its subsidiaries are
in material compliance with the terms of the Fountain Permits;
(iii) to the knowledge of Fountain, except as disclosed in the Fountain
SEC Reports filed prior to the date of this Combination
Agreement, the businesses of Fountain and its subsidiaries are
not being conducted in material violation of any law, ordinance
or regulation of any Governmental Entity, including without
limitation Section 30A of the Exchange Act; and
(iv) to the knowledge of Fountain, except as disclosed in the Fountain
SEC Reports, no investigation or review by any Governmental
Entity with respect to Fountain or any of its subsidiaries is
pending, or, to the knowledge of Fountain, threatened, nor has
any Governmental Entity indicated an intention to conduct the
same provided, however, that the foregoing representations
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are made as to ERISA and environmental matters, only as to
Fountain's knowledge, to the extent contemplated by Sections
2.10 and 2.18.
2.13 Liabilities.
As of September 30, 1997, neither Fountain nor any of its subsidiaries
had any liabilities or obligations (absolute, accrued, contingent or otherwise)
of a nature required to be disclosed on a balance sheet or in the related notes
to the consolidated financial statements prepared in accordance with U.S. GAAP
which are not disclosed or provided for in the most recent Fountain SEC Report.
To the knowledge of Fountain, there was no basis, as of September 30, 1997, for
any claim or liability (absolute, accrued, contingent or otherwise) of a nature
required to be disclosed on a balance sheet or in the related notes to the
consolidated financial statements prepared in accordance with U.S. GAAP which is
not reflected in the Fountain SEC Reports.
2.14 Taxes.
Each of Fountain and its subsidiaries has filed all tax returns required
to be filed by any of them and has paid (or had paid on its behalf), or has set
up an adequate reserve for the payment of, all taxes required to be paid in
respect of the periods covered by such returns. The information contained in
such tax returns is true, complete and accurate. Neither Fountain nor any
subsidiary of Fountain is delinquent in the payment of any tax, assessment or
governmental charge. No deficiencies for any taxes have been proposed, asserted
or assessed against Fountain or any of its subsidiaries that have not been
finally settled or paid in full, and no requests for waivers of the time to
assess any such tax are pending and there are no outstanding audits,
examinations, deficiency litigations or refund litigations with respect to
Fountain or any of its subsidiaries. For the purposes of this Combination
Agreement, the term "TAX" shall include all federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise and other taxes, duties and assessments of any
nature whatsoever together with all interest, penalties and additions imposed
with respect to such amounts.
2.15 Certain Agreements.
Except as disclosed in Section 2.15 of the Fountain Disclosure Schedule,
neither Fountain nor any of its subsidiaries is a party to any oral or written
(i) agreement, contract, indenture or other instrument relating to Indebtedness
(as defined below) in an amount exceeding $100,000, (ii) other contract,
agreement or commitment having a Fountain Material Adverse Effect, or (iii)
contract, agreement or commitment, whether or not in the ordinary course of
business, that is reasonably expected to require payments by or to Fountain or
any of its subsidiaries in an amount that would exceed $100,000 in any calendar
year subsequent to 1997. "INDEBTEDNESS" means any liability in respect of (A)
borrowed money, (B) capitalized lease obligations, (C) the deferred purchase
price of property or services (other than trade payables in the ordinary course
of business) and (D) guarantees of any of the foregoing incurred by any person
other than Fountain or any of its subsidiaries. Neither Fountain nor any of its
subsidiaries is in default (with or without notice or lapse of time, or both)
under any contract, indenture, note, credit agreement, loan document, lease,
license or other agreement including, but not limited to, any Benefit Plan,
whether or not such default has been waived. Except as set forth in Section 2.15
of the Fountain Disclosure Schedule, none of Fountain and its subsidiaries is a
party to and bound by any contract, agreement, commitment, plan, arrangement or
other understanding which by reason of the execution of this Combination
Agreement or consummation of the transactions contemplated hereby will (either
alone or upon the occurrence of additional acts or events) result in any payment
becoming due from CanArgo or Fountain or any of their subsidiaries.
2.16 Patents, Trademarks, Etc.
To the knowledge of Fountain, Fountain and its subsidiaries have all
patents, trademarks, trade names, service marks, trade secrets, copyrights and
other proprietary intellectual property rights and licenses as are necessary in
connection with the businesses of Fountain and its subsidiaries, and Fountain
does not have any
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knowledge of any conflict with the rights of Fountain and its subsidiaries
therein or any knowledge of any conflict by them with the rights of others
therein.
2.17 Product and Other Liability.
Fountain has no knowledge of any claim, or the basis of any claim,
against Fountain or any of its subsidiaries for injury to person or property of
employees or any third parties suffered as a result of the sale of any product
or performance of any service by Fountain or any of its subsidiaries or the
conduct of their respective operations, including claims arising out of the
defective or unsafe nature of its products, services or operations. Fountain and
its subsidiaries have, and on the Effective Date will have, adequate insurance
coverage for potential liability claims against it.
2.18 Environment.
"ENVIRONMENTAL LAWS" mean all national, provincial, state, municipal and
local laws, statutes, ordinances, by-laws and regulations of any governmental
unit wherever located, and orders, directives and decisions rendered by, and
policies, instructions, guidelines and similar guidance of, any ministry,
department or administrative or regulatory agency relating to the protection of
the environment, occupational health and safety or the manufacture, processing,
distribution, use, treatment, storage, disposal, discharge, packaging,
transport, handling, containment, clean-up or other remediation or corrective
action of or with respect to any pollutants, contaminants, chemicals or
industrial, toxic or hazardous wastes or substances. Except as disclosed in
Section 2.18 of the Fountain Disclosure Schedule, the operations of Fountain and
its subsidiaries are and have been in compliance in all material respects with
all Environmental Laws, and the operation of their businesses does not
constitute a material breach of any Environmental Law nor has any claim of
nuisance, tort or trespass been made. Fountain and its subsidiaries have neither
received nor are subject to any notice of any violation or allegations of
non-compliance with any Environmental Law, nor, to the knowledge of Fountain are
there any existing conditions which might constitute a basis for such
allegations nor has Fountain or its subsidiaries received any notice or request
for information, from any person, governmental agency or authority issued
pursuant to any Environmental Law. Fountain and its subsidiaries have maintained
all documents and records, in the manner and for the periods required by
Environmental Laws in all material respect.
2.19 Title to Assets; Liens.
Fountain and its subsidiaries have (i) good and marketable title to all
of their inventory, accounts receivable, property, equipment and other assets,
and except as disclosed in the Fountain's SEC Reports, such assets are free and
clear of any mortgages, liens, charges, encumbrances, or title defects of any
nature whatsoever and (ii) valid and enforceable leases for the premises and the
equipment, furniture and fixtures purported to be leased by them.
2.20 Fountain Action.
The Board of Directors of Fountain (at a meeting duly called and held)
has by the requisite vote of directors (a) determined that the Arrangement is
advisable and fair and in the best interest of Fountain and its stockholders;
(b) adopted a resolution setting forth the Fountain Charter Changes and
declaring their advisability; and (c) recommended the approval of the Stock
Issuance Proposal and Fountain Charter Changes by the holders of Fountain Common
Stock and directed that the Stock Issuance Proposal and Fountain Charter Changes
be submitted for consideration by Fountain's stockholders entitled to vote
thereon at the Fountain Meeting.
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2.21 Financial Advisors.
Except for CIBC Oppenheimer Corp. and Orkla Finans (Fondsmegling) A S.
(collectively the "FOUNTAIN ADVISORS"), financial advisors to Fountain, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Arrangement or the transactions
contemplated by this Combination Agreement based upon arrangements made by or on
behalf of Fountain or any of its Subsidiaries, and the fees and other amounts
payable to the Fountain Advisors as contemplated by this Section will be as
provided in that certain letter agreement dated October 12, 1997, as amended by
letter amendment dated January 15, 1998, among the Fountain Advisors and
Fountain.
2.22 [Intentionally Omitted]
2.23 Cash and Cash Equivalents
The aggregate cash and cash equivalents of Fountain and its consolidated
subsidiaries, determined in accordance with U.S. GAAP, as of January 23, 1998,
was an amount no less than that stated in Section 2.23 of the Fountain
Disclosure Schedule.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF CANARGO
Except (i) as set forth in a disclosure schedule delivered by CanArgo to
Fountain concurrently herewith (the "CANARGO DISCLOSURE SCHEDULE") and without
regard to whether it is set forth pursuant to a reference herein to a specific
section of the CanArgo Disclosure Schedule and (ii) for circumstances that,
taken in the aggregate, would not have a CanArgo Material Adverse Effect (as
defined in Section 8.10 ) in the case of all representations and warranties
herein other than those set forth in the first sentence of Section 3.1, the
first four sentences of Section 3.4, and Sections 3.2, 3.6, and 3.7, CanArgo
represents and warrants to Fountain as follows:
3.1 Organization and Qualification.
CanArgo is a corporation duly organized, validly existing and in good
standing under the laws of the Province of Alberta and has the corporate power
to carry on its business as it is now being conducted or currently proposed to
be conducted. CanArgo is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities makes such
qualification necessary. Complete and correct copies as of the date hereof of
the certificate of incorporation and by-laws of CanArgo and each of its
Significant Subsidiaries have, to the extent requested by Fountain, heretofore
been delivered to Fountain as part of CanArgo Disclosure Schedule.
3.2 Capitalization.
The authorized capital stock of CanArgo consists of an unlimited number
of common shares without par value, an unlimited number of first preference
shares without par value, and an unlimited number of second preference shares
without par value. As of December 31, 1997, 10,438,391 shares of CanArgo Common
Shares and 1,636,597 Special Warrants were validly issued and outstanding, fully
paid and nonassessable and no preference shares of CanArgo were issued and
outstanding. As of December 31, 1997, except for stock options to acquire
1,235,000 shares of CanArgo Common Shares at a weighted average exercise price
of Cdn. $2.25 per share and except for rights pursuant to the Purchase Warrants
to acquire an additional 1,500,059 shares of CanArgo Common Shares at a weighted
average exercise price of Cdn. $2.48 per share and as set forth on Section 3.2
of CanArgo Disclosure Schedule, there are no options, warrants, calls or other
rights, agreements or commitments
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presently outstanding obligating CanArgo to issue, deliver or sell shares of its
capital stock or debt securities, or obligating CanArgo to grant, extend or
enter into any such option, warrant, call or other such right, agreement or
commitment. Since December 31, 1997, CanArgo has not issued any shares of
CanArgo Common Shares or CanArgo Preferred Shares, except for shares of CanArgo
Common Shares issued pursuant to said options and rights. Since December 31,
1997, CanArgo has not issued or obligated itself to issue any options, warrants,
calls or other rights, agreements or commitments obligating CanArgo to issue,
deliver or sell shares of its capital stock or debt securities.
3.3 Subsidiaries.
The only Significant Subsidiaries of CanArgo are those set forth in
Section 3.3 of CanArgo Disclosure Schedule. Each Significant Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has the corporate power to carry on its
business as it is now being conducted or currently proposed to be conducted.
Each Significant Subsidiary is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary. All the outstanding shares of capital stock of
each Significant Subsidiary are validly issued, fully paid and nonassessable,
and those owned by CanArgo or by a subsidiary of CanArgo are owned free and
clear of any liens, claims or encumbrances. There are no existing options,
warrants, calls or other rights, agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of any of
the Significant Subsidiaries of CanArgo. Except as set forth in section 3.3 of
the CanArgo Disclosure Schedule and except for wholly owned subsidiaries which
are formed after the date hereof in the ordinary course of business, CanArgo
does not directly or indirectly own any interest in any other corporation,
partnership, joint venture or other business association or entity which is
material to CanArgo and its subsidiaries taken as a whole.
3.4 Authority Relative to this Combination Agreement.
CanArgo has the corporate power to enter into this Combination
Agreement, and subject to the requisite shareholder and Court approval
contemplated by this Combination Agreement, to carry out its obligations
hereunder. The execution and delivery of this Combination Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by CanArgo's Board of Directors. This Combination Agreement constitutes a valid
and binding obligation of CanArgo enforceable in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. Except for the requisite approval of the holders of CanArgo Common
Shares and of the Court, no other corporate proceedings on the part of CanArgo
are necessary to authorize this Combination Agreement and the transactions
contemplated hereby. CanArgo is not subject to or obligated under (i) any
charter, by-law, indenture or other loan document provision or (ii) any other
contract, license, franchise, permit, order, decree, concession, lease,
instrument, judgment, statute, law, ordinance, rule or regulation applicable to
CanArgo or any of its subsidiaries or their respective properties or assets
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation or acceleration of any obligation or
the loss of a material benefit, by its executing and carrying out this
Combination Agreement, other than, in the case of clause (ii) only, the laws and
regulations referred to in the next sentence. Except as referred to herein or in
the Plan of Arrangement or in connection, or in compliance, with the provisions
of the Securities Act, the Exchange Act, the Foreign Laws, the State Laws, the
Securities Act (Ontario) and corresponding legislation of other Canadian
provinces (all of which required consents and approvals under Foreign Laws and
State Laws are identified in Section 3.4 of CanArgo Disclosure Schedule), no
filing by CanArgo or registration by CanArgo with any public body or authority
is necessary for, nor is any authorization, consent or approval of any public
body or authority required to be obtained by CanArgo for, the consummation of
the Arrangement or the other transactions contemplated hereby.
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3.5 Reports and Financial Statements.
Since December 31, 1996, CanArgo has filed all forms, reports and
documents with the Ontario Securities Commission (the "OSC") and the Alberta
Securities Commission (the "ASC") required to be filed by it pursuant to the
Securities Act (Ontario) and the Securities Act (Alberta) and the regulations
promulgated thereunder, (such forms, reports and documents collectively, the
"CANARGO REPORTS"), all of which complied when filed in all material respects
with all then applicable requirements of such statutes, regulations, policies
and rules. None of the CanArgo Reports, at the time filed or as subsequently
amended, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of CanArgo included in the CanArgo
Reports comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto, and the financial statements included in the CanArgo Reports
have been prepared in accordance with Canadian generally accepted accounting
principles ("CANADIAN GAAP") applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of CanArgo and its subsidiaries as at the dates thereof and the results
of their operations and changes in financial position for the periods then ended
subject, in the case of the unaudited interim financial statements, to normal
year-end audit adjustments and any other adjustments described therein.
3.6 Absence of Certain Changes or Events.
Except as disclosed in CanArgo Reports, since September 30, 1997, there
has not been (i) any event, condition, transaction, commitment, dispute or other
circumstance (financial or otherwise) of any character (whether or not in the
ordinary course of business) individually or in the aggregate having a CanArgo
Material Adverse Effect, (ii) any damage, destruction or loss, whether or not
covered by insurance, which, insofar as reasonably can be foreseen, in the
future would have a CanArgo Material Adverse Effect, (iii) any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to the capital stock of CanArgo, or (iv) any
entry into any commitment or transaction material to CanArgo and its
subsidiaries taken as a whole (including, without limitation, any borrowing or
sale of assets). Since September 30, 1997, CanArgo and its subsidiaries have
conducted their respective businesses in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted.
3.7 Litigation.
Except as set forth in Section 3.7 of CanArgo Disclosure Schedule, there
is no suit, action or proceeding pending or, to the knowledge of CanArgo,
threatened against or affecting CanArgo or any of its subsidiaries which, either
alone or in the aggregate, has, or is reasonably likely to have, a CanArgo
Material Adverse Effect, nor is there any judgment, decree, injunction, rule or
order of any court, governmental department, commission, agency, instrumentality
or arbitrator outstanding against CanArgo or any of its subsidiaries having, or
reasonably likely to have, either alone or in the aggregate, any such CanArgo
Material Adverse Effect.
3.8 Information in Disclosure Documents.
None of the information with respect to CanArgo or its subsidiaries to
be included or incorporated by reference in the Joint Proxy Statement or
Registration Statement will, in the case of the Joint Proxy Statement or any
amendments or supplements thereto, at the time of the mailing of the Joint Proxy
Statement and any amendments or supplements thereto, and at the times of CanArgo
Meeting and the Fountain Meeting, or, in the case of the Registration Statement,
at the time it becomes effective, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Joint Proxy Statement will comply
as
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to form in all material respects with the provisions of the Business
Corporations Act (Ontario), the Business Corporations Act (Alberta), the
Securities Act (Ontario) and the Securities Act (Alberta) and the rules and
regulations thereunder.
3.9 Employee Benefit Plans.
Except as set forth in Section 3.9 of CanArgo Disclosure Schedule, there
are no employee benefit, compensation or severance plans, agreements or
arrangements, including, but not limited to, plans, agreements or arrangements
relating to former employees maintained by CanArgo or any of its subsidiaries or
collective bargaining agreements to which CanArgo or any of its subsidiaries is
a party (together, the "CANARGO BENEFIT PLANS"). To the knowledge of CanArgo, no
default exists with respect to the obligations of CanArgo or any of its
subsidiaries under such CanArgo Benefit Plan. Since January 1, 1996, there have
been no disputes or grievances subject to any grievance procedure, unfair labor
practice proceedings, arbitration or litigation under such CanArgo Benefit
Plans, which have not been finally resolved, settled or otherwise disposed of,
nor is there any default, or any condition which, with notice or lapse of time
or both, would constitute such a default, under any such CanArgo Benefit Plans,
by CanArgo or its subsidiaries or, to the knowledge of CanArgo and its
subsidiaries, any other party thereto. Since January 1, 1996, there have been no
strikes, lockouts or work stoppages or slowdowns, or to the knowledge of CanArgo
and its subsidiaries, jurisdictional disputes or organizing activity occurring
or threatened with respect to the business or operations of CanArgo or its
subsidiaries. Neither the execution of the Combination Agreement nor the
consummation of the transactions contemplated hereby will (either alone or upon
the occurrence of additional events or acts) result in, cause the accelerated
vesting or delivery of, or increase the amount or value of, any payment or
benefit to any employee of CanArgo or any of its subsidiaries. There are no
actions, suits, claims, trials, demands, arbitrations or other proceedings
pending or, to the knowledge of CanArgo, threatened with respect to the CanArgo
Benefit Plans against CanArgo or any of its subsidiaries or any fiduciary,
funding agent, insurer or fund of such CanArgo Benefit Plans, other than
ordinary and usual claims for benefits by employees or beneficiaries, that could
be expected to materially adversely affect the business or condition of CanArgo
and its subsidiaries taken as a whole. All CanArgo Benefit Plans that are funded
plans are funded or insured in accordance with their terms, rules, and all
applicable laws. All required contributions, premium payments and
source-deducted employee contributions under the CanArgo Benefit Plans have been
or will be made to the funding agents as required by the CanArgo Benefit Plans
or applicable law, including all current service costs and any special payments
or contributions required to be made.
3.10 Takeover Provisions Inapplicable.
As of the date hereof and at all times thereafter, until and including
the Effective Date, Section 203 of the DGCL is, and shall be, inapplicable to
the Arrangement and the transactions contemplated by this Combination Agreement
by reason of CanArgo not being an "interested stockholder" as defined in said
Section 203.
3.11 CanArgo Action.
The Board of Directors of CanArgo (at a meeting duly called and held)
has by the requisite vote of directors (a) determined that the Arrangement is
advisable and fair and in the best interests of CanArgo and its shareholders,
(b) approved the Arrangement in accordance with the provisions of applicable
laws, and (c) recommended the approval of this Combination Agreement and the
Arrangement by the holders of CanArgo Common Stock and directed that the
Arrangement be submitted for consideration by CanArgo's shareholders entitled to
vote thereon at the CanArgo Meeting.
3.12 Oil and Gas Properties.
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(a) Included within Section 3.12(a) of CanArgo Disclosure Schedule is
a listing of all properties ("CANARGO OIL AND GAS PROPERTIES")
from which CanArgo or any of its subsidiaries is currently
producing, proposing to produce, receiving the economic benefit
of production, or proposing to receive the economic benefit of
production of oil, gas, minerals, and other gaseous and liquid
hydrocarbons or any combination thereof ("HYDROCARBONS"). Also
included within Section 3.12(a) of CanArgo Disclosure Schedule is
a listing of all agreements pursuant to which CanArgo and its
subsidiaries directly or indirectly hold or which in any material
respect directly or indirectly affect the rights of CanArgo and
its subsidiaries to produce or enjoy the economic benefit of
production of Hydrocarbons from CanArgo Oil and Gas Properties
including, without limitation, leases, licenses, concessions,
permits, operating agreements, Hydrocarbon sales agreements,
transportation agreements, joint venture agreements and
partnership agreements ("CANARGO OIL AND GAS AGREEMENTS").
CanArgo has provided Fountain with true and complete copies of
each of the CanArgo Oil and Gas Agreements. Each of the CanArgo
Oil and Gas Agreements is in full force and effect in accordance
with its terms, and there are currently pending no requests or
demands for payments, adjustments to payments or performance,
revisions or amendments in relation to the CanArgo Oil and Gas
Agreements. The CanArgo Oil and Gas Agreements are among the
agreements referred to in Section 3.17 hereof.
(b) Neither CanArgo nor any of its subsidiaries has (i) sold forward
a material amount of Hydrocarbons, (ii) received any material
advance, "take-or-pay" or similar payment or entered into any
other arrangement that would entitle any third party to receive
deliveries of Hydrocarbons without paying at such time the
contract price or other fair consideration therefor, or (iii)
taken or received any material amount of Hydrocarbons under any
arrangement that would permit a third party hereafter to receive
any material amount of Hydrocarbons that would otherwise be
attributable to CanArgo or its subsidiaries.
(c) Included within Section 3.12(c) of CanArgo Disclosure Schedule is
a listing of the latest reports, if any, by independent petroleum
engineers with respect to each of CanArgo Oil and Gas Properties
("CANARGO RESERVE REPORTS"). CanArgo has provided Fountain with
true and complete copies of each of CanArgo Reserve Reports.
CanArgo and its subsidiaries have provided no false or misleading
information to and have not withheld any material information
from the petroleum engineers preparing CanArgo Reserve Reports in
connection with their preparation thereof. CanArgo is not aware
of any facts or circumstances that should reasonably cause
CanArgo to conclude that any of the information that was supplied
by CanArgo and its subsidiaries to such petroleum engineers or
otherwise relied upon by such petroleum engineers in connection
with their preparation of CanArgo Reserve Reports is not
currently correct in all material respects.
(d) CanArgo and its subsidiaries have good and valid title to all of
CanArgo Oil and Gas Properties which entitles CanArgo or one of
its subsidiaries to receive and retain, without suspension,
reduction or termination, the net revenue interest or other
interest in each of CanArgo Oil and Gas Properties indicated in
the relevant CanArgo Oil and Gas Agreements or otherwise
indicated in Section 3.12(d) of CanArgo Disclosure Schedule.
CanArgo Oil and Gas Agreements or Section 3.12(d) of CanArgo
Disclosure Schedule set forth all obligations under which CanArgo
or any of its subsidiaries are or may be obligated to bear costs
and expenses relating directly or indirectly to the acquisition,
maintenance, development and operation of CanArgo Oil and Gas
Properties.
3.13 Financial Advisor.
No broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Arrangement or the
transactions contemplated by this Combination Agreement based upon arrangements
made by or on behalf of CanArgo or any of its subsidiaries, other than Peder
Paus, who is entitled to a fee in respect of financial services rendered to
CanArgo with respect to the Arrangement payable by the issuance
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of up to 225,000 Common Shares of CanArgo following the approval of the
Arrangement and the adoption of this Combination Agreement at the CanArgo
Meeting and the approval of the Stock Issuance Proposal at the Fountain Meeting.
3.14 Compliance with Applicable Laws.
(i) CanArgo and its subsidiaries hold all material permits, licenses,
variances, exemptions, orders and approvals (the "CANARGO
PERMITS") of all Governmental Entities necessary for the
operation of the businesses of CanArgo and its subsidiaries;
(ii) to the knowledge of CanArgo, CanArgo and its subsidiaries are in
material compliance with the terms of CanArgo Permits;
(iii) to the knowledge of CanArgo, except as disclosed in CanArgo OSC
Reports filed prior to the date of this Combination Agreement,
the businesses of CanArgo and its subsidiaries are not being
conducted in material violation of any law, ordinance or
regulation of any Governmental Entity;
(iv) to the knowledge of CanArgo, no investigation or review by any
Governmental Entity with respect to CanArgo or any of its
subsidiaries is pending, or, to the knowledge of CanArgo,
threatened, nor has any Governmental Entity indicated an
intention to conduct the same provided, however, that the
foregoing representations are made as to environmental matters,
only as to CanArgo's knowledge, to the extent contemplated by
Sections 3.20; and
(v) Except as set forth in Section 3.14 of the CanArgo Disclosure
Schedule, CanArgo and its subsidiaries are and have been in
compliance with section 30A of the Exchange Act as if CanArgo had
been a registrant thereunder.
3.15 Liabilities.
As of September 30, 1997, neither CanArgo nor any of its subsidiaries
had any liabilities or obligations (absolute, accrued, contingent or otherwise)
of a nature required to be disclosed on a balance sheet or in the related notes
to the consolidated financial statements prepared in accordance with Canadian
GAAP which are not disclosed or provided for in the most recent CanArgo Report.
To the knowledge of CanArgo, there was no basis, as of September 30, 1997, for
any claim or liability (absolute, accrued, contingent or otherwise) of a nature
required to be disclosed on a balance sheet or in the related notes to the
consolidated financial statements prepared in accordance with Canadian GAAP
which is not reflected in the CanArgo Reports.
3.16 Taxes.
Each of CanArgo and its subsidiaries has filed all tax returns required
to be filed by any of them and has paid (or had paid on its behalf), or has set
up an adequate reserve for the payment of, all taxes required to be paid in
respect of the periods covered by such returns. The information contained in
such tax returns is true, complete and accurate. Neither CanArgo nor any
subsidiary of CanArgo is delinquent in the payment of any tax, assessment or
governmental charge. No deficiencies for any taxes have been proposed, asserted
or assessed against CanArgo or any of its subsidiaries that have not been
finally settled or paid in full and no requests for waivers of the time to
assess any such tax are pending and there are no outstanding audits,
examinations, deficiency litigations or refund litigations with respect to
CanArgo or any of its subsidiaries.
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3.17 Certain Agreements.
Except as disclosed in Section 3.17 of the CanArgo Disclosure Schedule,
neither CanArgo nor any of its subsidiaries is a party to any oral or written
(i) agreement, contract, indenture or other instrument relating to Indebtedness
in an amount exceeding $100,000, (ii) agreement which, after giving effect to
the transactions contemplated by this Combination Agreement, purports to
restrict or bind Fountain or any of its subsidiaries in any respect that could
have a Fountain Material Adverse Effect, (iii) contract, agreement or commitment
having a CanArgo Material Adverse Effect, or (iv) contract, agreement or
commitment, whether or not in the ordinary course of business, that is
reasonably expected to require payments by or to CanArgo or any of its
subsidiaries in an amount that would exceed $100,000 in any calendar year
subsequent to 1997. Neither CanArgo nor any of its subsidiaries is in default
(or would be in default with notice or lapse of time, or both) under any
contract, indenture, note, credit agreement, loan document, lease, license or
other agreement including, but not limited to, any CanArgo Benefit Plan, whether
or not such default has been waived. Except as set forth in Section 3.17 of
CanArgo Disclosure Schedule, none of CanArgo and its subsidiaries is a party to
and bound by any contract, agreement, commitment, plan, arrangement or other
understanding which by reason of the execution of this Combination Agreement or
consummation of the transactions contemplated hereby will (either alone or upon
the occurrence of additional acts or events) result in any payment becoming due
from CanArgo or Fountain or any of their subsidiaries.
3.18 Patents, Trademarks, Etc.
To the knowledge of CanArgo, CanArgo and its subsidiaries have all
patents, trademarks, trade names, service marks, trade secrets, copyrights and
licenses and other proprietary intellectual property rights and licenses as are
necessary in connection with the businesses of CanArgo and its subsidiaries, and
CanArgo does not have any knowledge of any conflict with the rights of CanArgo
and its subsidiaries therein or any knowledge of any conflict by them with the
rights of others therein.
3.19 Product and Other Liability.
CanArgo has no knowledge of any claim, or the basis of any claim,
against CanArgo or any of its subsidiaries for injury to person or property of
employees or any third parties suffered as a result of the sale of any product
or performance of any service by CanArgo or any of its subsidiaries or the
conduct of their respective operations, including claims arising out of the
defective or unsafe nature of its products, services or operations. CanArgo and
its subsidiaries have, and on the Effective Date will have, adequate insurance
coverage for potential liability claims against it.
3.20 Environment.
Except as disclosed in Section 3.20 of the CanArgo Disclosure Schedule,
the operations of CanArgo and its subsidiaries are and have been in compliance
in all material respects with all Environmental Laws, and the operation of their
businesses does not constitute a material breach of any Environmental Law nor
has any claim of nuisance, tort or trespass been made. CanArgo and its
subsidiaries have neither received nor are subject to any notice of any
violation of or allegations of non-compliance with any Environmental Law, nor,
to the knowledge of CanArgo, are there any existing conditions which might
constitute a basis for such allegations nor has CanArgo or its subsidiaries
received any notice or request for information, from any person, governmental
agency or authority issued pursuant to any Environmental Law. CanArgo and its
subsidiaries have maintained all documents and records, in the manner and for
the periods required by Environmental Laws in all material respects.
3.21 Title to Assets; Liens.
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CanArgo and its subsidiaries have (i) good and marketable title to all
of its inventory, accounts receivable, property, equipment and other assets, and
except as disclosed in CanArgo's OSC Reports such assets are free and clear of
any mortgages, liens, charges, encumbrances, or title defects of any nature
whatsoever and (ii) valid and enforceable leases for the premises and the
equipment, furniture and fixtures purported to be leased by them.
3.22 [Intentionally Omitted]
3.23 Cash and Cash Equivalents.
The aggregate cash and cash equivalents of CanArgo and its consolidated
subsidiaries, determined in accordance with Canadian GAAP, as of January 19,
1998, was an amount no less than that stated in Section 3.23 of the CanArgo
Disclosure Schedule.
ARTICLE 4
COVENANTS
4.1 Conduct of Business Pending the Arrangement.
(a) Upon execution of this Combination Agreement, Fountain and
CanArgo shall appoint a steering committee (the "STEERING
COMMITTEE") consisting of Einar Bandlien, Michael Binnion, John
McLeod, David Robson and Nils Trulsvik. The Steering Committee
shall coordinate the activities of Fountain and CanArgo prior to
the consummation of the Combination Agreement in a manner
consistent with the provisions of Section 4.1, facilitate
communication between Fountain and CanArgo during such period,
plan for the integration of the activities of Fountain and
CanArgo following consummation of the Arrangement and facilitate
the approval process regarding any exceptions to the business
plan referred to in Section 4.1(b).
(b) Prior to the Effective Date, unless Fountain and CanArgo shall
otherwise agree in writing, Fountain and CanArgo shall, and shall
cause their respective subsidiaries to, carry on their respective
businesses in accordance with the business plan (the "BUSINESS
PLAN") set forth in Schedule 4.1 and to the extent not
inconsistent with such Business Plan to conduct such businesses
in the usual, regular and ordinary course. Prior to the Effective
Date, Fountain and CanArgo shall, and shall cause their
respective subsidiaries to, (i) maintain insurance coverages and
their respective books, accounts and records in the usual manner
consistent with prior practices; (ii) comply in all material
respects with all laws, ordinances and regulations of
Governmental Entities applicable to them and their activities;
(iii) maintain and keep their respective properties and equipment
in good repair, working order and condition, ordinary wear and
tear excepted; and (iv) perform in all material respects their
respective obligations under all contracts and commitments to
which any of them is a party or by which any of them is bound, in
each case other than where the failure to so maintain, comply or
perform, either individually or in the aggregate, would not
reasonably be expected to result in a CanArgo Material Adverse
Effect or in a Fountain Material Adverse Effect or would be
contemplated by the Business Plan;
(c) Prior to the Effective Date, Fountain and CanArgo shall not (i)
amend their respective certificate or articles of incorporation
or bylaws except as contemplated in the Fountain Charter Changes
or otherwise contemplated by this Combination Agreement, (ii)
split, combine, recapitalize, exchange or reclassify their
respective outstanding capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of such capital stock,
except in connection with the Reverse Stock Split, or declare,
set aside or pay any dividend or other distribution payable in
cash, stock or property, or (iii) directly or indirectly
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redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of their respective
capital stock;
(d) Prior to the Effective Date and except as required or permitted
by this Combination Agreement or the Business Plan and except as
may be agreed to by the parties in writing, Fountain and CanArgo
shall not, and shall not permit any of their respective
subsidiaries to, (i) issue, deliver or sell or agree to issue,
deliver or sell any additional shares of, or rights of any kind
to acquire any shares of, their respective capital stock of any
class, or any option, rights or warrants to acquire, or
securities convertible into, shares of capital stock other than
issuances contemplated by Section 2.2 and 3.2 hereof in relation
to outstanding commitments recognized therein; (ii) acquire,
lease or dispose or agree to acquire, lease or dispose of any
capital assets or any other assets other than in the ordinary
course of business, (iii) incur additional Indebtedness or
encumber or grant a security interest in any asset or enter into
any other material transaction other than in the ordinary course
of business; (iv) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity
interest in, or by any other manner, any business or any
corporation, partnership, association or other business
organization or division thereof; or (v) enter into any contract,
agreement, commitment or arrangement with respect to any of the
foregoing which is binding;
(e) Prior to the Effective Date and except as required or permitted
by the Business Plan, Fountain and CanArgo shall not, and shall
not permit any of their respective subsidiaries to (i) adopt,
enter into, terminate, expand the applicability of or amend any
bonus, profit sharing, compensation, severance, termination,
stock option, pension, retirement, deferred compensation,
employment or other benefit plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any director, officer
or current or former employee, (ii) increase in any manner the
compensation or fringe benefits of any director, officer or
employee (except for normal increases in the ordinary course of
business that are consistent with past practice and that, in the
aggregate, do not result in a material increase in benefits or
compensation), (iii) pay any benefit not provided under any
existing plan or arrangement, (iv) grant any awards under any
bonus, incentive, performance or other compensation plan or
arrangement or benefit plan (including, without limitation, the
grant of stock options, stock appreciation rights, stock based or
stock related awards, performance units or restricted stock, or
the removal of existing restrictions in any benefit plans or
agreements or awards made thereunder), (v) take any action to
fund or in any other way secure the payment of compensation or
benefits under any employee plan, agreement, contract or
arrangement or benefit plan other than in the ordinary course of
business consistent with past practice, or (vi) adopt, enter
into, amend or terminate any contract, agreement, commitment or
arrangement to do any of the foregoing which is binding; and
(f) Prior to the Effective Date, Fountain and CanArgo shall not, and
shall not permit any of their respective subsidiaries to, make
any investments in non-investment grade securities.
4.2 Notice of Breach.
Each party shall promptly give written notice to the other party upon
becoming aware of the occurrence or, to its knowledge, impending or threatened
occurrence, of any event which would cause or constitute a breach of any of its
representations, warranties or covenants contained or referenced in this
Combination Agreement and will use its best efforts to prevent or promptly
remedy the same. Any such notification shall not be deemed an amendment of the
CanArgo Disclosure Schedule or the Fountain Disclosure Schedule.
4.3 Shareholder Approval.
CanArgo will call the CanArgo Shareholders Meeting and Fountain will
call the Fountain Shareholders Meeting, each to be held within 60 days after the
SEC has indicated that it has no further comments on the Joint
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Proxy Statement, to submit this Combination Agreement, the Arrangement and
related matters for the consideration and approval of the CanArgo Shareholders
and to submit the Stock Issuance Proposal and the Fountain Charter Changes for
consideration and approval of the Fountain stockholders. Such approval will be
recommended by the CanArgo Board and management, and by the Fountain Board,
subject in each case to the fiduciary obligations of such directors and
officers. Such meetings will be called, held and conducted, and any proxies will
be solicited, in compliance with applicable law.
4.4 Affiliate Agreements.
To ensure compliance with Rule 145 of the rules and regulations
promulgated by the SEC under the Securities Act, CanArgo will use commercially
reasonable efforts to procure the signature and delivery of CanArgo Affiliate
Agreements substantially in the form of Schedule 4.4(a) (the "CANARGO AFFILIATE
AGREEMENTS") from each of CanArgo's Affiliates promptly after the execution and
delivery of this Combination Agreement if requested by counsel to Fountain
acting reasonably. For purposes of this Combination Agreement, "AFFILIATE" shall
have the meaning referred to in Rule 145 under the Securities Act.
4.5 Joint Proxy Statement.
CanArgo and Fountain will mail the Joint Proxy Statement to their
respective shareholders in a timely manner for the purpose of enabling such
shareholders to consider and vote upon the Arrangement at the CanArgo Meeting
and the Stock Issuance Proposal and the Fountain Charter Changes at the Fountain
Meeting. Each of CanArgo and Fountain will promptly provide all information
relating to its business or operations necessary for inclusion in the Joint
Proxy Statement to satisfy all requirements of applicable U.S. and Canadian
state, provincial and federal corporate and securities laws. CanArgo shall be
solely responsible for any statement, information or omission in the Joint Proxy
Statement relating to it or its Affiliates based upon written information
furnished by it. CanArgo will not provide to its shareholders or publish any
material concerning it or its Affiliates that violates applicable Canadian law,
the Securities Act or the Exchange Act with respect to the transactions
contemplated hereby. Fountain shall be solely responsible for any statement,
information or omission in the Joint Proxy Statement relating to it or its
Affiliates based upon written information furnished by it. Fountain will not
provide to its stockholders or publish any material concerning it or its
Affiliates that violates applicable Canadian law, the Securities Act or the
Exchange Act with respect to the transactions contemplated hereby.
4.6 Regulatory Approvals.
Each of CanArgo and Fountain will promptly execute and file, or join in
the execution and filing of, any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
Governmental Entity which may be reasonably required, or which the other party
may reasonably request, in connection with the consummation of the transactions
contemplated by this Combination Agreement. Each of CanArgo and Fountain will
use commercially reasonable efforts to obtain promptly all such authorizations,
approvals and consents.
4.7 Necessary Consents.
During the term of this Combination Agreement, each of CanArgo and
Fountain will use commercially reasonable efforts to obtain such written
consents and take such other actions as may be necessary or appropriate, in
addition to those set forth in Section 4.6, to allow the consummation of the
transactions contemplated hereby.
4.8 Access to Information and Properties.
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Each of CanArgo and Fountain will allow the other party and its agents
reasonable access to the files, books, records, properties, assets, operations,
personnel and offices of CanArgo and each CanArgo Subsidiary, or Fountain and
each Fountain Subsidiary, as applicable, including, without limitation, any and
all information relating to CanArgo's or Fountain's taxes, commitments,
contracts, leases, licenses and real, personal and intangible property and
financial condition. Each of CanArgo and Fountain will cause its accountants,
independent petroleum engineers and other advisers to cooperate with the other
party and its agents in making available to such other party all information
reasonably requested, including, without limitation, the right to examine all
working papers pertaining to all tax returns, financial statements and reserve
reports prepared or audited by such persons subject to the execution of
customary access or indemnification agreements among the parties with respect to
such review.
4.9 Satisfaction of Conditions Precedent.
During the term of this Combination Agreement, each of CanArgo and
Fountain will use commercially reasonable efforts to satisfy or cause to be
satisfied all the conditions precedent that are set forth in Articles 5 and 6,
and will use commercially reasonable efforts to cause the Arrangement and the
other transactions contemplated by this Combination Agreement to be consummated.
4.10 No Solicitation.
(a) Neither CanArgo nor Fountain shall, directly or indirectly, take
(nor shall they authorize or permit their respective
subsidiaries, officers, directors, employees, representatives,
investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (i) encourage, solicit or
initiate the submission of any Acquisition Proposal, (ii) enter
into any agreement with respect to any Acquisition Proposal or
(iii) participate in any way in discussions or negotiations with,
or furnish any information to, any person in connection with, or
take any other action to facilitate any inquiries or the making
of any proposal that constitutes, or may reasonably be expected
to lead to, any Acquisition Proposal. Each party will promptly
communicate to the other that such a solicitation has been
received, or that any such information has been requested from it
or that such negotiations or discussions have been sought to be
initiated with it. "ACQUISITION PROPOSAL" shall mean any proposed
(A) merger, consolidation or similar transaction involving
Fountain or CanArgo, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange
or otherwise of assets of Fountain or CanArgo or their respective
subsidiaries representing 30% or more of the consolidated assets
of Fountain or CanArgo, (C) issue, sale, or other disposition of
(including by way of merger, consolidation, share exchange or any
similar transaction) securities (or options, rights or warrants
to purchase, or securities convertible into, such securities)
representing 30% or more of the voting power of Fountain or
CanArgo or (D) transaction in which any person shall acquire
beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act), or the right to acquire beneficial ownership
or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right
to acquire beneficial ownership of 30% or more of the outstanding
voting securities of Fountain or CanArgo.
(b) Notwithstanding anything in this Combination Agreement to the
contrary (including without limitation clause (a) of this Section
4.10), to the extent the Board of Directors of either Fountain or
CanArgo receives a communication with respect to an Acquisition
Proposal, which such Board of Directors determines, after
consultation with its financial advisors, may be reasonably
likely to result in a transaction (an "ALTERNATIVE TRANSACTION")
that is more favorable to its shareholders than the transactions
contemplated by the Arrangement and this Combination Agreement
(taking into account the nature of the proposed transaction, the
nature and amount of the consideration, the likelihood of
completion and any other factors deemed appropriate by the Board
of Directors), the Board of Directors may engage in any
negotiations concerning, or provide any confidential
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information or data to, or have any discussions with, any person
relating to such an Alternative Transaction, or otherwise
facilitate any effort or attempt to make or implement such an
Alternative Transaction; provided, however, that upon engaging in
such negotiations or discussions, providing such information or
otherwise facilitating any effort or attempt to make or implement
an Alternative Transaction, such party shall give notice to the
other party of such party's engagement in such activities
("ALTERNATIVE TRANSACTION NOTICE"). Prior to furnishing nonpublic
information to, or entering into discussions or negotiations
with, any other persons or entities, such party shall obtain from
such person or entity an executed confidentiality agreement with
terms no less favorable, taken as a whole, to CanArgo or Fountain
than those contained in the confidentiality agreement delivered
by CanArgo to Fountain, and such party shall advise the other
party of the nature of such nonpublic information delivered to
such person reasonably promptly following its delivery to the
requesting party.
4.11 Listing
Fountain shall take all actions not inconsistent with its obligations
pursuant to this Combination Agreement which are reasonably necessary to
maintain the listing for Fountain Common Stock on the Nasdaq Stock Market Inc.
National Market System ("Nasdaq") for as long as Exchangeable Shares are
outstanding, including if necessary filing a listing application in the event
the Arrangement and the transactions related thereto are deemed to terminate
Fountain's current listing, and to obtain the approval of Nasdaq for the listing
on Nasdaq, subject to notice of issuance, of the shares of Fountain Common Stock
issuable upon exchange of the Exchangeable Shares.
4.12 Notification of Certain Matters.
Each of CanArgo and Fountain will give prompt notice to the other party
of (i) any change that is reasonably likely to result in any Material Adverse
Effect with respect to it, (ii) any other change or event which would cause any
representation or warranty made by it to be untrue or inaccurate as of the
Effective Time or (iii) any material failure by it to comply with or satisfy any
covenant, agreement or condition to be complied with or satisfied by it
hereunder.
4.13 Indemnification.
(a) From and after the Effective Date, Fountain shall indemnify,
defend and hold harmless the officers, directors and employees of
Fountain and CanArgo (the "INDEMNIFIED PARTIES") against all
losses, expenses, claims, damages or liabilities (i) arising out
of the transactions contemplated by this Combination Agreement or
arising as a result thereof or (ii) otherwise arising prior to
the Effective Date to the fullest extent, in the case of (i) or
(ii), permitted or required under (A) applicable law, (B) any
indemnification agreements between Fountain or CanArgo and any
such person and (C) the certificate of incorporation and by-laws
of Fountain and CanArgo. Fountain agrees to maintain in effect
for not less than four years after the Effective Date coverage no
less favorable than the current policies of directors' and
officers' liability insurance maintained by Fountain and CanArgo
with respect to matters occurring prior to the Effective Date and
to include within the coverage thereof the present and former
officers and directors of CanArgo and Fountain.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this
Combination Agreement is commenced, whether before or after the
Effective Date, the parties hereto agree to cooperate and use
their respective reasonable efforts to vigorously defend against
and respond thereto.
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4.14 Closing.
Subject to the termination of this Combination Agreement as provided in
Article 7, the closing of the transactions contemplated by this Combination
Agreement (the "CLOSING") will take place at the offices of CanArgo in Calgary,
Alberta on a date (the "CLOSING DATE") and at a time to be mutually agreed upon
by the parties, which date shall be no later than the third business day after
all conditions to Closing set forth herein shall have been satisfied or waived,
unless another place, time and date is mutually selected by Fountain and
CanArgo. Concurrently with the Closing, the Plan of Arrangement will be filed
with the Ministry of Consumer and Commercial Relations of the Province of
Ontario and any Fountain Charter Changes adopted by the stockholder of Fountain
will be filed with the Secretary of State of the State of Delaware. Fountain
will use its best efforts to cause the shares of Fountain Common Stock issuable
from time to time upon exchange of the Exchangeable Shares to be approved for
listing on the Nasdaq National Market System upon notice of issuance.
4.15 Continued CanArgo Operations.
Fountain does not presently have any plan or intention to liquidate
CanArgo, to merge CanArgo with or into another corporation, or to sell or
otherwise dispose of any of the stock of CanArgo (whether acquired pursuant to
the Arrangement or otherwise).
4.16 Certain Employee Benefit Matters.
If there are any employee benefit plans in which employees of CanArgo or
any CanArgo Subsidiary, on the one hand, and employees of any other company, on
the other hand, participate, then appropriate arrangements shall be made for the
separation of such plans following the consummation of the Arrangement and such
transitional arrangements as may be appropriate.
4.17 Board Composition.
Fountain shall take all necessary action such that, on or immediately
after the Effective Date, (i) the Board of Directors of Fountain is composed of
the individuals listed as directors on Schedule 4.17 and (ii) the officers of
Fountain shall be the individuals listed as officers on Schedule 4.17 with each
such individual to hold the office or offices set forth opposite his or her name
on such Schedule. In the event one or more of such individuals so designated to
be directors is unable or unwilling to serve as a director of Fountain, the
remaining individuals so designated to be directors shall select the person or
persons to replace those unable or unwilling to serve, and in the event one or
more of the individuals so designated to be officers is unable or unwilling to
so serve, a replacement, if any, shall be designated by the Board of Directors
of Fountain taking office on or immediately after the Effective Date in
accordance with this Section 4.17.
4.18 Bring Down Certificates - Fountain.
Within two days prior to the filing of the preliminary Joint Proxy
Statement with the SEC, within two days prior to the mailing of the Joint Proxy
Statement, and any amendments or supplements thereto, to the shareholders of
CanArgo and within two days prior to the CanArgo Meeting, Fountain shall deliver
to CanArgo a certificate executed by the Chief Executive Officer and Chief
Financial Officer of Fountain confirming the truth and accuracy of the
representations and warranties of Fountain set forth in Article 2 (as qualified
by the introduction to Article 2) on and as of the date of such certificate
except for representations and warranties which are by their express provisions
made as of a specific date or dates, which were or will be true in all material
respects at such time or times as stated therein, and except to the extent the
failure of such representations and warranties to be true and accurate has not
had and would not be reasonably likely to have a Fountain Material Adverse
Effect.
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4.19 Bring Down Certificates - CanArgo.
Within two days prior to the filing of the preliminary Joint Proxy
Statement with the SEC, within two days prior to the mailing of the Joint Proxy
Statement, and any amendments or supplements thereto, to the shareholders of
Fountain and within two days prior to the Fountain Meeting CanArgo shall deliver
to Fountain a certificate executed by the Chief Executive Officer and Chief
Financial Officer of CanArgo confirming the truth and accuracy of the
representations and warranties set forth in Article 3 (as qualified by the
introduction to Article 3 hereof) on and as of the date of such certificate
except for representations and warranties which are by their express provisions
made as of a specific date or dates, which were or will be true in all material
respects at such time or times as stated therein, and except to the extent the
failure of such representations and warranties to be true and accurate has not
had and would not be reasonably likely to have a CanArgo Material Adverse
Effect.
4.20 Compliance with the Securities Act.
(a) Prior to the Effective Date CanArgo shall cause to be delivered
to Fountain an opinion (reasonably satisfactory to counsel for
Fountain) of counsel to CanArgo identifying all persons who are
affiliates of CanArgo at the time of the CanArgo Meeting.
(b) Fountain shall use its best efforts to publish as promptly as
practicable financial information (including combined sales and
net income) covering at least 30 days of post-Effective Date
operations; provided, however, that if the Effective Date occurs
in the second month of a calendar quarter, the requirement of
this paragraph (b) shall be satisfied by Fountain's customary
announcement, in accordance with its past practice, of its
quarterly financial results.
(c) Prior to the date on which the Registration Statement becomes
effective, CanArgo shall cause to be delivered to Fountain a
letter addressed to Fountain from Ernst & Young, CanArgo's
independent auditors, and Fountain shall cause to be delivered to
CanArgo a letter addressed to CanArgo from Coopers & Lybrand
L.L.P., Fountain's independent auditors, each dated a date within
two business days prior to the date on which the Registration
Statement becomes effective and customary in scope and substance
for letters delivered by independent public accountants in
connection with registration statements similar to the
Registration Statement.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF CANARGO
The obligations of CanArgo hereunder are subject to the fulfilment or
satisfaction on or before the Closing, of each of the following conditions (any
one or more of which may be waived by CanArgo, but only in a writing signed by
CanArgo):
5.1 Accuracy of Representations and Warranties.
The representations and warranties of Fountain set forth in Article 2
(as qualified by the introduction to Article 2) shall be true and accurate when
made and on and as of the Closing Date with the same force and effect as if they
had been made at the Closing except for representations and warranties which are
by their express provisions made as of a specific date or dates, which were or
will be true in all material respects at such time or times as stated therein,
and except to the extent the failure of such representations and warranties to
be true and accurate has not had and would not be reasonably likely to have a
Fountain Material Adverse Effect, and CanArgo shall have received a certificate
to such effect executed by Fountain's Chief Executive Officer and Chief
Financial Officer.
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5.2 Covenants.
Fountain shall have performed and complied in all material respects with
all of its covenants required to be performed by it under this Combination
Agreement and shall have complied with section 6 of the Business Plan (Budget)
on or before the Closing, and CanArgo shall receive a certificate to such effect
signed by Fountain's Chief Executive Officer and Chief Financial Officer.
5.3 Absence of Material Adverse Change.
Since the date of this Combination Agreement, there shall not have been
one or more events or changes that has had or would be reasonably likely to have
a Fountain Material Adverse Effect.
5.4 Compliance with Law.
There shall be no order, decree or ruling by any governmental agency or
threat thereof, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Arrangement, which would prohibit or render
illegal the transactions contemplated by this Combination Agreement.
5.5 Government Consents.
There shall have been obtained on or before the Closing such material
permits or authorizations, and there shall have been taken such other action, as
may be required to consummate the Arrangement by any regulatory authority having
jurisdiction over the parties and the actions herein proposed to be taken,
including but not limited to requirements under applicable federal, provincial
and state securities laws.
5.6 SEC Filings.
The Registration Statement, if filed, shall have been declared effective
under the Securities Act and shall not be the subject of any stop-order or
proceedings seeking a stop-order, and the Joint Proxy Statement shall on the
Closing Date not be subject to any similar proceedings commenced or threatened
by the SEC or the OSC.
5.7 Shareholder approval.
This Agreement and the Arrangement shall have been approved and adopted
by the CanArgo shareholders in accordance with applicable law and CanArgo's
articles of incorporation and bylaws, and CanArgo shall not have received on or
prior to the Effective Time notice from the holders of more than 10% of the
CanArgo Common Shares of their intention to exercise their rights of dissent
under section 185 of the OBCA.
5.8 Fountain Approvals.
The Stock Issuance Proposal shall have been approved by the Fountain
stockholders in accordance with the rules of the Nasdaq National Market System,
applicable law and Fountain's certificate of incorporation and bylaws.
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5.9 No Legal Action.
No temporary restraining order, preliminary injunction or permanent
injunction or other order preventing the consummation of the Arrangement shall
have been issued by any Canadian or U.S. federal, provincial or state court and
remain in effect, nor shall any proceeding be pending which is reasonably likely
to result in any of the foregoing.
5.10 [Intentionally deleted]
5.11 Tax Opinion.
CanArgo shall have received an opinion, reasonably satisfactory to
CanArgo, of Lang Michener, counsel for CanArgo, to the effect that the
Arrangement will be generally treated for Canadian federal income tax purposes
as a reorganization of capital for those CanArgo Shareholders who hold their
CanArgo Common Shares as capital property for purposes of the ITA to the extent
that Exchangeable Shares are received in exchange for CanArgo Common Shares, and
such other opinions as are customary in these transactions.
5.12 Court Approval.
The Court shall have issued its final order approving the Arrangement
and such order shall (a) not impose any material conditions or costs, (b) be in
form and substance reasonably satisfactory to Fountain and CanArgo (such
approvals not to be unreasonably withheld or delayed by Fountain or CanArgo) and
(c) reflect the terms hereof.
5.13 OSC, Etc.
All necessary orders shall have been obtained from the OSC and other
relevant Canadian securities regulatory authorities in connection with the
Arrangement. The Arrangement shall have received the allowance or approval or
deemed allowance or approval by the responsible Minister under the Investment
Canada Act in respect of the Arrangement, to the extent such allowance or
approval is required, and such allowance or approval shall (a) not impose any
material conditions or costs and (b) be on terms and conditions reasonably
satisfactory to the parties (such approvals not to be unreasonably withheld or
delayed).
5.14 Appointment to Fountain Board.
The restructuring of the Fountain Board and management provided for in
Section 4.17 shall be effected concurrently with the Closing.
5.15 Legal Opinions.
CanArgo shall have received a legal opinion reasonably satisfactory to
CanArgo and its counsel with respect to the matters described in Schedule 5.15.
5.16 [Intentionally Omitted]
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5.17 Accountant's Letter.
CanArgo shall have received a letter from Coopers & Lybrand L.L.P.,
Fountain's independent auditors, dated a date within two business days before
the Effective Date and addressed to CanArgo, with respect to the financial
information relating to Fountain contained in the Joint Proxy Statement in a
form customary for this type of transaction.
ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATIONS OF FOUNTAIN
The obligations of Fountain hereunder are subject to the fulfilment or
satisfaction on or before the Closing, of each of the following conditions (any
one or more of which may be waived by Fountain, but only in a writing signed by
Fountain):
6.1 Accuracy of Representations and Warranties.
The representations and warranties of CanArgo set forth in Article 3 (as
qualified by the introduction to Article 3) shall be true and accurate when made
and on and as of the Closing Date with the same force and effect as if they had
been made at the Closing except for representations and warranties which are by
their express provisions made as of a specific date or dates, which were or will
be true in all material respects at such time or times as stated therein, and
except to the extent the failure of such representations and warranties to be
true and accurate has not had and would not be reasonably likely to have a
CanArgo Material Adverse Effect, and Fountain shall have received a certificate
to such effect executed by CanArgo's Chief Executive Officer and Chief Financial
Officer.
6.2 Covenants.
CanArgo shall have performed and complied in all material respects with
all of its covenants required to be performed by it under this Combination
Agreement on or before the Closing, and Fountain shall receive a certificate to
such effect signed by CanArgo's Chief Executive Officer and Chief Financial
Officer.
6.3 Absence of Material Adverse Change.
Since the date of this Combination Agreement, there shall not have been
one or more events or changes that has had or would be reasonably likely to have
a CanArgo Material Adverse Effect.
6.4 Compliance with Law.
There shall be no order, decree or ruling by any governmental agency or
threat thereof, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Arrangement, which would prohibit or render
illegal the transactions contemplated by this Combination Agreement.
6.5 Government Consents.
There shall have been obtained on or before the Closing such material
permits or authorizations, and there shall have been taken such other action, as
may be required to consummate the Arrangement by any regulatory authority having
jurisdiction over the parties and the actions herein proposed to be taken,
including but not limited to requirements under applicable federal, provincial
and state securities laws.
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6.6 SEC Filings.
The Registration Statement, if filed, shall have been declared effective
under the Securities Act and shall not be the subject of any stop-order or
proceedings seeking a stop-order, and the Joint Proxy Statement shall on the
Closing Date not be subject to any similar proceedings commenced or threatened
by the SEC or the OSC.
6.7 Stockholder Approval.
The Stock Issuance Proposal shall have been approved and adopted by the
Fountain stockholders in accordance with the rules of the Nasdaq National Market
System, applicable law and Fountain's certificate of incorporation and bylaws.
6.8 CanArgo Approvals.
This Agreement and the Arrangement shall have been approved and adopted
by the CanArgo shareholders in accordance with applicable law and CanArgo's
articles of incorporation and bylaws, and CanArgo shall not have received on or
prior to the Effective Time notice from holders of more than 10% of the CanArgo
Common Shares of their intention to exercise their rights of dissent under
section 185 of the OBCA.
6.9 No Legal Action.
No temporary restraining order, preliminary injunction or permanent
injunction or other order preventing the consummation of the Arrangement shall
have been issued by any U.S. or Canadian federal, provincial or state court and
remain in effect, nor shall any proceeding be pending which is reasonably likely
to result in any of the foregoing.
6.10 Affiliate Agreements.
Fountain shall have received executed originals of the CanArgo Affiliate
Agreement from each CanArgo Affiliate if such CanArgo Affiliate Agreements have
been requested by Counsel to Fountain in accordance with Section 4.4 of this
Combination Agreement.
6.11 Court Approval.
The Court shall have issued its final order approving the Arrangement
and such order shall (a) not impose any material conditions or costs, (b) be in
form and substance reasonably satisfactory to Fountain and CanArgo (such
approvals not to be unreasonably withheld or delayed by Fountain or CanArgo) and
(c) reflect the terms hereof.
6.12 OSC, Etc.
All necessary orders shall have been obtained from the OSC and other
relevant Canadian securities regulatory authorities in connection with the
Arrangement. The Arrangement shall have received the allowance or approval or
deemed allowance or approval by the responsible Minister under the Investment
Canada Act in respect of the Arrangement, to the extent such allowance or
approval is required, and such allowance or approval shall (a) not impose any
material conditions or costs and (b) be on terms and conditions reasonably
satisfactory to the parties (such approvals not to be unreasonably withheld or
delayed).
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6.13 Legal Opinions.
Fountain shall have received a legal opinion reasonably satisfactory to
Fountain and its counsel with respect to the matters described in Schedule 6.13.
6.14 Fairness Opinion.
Fountain shall have received the advice of one or more of the Fountain
Advisors that, satisfactory in form and substance to Fountain, the Arrangement
is fair from a financial point of view to Fountain and its stockholders.
6.15 [Intentionally Omitted]
6.16 Accountant's Letter.
Fountain shall have received a letter of Ernst & Young, CanArgo's
independent auditors, dated a date within two business days before the Effective
Date and addressed to Fountain with respect to the financial information
relating to CanArgo contained in the Joint Proxy Statement in a form customary
for this type of transaction.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination.
This Combination Agreement may be terminated at any time prior to the
Effective Date, whether before or after approval by the shareholders of CanArgo
or the Fountain:
(a) by mutual consent of the Board of Directors of Fountain and the
Board of Directors of CanArgo;
(b) by either Fountain or CanArgo if the Arrangement shall not have
been consummated on or before September 30, 1998; provided, that
the terminating party is not then in material breach of its
representations, warranties or obligations under this Combination
Agreement;
(c) by CanArgo if any of the conditions specified in Section 4.18 and
Article 5 has not been met or waived by CanArgo at such time as
such condition is no longer capable of satisfaction;
(d) by Fountain if any of the conditions specified in Section 4.19
and Article 6 has not been met or waived by Fountain at such time
as such condition is no longer capable of satisfaction;
(e) by Fountain or CanArgo if any requirements or conditions are
imposed, or proposed to be imposed, upon either Fountain or
CanArgo or any of their respective affiliates by any Governmental
Entity in connection with the authorization, consent or approval
of such Governmental Entity (or the expiration or termination of
any waiting period applicable to such Governmental Entity's
review of the transactions contemplated by this Combination
Agreement), or by any domestic or foreign court or similar
tribunal in any suit brought by a private party or Government
Entity challenging the transactions contemplated hereby as
violative of any law, which, in the reasonable opinion of
Fountain or CanArgo, would require Fountain to take any
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action that would have a Fountain Material Adverse Effect or a
CanArgo Material Adverse Effect;
(f) by CanArgo or Fountain, if the CanArgo Board determines to
recommend to the CanArgo shareholders that they vote against the
Arrangement and approve instead an Alternative Transaction; and
(g) by CanArgo or Fountain, if the Fountain Board determines to
recommend to the Fountain stockholders that they vote against
approval of the Stock Issuance Proposal and approve instead an
Alternative Transaction.
7.2 Effect of Termination.
(a) In the event of termination of this Combination Agreement by
either Fountain or CanArgo, as provided above, this Combination
Agreement shall forthwith become void and (except for the willful
breach of this Combination Agreement by any party hereto) there
shall be no liability on the part of either CanArgo or Fountain
or their respective officers or directors other than as set forth
in this Section 7.2; provided that Sections 7.2, 8.1, 8.7 and
8.12 shall survive the termination.
(b) CanArgo shall make a payment to Fountain (by wire transfer or
cashiers check) of a breakup fee in the amount of $3,000,000 in
the event (i) this Combination Agreement is terminated pursuant
to Section 7.1(f), (ii) CanArgo refuses or otherwise willfully
fails in breach of its obligations under this Combination
Agreement to consummate the Arrangement or, (iii) the Closing
pursuant to this Combination Agreement does not occur by reason
of the failure of the conditions set forth in Section 5.7 or 6.8
hereof and if at the time of such termination Fountain is not in
material breach of any representation, warranty or material
covenant contained herein.
(c) Fountain shall make a payment to CanArgo (by wire transfer or
cashiers check) of a breakup fee in the amount of $3,000,000 in
the event (i) this Combination Agreement is terminated pursuant
to Section 7.1(g), (ii) Fountain refuses or otherwise willfully
fails in breach of its obligations under this Combination
Agreement to consummate the Arrangement, or (iii) the Closing
pursuant to this Combination Agreement does not occur by reason
of the failure of the conditions set forth in Sections 6.7 or 5.8
hereof and if at the time of such termination CanArgo is not in
material breach of any representation, warranty or material
covenant contained herein.
7.3 Amendment.
This Combination Agreement may be amended by the parties hereto, by or
pursuant to action taken by their respective Boards of Directors, at any time
before or after approval hereof by the shareholders of CanArgo or Fountain, but
after either such approval no amendment shall be made which changes the Exchange
Ratio or which in any way materially adversely affects the rights of the
shareholders of either CanArgo or Fountain, without the further approval of such
shareholders. This Combination Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
7.4 Waiver.
At any time prior to the Effective Date, the parties hereto, by or
pursuant to action taken by their respective Boards of Directors, may (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any documents delivered pursuant hereto, and
(iii) waive compliance with any of the agreements or conditions contained
herein, provided, however, that no such waiver shall materially adversely affect
the rights of the
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shareholders of either CanArgo or Fountain. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE 8
GENERAL PROVISIONS
8.1 Governing Law.
The internal laws of the State of Delaware (irrespective of its choice
of law principles) will govern the validity of this Combination Agreement, the
construction of its terms and the interpretation and enforcement of the rights
and duties of the parties hereto, except to the extent mandatorily governed by
the laws of Ontario.
8.2 Non-Survival of Representations, Warranties and Agreements.
No representations, warranties or agreements in this Combination
Agreement shall survive the Arrangement, except for the agreements contained in
Sections 1.1, 4.13, 8.2, 8.7 and 8.11.
8.3 Severability.
If any provision of this Combination Agreement, or the application
thereof, is for any reason and to any extent determined to be invalid or
unenforceable, such provisions shall, if possible, be deemed modified to the
extent (but only to the extent) necessary to render it valid or enforceable, and
the remainder of this Combination Agreement and application of such provision to
other persons or circumstances will remain in full force and effect. The parties
further agree to replace such void or unenforceable provision of this
Combination Agreement with a valid and enforceable provision that will achieve,
to the greatest extent possible, the economic, business and other purposes of
the void or unenforceable provision.
8.4 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which will be an original as regards any party whose signature appears thereon
and all of which together will constitute one and the same instrument. This
Agreement will become binding when one or more counterparts hereof, individually
or taken together, will bear the signatures of all the parties reflected hereon
as signatories.
8.6 Amendment and Waivers.
Any term or provision of this Combination Agreement may be amended, and
the observance of any term of this Combination Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound thereby. The waiver by a party
of any breach hereof or default in the performance hereof will not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
The Agreement may be amended by the parties hereto at any time before or after
approval of the CanArgo shareholders or the Fountain stockholders, but after
such approval no amendment will be made which by applicable law requires the
further approval of the CanArgo shareholders or the Fountain stockholders
without obtaining such further approval.
8.5 Notices.
All notices or other communications under this Combination Agreement
shall be in writing and shall be given (and shall be deemed to have been duly
given upon receipt) by delivery in person, by cable, telegram, telex,
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telecopy or other standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
If to Fountain:
Fountain Oil Incorporated
Skysstasjon 11B (4th Floor)
1370 Asker, Norway
Attention: Nils N. Trulsvik
President
Telecopy No.: 47 66 78 69 10
With copies to:
Gibson, Dunn & Crutcher
333 S. Grand Avenue
Los Angeles, California 90071
Attention: Bruce D. Meyer
Telecopy No.: (213) 229-7520
and
Alan D. Jacobson, Esq.
2029 Century Park East
Suite 2600
Los Angeles, California 90067
Telecopy No.: (310) 277-1804
If to CanArgo:
CanArgo Energy Inc.
P. O. Box 291
St. Peter Port
Guernsey, Channel Islands
Great Britain GY1 3AR
Attention: David Robson
Telecopy No.: 011 44 1481 729982
and
CanArgo Energy Inc.
1580 Guiness House
727 7th Avenue S.W.
Calgary, Alberta
T2P 0Z5
Attention: Michael Binnion
Telecopy No.: (403) 777-1578
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<PAGE> 259
With a copy to:
Lang Michener
BCE Place
Suite 2500
181 Bay Street
Toronto, Ontario
M5J 2T7
Attention: Philippe Tardif
Telecopy No.: (416) 365-1719
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
8.7 Fees and Expenses.
Whether or not the Arrangement is consummated, all costs and expenses
incurred in connection with this Combination Agreement and the transactions
contemplated by this Combination Agreement shall be paid by the party incurring
such costs and expenses.
8.8 Public Announcement.
Upon execution of this Combination Agreement, Fountain and CanArgo
promptly will issue a joint press release approved by both parties announcing
the Arrangement. Thereafter, Fountain or CanArgo may issue such press releases,
and make such other disclosures regarding the Arrangement, as it determines
(after consultation with legal counsel) are required under applicable securities
laws or by the Nasdaq National Market System or the Olso Stock Exchange;
provided that to the extent reasonably practicable each party making any such
disclosure will provide advance notice to the other of the proposed form and
content of any such disclosure and opportunity to comment promptly thereon and
will attempt in good faith to reach agreement with the other party as to the
form and content of such disclosure, and shall in any case promptly deliver a
copy of such disclosure in the form released to the other party.
8.9 Specific Performance.
The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Combination Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Combination Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or Canada or any state or province having jurisdiction, this being in addition
to any other remedy to which they are entitled at law or in equity.
8.10 Interpretation.
(a) When a reference is made in this Combination Agreement to
subsidiaries of Fountain or CanArgo, the word "SUBSIDIARIES"
means corporations more than 50% of whose outstanding voting
securities are directly or indirectly owned by Fountain or
CanArgo, as the case may be.
(b) The headings contained in this Combination Agreement are for
reference purposes only and shall not affect in any way the
meaning or interpretation of this Combination Agreement.
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<PAGE> 260
(c) As used in this Combination Agreement, "FOUNTAIN MATERIAL ADVERSE
Effect" shall mean a material adverse effect on the business,
properties, assets, financial condition, or results of operations
of Fountain and its subsidiaries taken as a whole (excluding the
effect of a change in general economic conditions); and "CANARGO
MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
the business, properties, assets, financial condition, or results
of operations of CanArgo and its subsidiaries taken as a whole
(excluding the effect of a change in general economic
conditions).
(d) As used in this Combination Agreement, "KNOWLEDGE" shall mean,
with respect to the matter in question, the actual knowledge of
such matter by an executive officer of Fountain or CanArgo, as
applicable.,
(e) The inclusion of an item on any schedule to this Combination
Agreement, including the Fountain Disclosure Schedule and CanArgo
Disclosure Schedule, shall not be deemed to be indicative of the
materiality of such item.
8.11 Third Party Beneficiaries.
Except as specifically provided in Section 4.13(a), this Combination
Agreement is not intended to confer upon any other person any rights or remedies
hereunder.
8.12 Entire Agreement.
This Agreement and the schedules hereto constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between the parties with respect hereto other than those dealing with
confidentiality of information, which shall remain in full force and effect. The
express terms hereof control and supersede any course of performance or usage of
the trade inconsistent with any of the terms hereof.
8.13 No Assignment.
This Agreement shall not be assigned by operation of law or otherwise.
8.14 Cure Period.
No party shall have any rights under this Combination Agreement for any
actual or threatened breach of a representation, warranty, covenant or agreement
contained herein, if such breach is capable of being cured, until (i) the
non-breaching party has notified the breaching party of its determination of the
existence (or threatened existence) of the breach, and (ii) the breaching party
shall have had a reasonable time (considering the nature of the breach and the
actions required for cure, but in no event longer than 30 days) to cure such
breach.
IN WITNESS WHEREOF, the parties hereto have caused this Combination
Agreement to be signed by their respective officers thereunder duly authorized
all as of the date first written above.
FOUNTAIN OIL INCORPORATED
-36-
<PAGE> 261
By:
-----------------------------
Name:
-----------------------------
Title: President and Chief Executive
Officer
-37-
<PAGE> 262
CANARGO ENERGY INC.
By:
-----------------------------
Name:
-----------------------------
Title: Chairman and Chief Executive
Officer
-38-
<PAGE> 263
ANNEX F
SCHEDULE 1.1
PLAN OF ARRANGEMENT
UNDER SECTION 182
OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
<PAGE> 264
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I INTERPRETATION ................................................ 1
1.1 DEFINITION: ......................................................... 1
1.2 SECTIONS AND HEADINGS ............................................... 2
1.3 NUMBER, GENDER AND PERSONS .......................................... 2
1.4 PAYMENTS ............................................................ 2
ARTICLE 2 ARRANGEMENT ................................................... 3
2.1 BINDING EFFECT ...................................................... 3
2.2 EVENTS SEQUENTIAL ................................................... 3
2.3 AMENDMENT OF ARTICLES ............................................... 3
2.4 ISSUE OF COMMON SHARES .............................................. 3
2.5 EXCHANGE OF CANARGO COMMON SHARES ................................... 3
2.6 EXCHANGE AND CALL RIGHTS ............................................ 4
ARTICLE 3 RIGHTS OF DISSENT ............................................. 4
3.1 RIGHTS OF DISSENT ................................................... 4
ARTICLE 4 CERTIFICATES AND FRACTIONAL SHARES ............................ 4
4.1 ISSUANCE OF CERTIFICATES ............................................ 4
4.2 DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES ............ 5
4.3 NO FRACTIONAL SHARES ................................................ 5
4.4 LOST CERTIFICATES ................................................... 5
4.5 EXTINGUISHMENT OF RIGHTS ............................................ 6
ARTICLE 5 AMENDMENT ..................................................... 6
5.1 PLAN OF ARRANGEMENT AMENDMENT ....................................... 6
</TABLE>
<PAGE> 265
ANNEX G
SCHEDULE 1.1(b)(i)
PLAN OF ARRANGEMENT
UNDER SECTION 182
OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
ARTICLE I
INTERPRETATION
1.1 Definition:
In this Plan of Arrangement unless something in the subject matter or
context is inconsistent therewith:
"Arrangement " means the arrangement under section 182 of the OBCA on
the terms and subject to the conditions set out in this Plan of Arrangement,
subject to any amendments thereto made in accordance with section 5.1 or made at
the direction of the Court in the Final Order.
"Business Day" means any day other than a Saturday, a Sunday or a day
when banks are not open for business in either or both of Houston, Texas and
Toronto, Ontario.
"CanArgo Common Shares" means the common shares of the Corporation.
"Corporation" means CanArgo Energy Inc., a corporation existing under
the laws of the Province of Alberta.
"Court" means the Ontario Court of Justice (General Division).
"Current Market Price" has the meaning set out in subparagraph 4.(5)1.1
of Appendix A hereto.
"Depository" means the Montreal Trust Company of Canada at its principal
office in Toronto, Ontario.
"Dissent Procedures" means the procedures referred to in section 3.1.
"Effective Date" means the date shown on the certificate of arrangement
issued by the Director under the OBCA giving effect to the Arrangement.
"Effective Time" means 2:00 p.m. (Toronto time) on the Effective Date.
"Exchangeable Share Provisions" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares, which are set
forth in subparagraph 4.(5)1.1 of Appendix A hereto.
"Exchangeable Shares" means the Exchangeable Shares of the Corporation.
"Final Order" means the final order of the Court approving the
Arrangement as such order may be amended by the Court at any time prior to the
Effective Time.
"Fountain" means Fountain Oil Incorporated, a corporation existing under
the laws of the State of Delaware.
"Fountain Common Stock" means the shares of Common Stock of Fountain,
par value US$0.10 per share, having voting rights of one vote per share, and any
other securities into which such shares may be combined or changed or for which
such shares may be exchanged (whether or not Fountain shall be the issuer of
such other securities) or any other consideration which may be received by the
holders of such shares pursuant to a
<PAGE> 266
recapitalization, reconstruction, reorganization or reclassification of, or an
amalgamation, merger, liquidation or similar transaction affecting, such shares.
"Meeting" means the annual and special meeting of the shareholders of
the Corporation to be held to consider the Arrangement.
"OBCA" means the Business Corporations Act (Ontario), as amended.
"Proxy Statement" means the Joint Management Information Circular and
Proxy Statement of the Corporation and Fountain dated -.
"Subsidiary" means, when used with reference to Fountain, any
corporation more than 50% of the outstanding stock of which, by vote or by
value, is owned, directly or indirectly, by Fountain, by one or more other
Subsidiaries of Fountain, or by Fountain and one or more other Subsidiaries of
Fountain.
"Transfer Agent" has the meaning set out in subparagraph 4.(5)1.1 of
Appendix A hereto.
1.2 Sections and Headings.
The division of this Plan of Arrangement into articles and sections and
the insertion of headings are for reference purposes only and shall not affect
the interpretation of this Plan of Arrangement. Unless otherwise indicated, any
reference in this Plan of Arrangement to an article, section or Appendix refers
to the specified article or section of or Appendix to this Plan of Arrangement.
1.3 Number, Gender and Persons.
In this Plan of Arrangement, unless the context otherwise requires,
words importing the singular number include the plural and vice versa, words
importing any gender include all genders and words importing persons include
individuals, corporations, partnerships, companies, associations, trusts,
unincorporated organizations, governmental bodies and other legal or business
entities of any kind.
1.4 Payments.
All payments to be made hereunder shall be made without interest and
less any tax required by law to be deducted and withheld. Notwithstanding the
provisions of Article 4, any cheque deliverable to a holder of Exchangeable
Shares whose address as recorded in the securities register of the Corporation
is in the United States shall be payable in U.S. dollars.
ARTICLE 2
ARRANGEMENT
2.1 Binding Effect.
This Plan will become effective on, and be binding on and after, the
Effective Time on (i) the Corporation, (ii) Fountain and its Subsidiaries, (iii)
all holders of CanArgo Common Shares and (iv) all holders of Exchangeable
Shares.
2.2 Events Sequential.
2
<PAGE> 267
At the Effective Time, each of the provisions of this Article 2 shall
occur and be deemed to occur in the order set out below, without any further act
or formality.
2.3 Amendment of Articles.
The articles of the Corporation shall be amended as set out in the
articles of amendment annexed as Appendix A hereto.
2.4 Issue of Common Shares.
The Corporation shall issue to Fountain 100 CanArgo Common Shares in
consideration of US$160. The amount added to the stated capital account
maintained for the CanArgo Common Shares with respect to the CanArgo Common
Shares issued pursuant to this section 2.4 shall be US$160.
2.5 Exchange of CanArgo Common Shares.
(1) Each CanArgo Common Share (other than the CanArgo Common Shares held
by Fountain and by holders who have exercised their rights of dissent in
accordance with Article 3 and who are ultimately entitled to be paid fair value
for such shares) shall be exchanged for 1.6 fully paid and non assessable
Exchangeable Shares; provided that if each issued and outstanding share of
Fountain Common Stock is combined prior to the Effective Time on the basis of 4
shares of Fountain Common Stock (prior to such combination) into 1 share of
Fountain Common Stock (after giving effect to such combination), then each
CanArgo Common Share (other than the CanArgo Common Shares held by Fountain and
by holders who have exercised their rights of dissent in accordance with Article
3 and who are ultimately entitled to be paid fair value for such shares) shall
be exchanged for 0.4 fully paid and non-assessable Exchangeable Share.
(2) Upon the exchange referred to in section 2.5(1), each holder of a
CanArgo Common Share whose share is so exchanged shall be deemed to grant the
call rights set out in Articles 5, 6 and 7 of the Exchangeable Share Provisions,
shall cease to be such a holder, shall have its name removed from the register
of holders of CanArgo Common Shares and shall become a holder of the number of
Exchangeable Shares to which such holder is entitled as a result of the exchange
referred to in section 2.5(1) and such holder's name shall be added to the
register of holders of Exchangeable Shares accordingly.
(3) The amount added to the stated capital account maintained for the
Exchangeable Shares with respect to the Exchangeable Shares issued pursuant to
this section 2.5 shall be equal to the aggregate amount of stated capital
attributable to the CanArgo Common Shares (less the amount paid for fractional
shares pursuant to section 4.3) that are exchanged for Exchangeable Shares
pursuant to this section 2.5.
2.6 Exchange and Call Rights.
Fountain shall be entitled to enforce the exchange right and call rights
set out in Articles 5, 6 and 7 of the Exchangeable Share Provisions and in
exercising such rights Fountain will not be required to purchase Exchangeable
Shares from itself.
ARTICLE 3
RIGHTS OF DISSENT
3.1 Rights of Dissent.
(1) Holders of CanArgo Common Shares may exercise rights of dissent with
respect to such shares in connection with the Arrangement pursuant to and in the
manner set forth in section 185 of the OBCA except that,
3
<PAGE> 268
notwithstanding the provisions of section 185 of the OBCA, holders who duly
exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for their
CanArgo Common Shares shall (i) be deemed to have transferred their
CanArgo Common Shares to CanArgo for cancellation and such shares shall
be cancelled at the Effective Time and (ii) not be entitled to any other
payment or consideration including any payment that would be payable
under the Arrangement had such holders not exercised their right of
dissent; or
(b) are ultimately not entitled, for any reason, to be paid fair
value for their CanArgo Common Shares shall be deemed to have
participated in the Arrangement on the same basis as any non-dissenting
holder of CanArgo Common Shares, including receiving Exchangeable Shares
pursuant to section 2.5.
In no case shall the Corporation be required to recognize such holders as
holders of CanArgo Common Shares after the Effective Time, and the names of such
holders of CanArgo Common Shares shall be deleted from the register of holders
of CanArgo Common Shares at the Effective Time.
(2) Holders of CanArgo Common Shares who are ultimately entitled to be
paid fair value for their CanArgo Common Shares in accordance with section
3.1(1)(a) shall be paid by the Corporation.
ARTICLE 4
CERTIFICATES AND FRACTIONAL SHARES
4.1 Issuance of Certificates.
As soon as practicable after the Effective Date, the Corporation shall
deposit with the Depository, for the benefit of the holders of CanArgo Common
Shares exchanged pursuant to section 2.5, certificates representing the
Exchangeable Shares issued in exchange for their outstanding CanArgo Common
Shares. Upon surrender to the Depository for cancellation of a certificate which
immediately prior to the Effective Time represented outstanding CanArgo Common
Shares that were exchanged for Exchangeable Shares, together with such other
documents and instruments as would have been required to effect the transfer of
the shares formerly represented by such certificate under the OBCA and such
additional documents and instruments as the Depository and the Corporation may
reasonably require, the holder of such surrendered certificate shall be entitled
to receive in exchange therefor, and the Depository shall deliver to such
holder, a certificate representing that number (rounded down to the nearest
whole number) of Exchangeable Shares that such holder has the right to receive
and a cheque for (i) any dividends or distributions with respect thereto then
payable pursuant to section 4.2 and (ii) any cash in lieu of a fractional
Exchangeable Share payable pursuant to section 4.3, and the certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of CanArgo Common Shares that is not registered in the transfer
records of the Corporation, a certificate representing the proper number of
Exchangeable Shares may be issued to the transferee if the certificate
representing such CanArgo Common Shares is presented to the Depository
accompanied by all documents required by the Depository and the Corporation to
evidence and effect such transfer. Until surrendered as contemplated by this
section 4.1, each certificate which immediately prior to the Effective Time
represented outstanding CanArgo Common Shares that were exchanged for
Exchangeable Shares shall be deemed at any time after the Effective Time to
represent only the right to receive, upon such surrender, the certificate
representing Exchangeable Shares as contemplated by this section 4.1 and, at the
time or times set forth in section 4.2, a cheque for (i) any dividends or
distributions with a record date after the Effective Time theretofore paid or
payable with respect to Exchangeable Shares as contemplated by section 4.2 and
(ii) a cash payment in lieu of any fractional Exchangeable Share as contemplated
by section 4.3.
4
<PAGE> 269
4.2 Distributions with Respect to Unsurrendered Certificates.
No dividends or other distributions declared or made after the Effective
Time with respect to Exchangeable Shares with a record date after the Effective
Time shall be paid to the holder of any unsurrendered certificate that,
immediately prior to the Effective Time, represented outstanding CanArgo Common
Shares and no cash payment in lieu of any fractional share shall be paid to any
such holder pursuant to section 4.3, unless and until such certificate shall be
surrendered in accordance with section 4.1. Subject to applicable law at the
time of such surrender of any such certificate (or, in the case of clause (iii)
below, at the appropriate payment date), there shall be paid to the registered
holder of a certificate representing whole Exchangeable Shares (i) the amount of
any cash payable in lieu of a fractional Exchangeable Share to which such holder
is entitled pursuant to section 4.3, (ii) the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole Exchangeable Shares and (iii) the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole Exchangeable Shares.
4.3 No Fractional Shares.
No certificates or scrip representing fractional Exchangeable Shares
shall be issued upon the surrender of certificates for exchange pursuant to
section 4.1 and no dividend, stock split or other change in the capital
structure of the Corporation shall relate to any such fractional security and
such fractional interests shall not entitle the owner thereof to vote or to
exercise any rights as a security holder of the Corporation. In lieu of any such
fractional securities, each person entitled to a fractional interest in an
Exchangeable Share will receive an amount of cash (rounded to the nearest whole
cent) equal to the product obtained when such fraction is multiplied by the
Current Market Price on the Effective Date, such amount to be provided to the
Depository by the Corporation upon request.
4.4 Lost Certificates.
If any certificate which immediately prior to the Effective Time
represented outstanding CanArgo Common Shares that were exchanged pursuant to
section 2.5 has been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such certificate to be lost, stolen or
destroyed, the Depository will issue in exchange for such lost, stolen or
destroyed certificate, a certificate representing Exchangeable Shares (and a
cheque for any dividends or distributions with respect thereto pursuant to
section 4.2 and any cash for a fractional share pursuant to section 4.3)
deliverable in respect thereof. When authorizing such payment in exchange for
any lost, stolen or destroyed certificate, the person to whom a certificate
representing Exchangeable Shares is to be issued shall, as a condition precedent
to the issuance thereof, give a bond satisfactory to the Corporation and the
Depository in such sum as the Corporation may direct or otherwise indemnify the
Corporation, Fountain and the Depository in a manner satisfactory to them
against any claim that may be made against the Corporation, Fountain or the
Depository with respect to the certificate alleged to have been lost, stolen or
destroyed.
4.5 Extinguishment of Rights.
Notwithstanding any of the other provisions hereof, any certificate
which immediately prior to the Effective Time represented outstanding CanArgo
Common Shares that were exchanged pursuant to section 2.5 and has not been
surrendered with all other instruments required by section 4.1 on or prior to
the sixth anniversary of the Effective Date shall cease to represent a claim or
interest of any kind or nature as a shareholder of the Corporation. On such
date, the Exchangeable Shares to which the former registered holder of such
certificate was ultimately entitled shall be deemed to have been surrendered to
the Corporation together with all entitlements to dividends, distributions and
cash for fractional interests thereon held for such former registered holder for
no consideration.
5
<PAGE> 270
ARTICLE 5
AMENDMENT
5.1 Plan of Arrangement Amendment.
(1) The Corporation reserves the right to amend, modify and/or
supplement this Plan of Arrangement at any time and from time to time provided
that any such amendment, modification, or supplement must be contained in a
written document that is (i) agreed to by Fountain, (ii) filed with the Court
and, if made following the Meeting, approved by the Court and (iii) communicated
to holders of CanArgo Common Shares in the manner required by the Court (if so
required).
(2) Any amendment, modification or supplement to this Plan of
Arrangement may be proposed by the Corporation at any time prior to or at the
Meeting (provided that Fountain shall have consented thereto) with or without
any other prior notice or communication, and, if so proposed and accepted by the
persons voting at the Meeting (other than as may be required under the Court's
interim order), shall become part of this Plan of Arrangement for all purposes.
(3) Any amendment, modification or supplement to this Plan of
Arrangement that is approved by the Court following the Meeting shall be
effective only (i) if it is consented to by the Corporation, (ii) if it is
agreed to by Fountain and (iii), if required by applicable law, it is approved
as required by the holders of the CanArgo Common Shares or the Exchangeable
Shares, as the case may be.
6
<PAGE> 271
ANNEX G
Schedule 1.1(b)(i)
APPENDIX A
The articles of the corporation are amended as follows:
(1) to change the name of the Corporation to CANARGO OIL & GAS INC.
(2) to create 23,782,138 Exchangeable Shares;
(3) to declare that the capital of the Corporation after giving effect
to the foregoing consists of an unlimited number of Common Shares, an unlimited
number of First Preferred Shares, an unlimited number of Second Preferred Shares
and 23,782,138 Exchangeable Shares;
(4) to change the rights, privileges, restrictions and conditions
attaching to the Common Shares so as to provide that such rights, privileges,
restrictions and conditions are as follows:
1.1 Dividends
Subject to the prior rights of the holders of the Exchangeable Shares
and any other shares ranking senior to the Common Shares with respect to
priority in the payment of dividends, the holders of Common Shares shall
be entitled to receive dividends and the Corporation shall pay dividends
thereon, as and when declared by the board of directors of the
Corporation out of the assets of the Corporation properly applicable to
the payment of dividends, in such amount and in such form as the board
of directors may from time to time determine and all dividends that the
directors may declare on the Common Shares shall be declared and paid in
equal amounts per share on all Common Shares at the time outstanding.
2. 1 Dissolution
In the event of the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, or any other distribution
of assets of the Corporation among its shareholders for the purpose of
winding up its affairs, subject to the prior rights of the holders of
the Exchangeable Shares and any other shares ranking senior to the
Common Shares with respect to priority in the distribution of assets
upon dissolution, liquidation or winding up, the holders of the Common
Shares shall be entitled to participate rateably in any distribution of
the assets of the Corporation for the purposes of winding up its
affairs.
3.1 Voting Rights
The holders of the Common Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of the Corporation and
shall have one vote for each Common Share held at all meetings of the
shareholders of the Corporation, except for meetings at which only
holders of another specified class or series of shares of the
Corporation are entitled to vote separately as a class or series.
(5) to provide that the rights, privileges, restrictions and conditions
attaching to the Exchangeable Shares are as follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions
In these Exchangeable Share Provisions, unless something in the subject
matter or context is inconsistent therewith:
<PAGE> 272
"Automatic Exchange Right" has the meaning set out in Section 5.3(2) of
the Exchangeable Share Provisions.
"Board of Directors" means the board of directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day
when banks are not open for business in either or both of New York, New
York and Toronto, Ontario.
"Canadian Dollar Equivalent" means in respect of an amount expressed in
a foreign currency (the "Foreign Currency Amount") at any date the
product obtained by multiplying (a) the Foreign Currency Amount by (b)
the official noon spot exchange rate on such date for such foreign
currency as reported by the Bank of Canada or, in the event such spot
exchange rate is not available, such exchange rate on such date for such
foreign currency as may be determined in good faith by the Board of
Directors to be appropriate for such purpose.
"Code" means the United States Internal Revenue Code of 1986, as
amended.
"Combination Agreement" means the agreement between Fountain and the
Corporation, dated as of February 2, 1998, as the same may be amended,
providing for, among other things, the Arrangement.
"Common Shares" means the Common Shares of the Corporation.
"Corporation" means CanArgo Oil & Gas Inc., a corporation continued
under the laws of the Province of Ontario.
"Current Market Price" means, in respect of a share of Fountain Common
Stock on any date, the Canadian Dollar Equivalent of the average closing
sales price of a share of Fountain Common Stock during a period of 20
Business Days ending not more than five trading days before such date on
the NASDAQ National Market System during which the Fountain Common Stock
traded or, if the shares of Fountain Common Stock are not then listed on
the NASDAQ National Market System, on such other stock exchange or
automated quotation system on which the shares of Fountain Common Stock
are listed or quoted, as the case may be, as may be selected by the
Board of Directors for such purpose; provided, however, that if in the
opinion of the Board of Directors the public distribution or trading
activity of shares of Fountain Common Stock during such period is
inadequate to create a market that reflects the fair market value of a
share of Fountain Common Stock, then the Current Market Price of a share
of Fountain Common Stock shall be determined by the Board of Directors
based upon the advice of such qualified independent financial advisors
as the Board of Directors may deem to be appropriate, and provided
further that any such selection, opinion or determination by the Board
of Directors shall be conclusive and binding.
"Dividend Amount" means an amount equal to the full amount of all
dividends and distributions declared but unpaid on each Exchangeable
Share and all dividends and distributions declared on a share of
Fountain Common Stock after the date of issuance of such Exchangeable
Share as to which an equivalent dividend or distribution shall have not
been declared on such Exchangeable Share as contemplated by Section 3.1,
in each case with a record date prior to the effective date of the
exchange of such Exchangeable Share for a share of Fountain Common Stock
hereunder.
"Exchangeable Shares" mean the Exchangeable Shares of the Corporation to
which the Exchangeable Share Provisions apply.
"Exchangeable Share Provisions" means the rights, privileges,
restrictions and conditions set out in this paragraph 4(5) of these
articles of amendment.
2
<PAGE> 273
"Fountain" means Fountain Oil Incorporated, a corporation existing under
the laws of the State of Delaware, and any successor corporation.
"Fountain Call Notice" has the meaning set out in Section 6.2(2) of the
Exchangeable Share Provisions.
"Fountain Common Stock" means the shares of Common Stock of Fountain,
par value US$0.10 per share, having voting rights of one vote per share,
and any other securities into which such shares may be combined or
changed or for which such shares may be exchanged (whether or not
Fountain shall be the issuer of such other securities) or any other
consideration which may be received by the holders of such shares
pursuant to a recapitalization, reconstruction, reorganization or
reclassification of, or amalgamation, merger, liquidation or similar
transaction affecting, such shares.
"Fountain Dividend Declaration Date" means the date on which the board
of directors of Fountain declares any dividend on the shares of Fountain
Common Stock.
"Fountain Liquidation Event" has the meaning set out in Section 5.3(1)
of the Exchangeable Share Provisions.
"Fountain Liquidation Event Effective Date" has the meaning set out in
Section 5.3(3) of the Exchangeable Share Provisions.
"Liquidation Amount" has the meaning set out in Section 5.1(1) of the
Exchangeable Share Provisions.
"Liquidation Call Purchase Price" has the meaning set out in Section
5.2(1) of the Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning set out in Section 5.2(1) of
the Exchangeable Share Provisions.
"Liquidation Date" has the meaning set out in Section 5.1(1) of the
Exchangeable Share Provisions.
"OBCA" means the Business Corporations Act (Ontario), as amended.
"Optional Redemption Date" means a date, if any, established by the
Board of Directors for the redemption of Exchangeable Shares pursuant to
Section 7.1 hereof, provided that such date shall not be earlier than
January 30, 2004 unless the number of Exchangeable Shares outstanding
(other than Exchangeable Shares held by Fountain and its Subsidiaries
and as such number of shares may be adjusted as deemed appropriate by
the Board of Directors to give effect to any subdivision, combination or
consolidation of or stock dividend on the Exchangeable Shares, any issue
or distribution of rights to acquire Exchangeable Shares or securities
exchangeable for or convertible into Exchangeable Shares, any issue or
distribution of other securities or rights or evidences of indebtedness
or assets, or any other capital reorganization or other transaction
affecting the Exchangeable Shares) is less than 10% of the number of
Exchangeable Shares issued on the Effective Date in which event it means
any date established by the Board of Directors for the redemption of
Exchangeable Shares pursuant to Section 7.1 hereof.
"Plan of Arrangement" means the plan of arrangement relating to the
arrangement of the Corporation under section 182 of the OBCA
contemplated by the Combination Agreement.
"Redemption Call Purchase Price" has the meaning set out in Section
7.2(1) of the Exchangeable Share Provisions.
"Redemption Call Right" has the meaning set out in Section 7.2(1) of the
Exchangeable Share Provisions.
"Redemption Price" has the meaning set out in Section 7.1 (1) of the
Exchangeable Share Provisions.
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"Retracted Shares " has the meaning set out in Section 6.1 (1) of the
Exchangeable Share Provisions.
"Retraction Call Purchase Price" has the meaning set out in Section
6.2(1) of the Exchangeable Share Provisions.
"Retraction Call Right" has the meaning set out in Section 6.2(1) of the
Exchangeable Share Provisions.
"Retraction Date" has the meaning set out in Section 6.1 (1) of the
Exchangeable Share Provisions.
"Retraction Price" has the meaning set out in Section 6.1 (1) of the
Exchangeable Share Provisions.
"Retraction Request" has the meaning set out in Section 6.1(1) of the
Exchangeable Share Provisions.
"Subsidiary " means, when used with reference to Fountain, any
corporation more than 50% of the outstanding stock of which, by vote or
by value, is owned, directly or indirectly, by Fountain, by one or more
Subsidiaries of Fountain, or by Fountain and one or more Subsidiaries of
Fountain.
"Transfer Agent" means Montreal Trust Company of Canada, a corporation
existing under the laws of Canada, or such other person as may from time
to time be the registrar and transfer agent for the Exchangeable Shares.
"Trustee" means Montreal Trust Company of Canada, a corporation existing
under the laws of Canada, and any successor trustee appointed under the
Voting, Support and Exchange Trust Agreement.
"Trust Estate" has the meaning set out in Section 1.1 of the Voting,
Support and Exchange Trust Agreement.
"Voting, Support and Exchange Trust Agreement" means the Voting, Support
and Exchange Trust Agreement between the Corporation, Fountain and the
Trustee, made as of the date that the Plan of Arrangement becomes
effective.
1.2 Sections and Headings
The division of these Exchangeable Share Provisions into articles and
sections and the insertion of headings are for reference purposes only and shall
not affect the interpretation of these Exchangeable Share Provisions. Unless
otherwise indicated, any reference in these Exchangeable Share Provisions to an
article or section refers to the specified article or section of these
Exchangeable Share Provisions.
1.3 Number, Gender and Persons
In these Exchangeable Share Provisions, unless the context otherwise
requires, words importing the singular number include the plural and vice versa,
words importing any gender include all genders and words importing persons
include individuals, corporations, partnerships, companies, associations,
trusts, unincorporated organizations, governmental bodies and other legal or
business entities of any kind.
1.4 Payments
All payments to be made hereunder shall be made without interest and less
any tax required by law to be deducted and withheld.
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ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 Ranking
The Exchangeable Shares shall be entitled to a preference over the
Common Shares, and any other shares ranking junior to the Exchangeable Shares
with respect to the payment of dividends as and to the extent provided in
Article 3 and with respect to the distribution of assets in the event of the
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding up its affairs as and to the extent
provided in Article 5.
ARTICLE 3
DIVIDENDS
3. 1 Dividends
A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Fountain Dividend
Declaration Date declare, a dividend on each Exchangeable Share (a) in the case
of a cash dividend or distribution declared on the shares of Fountain Common
Stock, in an amount in cash for each Exchangeable Share as is equal to the
Canadian Dollar Equivalent on the Fountain Dividend Declaration Date of the cash
dividend or distribution declared on each share of Fountain Common Stock, (b) in
the case of a stock dividend or distribution declared on the shares of Fountain
Common Stock to be paid in shares of Fountain Common Stock, in such number of
Exchangeable Shares for each Exchangeable Share as is equal to the number of
shares of Fountain Common Stock to be paid on each share of Fountain Common
Stock or (c) in the case of a dividend or distribution declared on the shares of
Fountain Common Stock to be paid in property other than cash or shares of
Fountain Common Stock, in such type and amount of property for each Exchangeable
Share as is the same as or economically equivalent to (to be determined by the
Board of Directors as contemplated by section 6.7 of the Voting, Support and
Exchange Trust Agreement) the type and amount of property declared as a dividend
or distribution on each share of Fountain Common Stock. Such dividends shall be
paid out of the assets of the Corporation properly applicable to the payment of
dividends, or out of authorized but unissued shares or other securities of the
Corporation.
3.2 Payment of Dividends
Cheques of the Corporation payable at par at any branch of the bankers
of the Corporation shall be issued in respect of any cash dividends or
distributions contemplated by Section 3.1 (a) hereof and the sending of such a
cheque to each holder of an Exchangeable Share shall satisfy the cash dividend
represented thereby unless the cheque is not paid on presentation. Certificates
registered in the name of the registered holder of Exchangeable Shares shall be
issued or transferred in respect of any stock dividends or other distribution of
Exchangeable Shares contemplated by Section 3.1(b) hereof and the sending of
such a certificate to each holder of an Exchangeable Share shall satisfy the
stock dividend or other distribution of Exchangeable Shares represented thereby.
Such other type and amount of property in respect of any dividends or
distributions contemplated by Section 3.1(c) hereof shall be issued, distributed
or transferred by the Corporation in such manner as it shall determine and the
issuance, distribution or transfer thereof by the Corporation to each holder of
an Exchangeable Share shall satisfy the dividend or distribution represented
thereby. No holder of an Exchangeable Share shall be entitled to recover by
action or other legal process against the Corporation any dividend that is
represented by a cheque that has not been duly presented to the Corporation's
bankers for payment or that otherwise remains unclaimed for a period of six
years from the date on which such dividend or distribution was payable.
3.3 Record and Payment Dates
The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any dividend or
distribution declared on the Exchangeable Shares under Section 3.1
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hereof shall be the same as the record date and payment date, respectively, for
the corresponding dividend or distribution declared on the shares of Fountain
Common Stock.
3.4 Partial Payment
If on any payment date for any dividends or distributions declared on
the Exchangeable Shares under Section 3.1 hereof the dividends or distributions
are not paid in full on all of the Exchangeable Shares then outstanding, any
such dividends or distributions that remain unpaid shall be paid on a subsequent
date or dates determined by the Board of Directors on which the Corporation
shall have sufficient money or other assets properly applicable to the payment
of such dividends or distributions.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 Certain Restrictions
(1) Except as provided in Section 4.1(2), so long as any of the
Exchangeable Shares are outstanding, the Corporation shall not at any time
without, but may at any time with, the approval of the holders of the
Exchangeable Shares given as specified in Section 9.2 hereof:
(a) pay any dividends on the Common Shares, or any other shares
ranking junior to the Exchangeable Shares, other than stock dividends
payable in Common Shares, or any such other shares ranking junior to the
Exchangeable Shares, as the case may be;
(b) redeem or purchase or make any capital distribution in
respect of Common Shares, or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of the Corporation
ranking equally with the Exchangeable Shares with respect to the payment
of dividends or on any liquidation distribution; or
(d) issue any shares other than (i) Exchangeable Shares, (ii)
Common Shares and (iii) any other shares not ranking superior to the
Exchangeable Shares.
(2) The restrictions in Sections 4.1(1)(a), 4.1(1)(b) and 4.1(1)(c)
shall apply unless dividends and distributions shall have been declared and paid
in full on the outstanding Exchangeable Shares corresponding to dividends and
distributions declared and paid on the Fountain Common Stock during the period
Exchangeable Shares have been outstanding.
ARTICLE 5
LIQUIDATION
5.1 Participation Upon Liquidation, Dissolution or Winding Up of the
Corporation
(1) Subject to applicable law and the due exercise by Fountain of a
Liquidation Call Right, in the event of the liquidation, dissolution or winding
up of the Corporation or any other distribution of the assets of the Corporation
among its shareholders for the purpose of winding up its affairs, a holder of
Exchangeable Shares shall be entitled to receive from the assets of the
Corporation in respect of each Exchangeable Share held by such holder on the
effective date of such liquidation, dissolution or winding up (the "Liquidation
Date"), before any distribution of any part of the assets of the Corporation
among the holders of the Common Shares or any other shares ranking junior to the
Exchangeable Shares, an amount per share equal to (a) the Current Market Price
of a share of Fountain Common Stock on the last Business Day prior to the
Liquidation Date, which shall be satisfied in full by the Corporation causing to
be delivered to such holder one share of Fountain Common Stock, plus (b) the
Dividend Amount, if any (collectively, the "Liquidation Amount").
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(2) In the case of a distribution on Exchangeable Shares under this
Section 5.1, on or promptly after the Liquidation Date, the Corporation shall
cause to be delivered to the holders of the Exchangeable Shares the Liquidation
Amount for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the OBCA and such additional documents and instruments
as the Transfer Agent and the Corporation may reasonably require, at the
registered office of the Corporation or at any office of the Transfer Agent as
may be specified by the Corporation by notice to the holders of the Exchangeable
Shares. Payment of the aggregate Liquidation Amount for such Exchangeable Shares
shall be made by delivery to each holder, at the address of the holder recorded
in the securities register of the Corporation for the Exchangeable Shares or by
holding for pick up by the holder at the registered office of the Corporation or
at any office of the Transfer Agent as may be specified by the Corporation by
notice to the holders of Exchangeable Shares, certificates representing the
aggregate number of shares of Fountain Common Stock deliverable by the
Corporation to such holder (which shares shall be duly issued as fully paid and
non-assessable and shall be free and clear of any lien, claim, encumbrance,
security interest or adverse claim) and a cheque of the Corporation payable at
par at any branch of the bankers of the Corporation in payment of the remaining
portion, if any, of the aggregate Liquidation Amount payable to such holder. On
or before the Liquidation Date, the Corporation shall deposit or cause to be
deposited the total Liquidation Amount in respect of the Exchangeable Shares in
a custodial account with any chartered bank or trust company in Canada named in
such notice. Upon such deposit being made, the rights of the holders of
Exchangeable Shares as such shall be limited to receiving their proportionate
part of the total Liquidation Amount for such Exchangeable Shares so deposited,
against presentation and surrender of the said certificates held by them,
respectively, in accordance with the foregoing provisions and any interest
allowed on such deposit shall belong to the Corporation.
(3) After the Corporation has satisfied its obligations to pay the
holders of the Exchangeable Shares the total Liquidation Amount pursuant to this
Section 5.1, such holders shall not be entitled to share in any further
distribution of the assets of the Corporation.
5.2 Liquidation Call Rights
(1) Subject to the limitations set forth in Section 5.2(2), Fountain
shall have the overriding right (a "Liquidation Call Right"), in the event of
and notwithstanding the proposed liquidation, dissolution or winding up of the
Corporation pursuant to Section 5.1 hereof, to purchase from all but not less
than all of the holders of Exchangeable Shares on the Liquidation Date (other
than Fountain) all but not less than all of the Exchangeable Shares held by each
such holder on payment by Fountain of an amount per share equal to (a) the
Current Market Price of a share of Fountain Common Stock on the last Business
Day prior to the Liquidation Date, which shall be satisfied in full by causing
to be delivered to such holder one share of Fountain Common Stock, plus (b) the
Dividend Amount, if any (collectively, the "Liquidation Call Purchase Price").
In the event of the exercise of a Liquidation Call Right, each holder of
Exchangeable Shares shall be obligated to sell all the Exchangeable Shares held
by such holder to Fountain on the Liquidation Date on payment by Fountain to the
holder of the Liquidation Call Purchase Price for each such share.
(2) For the purposes of completing a purchase of the Exchangeable Shares
pursuant to the exercise of a Liquidation Call Right, Fountain shall deposit
with the Transfer Agent, on or before the Liquidation Date, certificates
representing the total number of shares of Fountain Common Stock deliverable by
Fountain (which shares shall be duly issued as fully paid and non-assessable and
shall be free and clear of any lien, claim, encumbrance, security interest or
adverse claim) in payment of the Liquidation Call Purchase Price and a cheque in
the amount of the remaining portion, if any, of the total Liquidation Call
Purchase Price and any interest allowed on such deposit shall belong to
Fountain. Provided that the total Liquidation Call Purchase Price has been so
deposited with the Transfer Agent, on and after the Liquidation Date the rights
of each holder of Exchangeable Shares (other than Fountain) will be limited to
receiving such holder's proportionate part of the total Liquidation Call
Purchase Price so deposited by Fountain, upon presentation and surrender by the
holder of Exchangeable Shares of certificates representing the Exchangeable
Shares held by such holder in accordance with the following provisions. Upon
surrender to the Transfer Agent of a certificate representing Exchangeable
Shares, together with such other documents and instruments as may be required to
effect a transfer of Exchangeable Shares under the
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OBCA and such additional documents and instruments as the Transfer Agent and the
Corporation may reasonably require, the holder of such surrendered certificate
shall be entitled to receive in exchange therefor, and the Transfer Agent on
behalf of Fountain shall deliver to such holder, a certificate representing the
shares of Fountain Common Stock to which such holder is entitled and a cheque in
payment of the remaining portion, if any, of the holder's proportionate part of
the total Liquidation Call Purchase Price. If Fountain does not exercise its
Liquidation Call Right in the manner described above, on the Liquidation Date
the holders of Exchangeable Shares shall be entitled to receive in exchange
therefor the liquidation price otherwise payable by the Corporation in
connection with the liquidation, dissolution or winding up of the Corporation
pursuant to Section 5.1 hereof.
5.3 Automatic Exchange on Liquidation of Fountain
(1) Fountain shall give the Transfer Agent written notice of each of the
following events (each a "Fountain Liquidation Event") at the time set forth
below:
(a) in the event of any determination by the board of directors
of Fountain to institute voluntary liquidation, dissolution or
winding-up proceedings with respect to Fountain or to effect any other
distribution of assets of Fountain among its stockholders for the
purpose of winding up it affairs, at least 60 days prior to the proposed
effective date of such liquidation, dissolution, winding up or other
distribution; and
(b) immediately, upon the earlier of (i) receipt by Fountain of
notice of and (ii) Fountain otherwise becoming aware of any threatened
or instituted claim, suit, petition or other proceedings with respect to
the involuntary liquidation, dissolution or winding up of Fountain or to
effect any other distribution of assets of Fountain among its
stockholders for the purpose of winding up its affairs.
(2) Immediately following receipt by the Transfer Agent from Fountain of
notice of any Fountain Liquidation Event contemplated by Section 5.3(1)(a) or
5.3(1)(b), the Transfer Agent will give notice thereof to the holders of
Exchangeable Shares. Such notice shall be provided by Fountain to the Transfer
Agent and shall include a brief description of the automatic exchange of
Exchangeable Shares for shares of Fountain Common Stock provided for in Section
5.3(4) below (the "Automatic Exchange Right").
(3) In order that the holders of Exchangeable Shares (other than
Fountain) will be able to participate on a pro rata basis with the holders of
Fountain Common Stock in the distribution of assets of Fountain in connection
with a Fountain Liquidation Event, on the fifth Business Day prior to the
effective date (the "Fountain Liquidation Event Effective Date") of a Fountain
Liquidation Event all of the then outstanding Exchangeable Shares (other than
Exchangeable Shares held by Fountain) shall be automatically exchanged for
shares of Fountain Common Stock. To effect such automatic exchange, Fountain
shall purchase each Exchangeable Share outstanding on the fifth Business Day
prior to the Fountain Liquidation Event Effective Date and held by a holder of
Exchangeable Shares (other than Fountain), and each such holder shall sell the
Exchangeable Shares held by it at such time, for a purchase price per share
equal to (a) the Current Market Price of a share of Fountain Common Stock on the
fifth Business Day prior to the Fountain Liquidation Event Effective Date, which
shall be satisfied in full by Fountain delivering to such holder one share of
Fountain Common Stock, plus (b) the Dividend Amount, if any.
(4) On the fifth Business Day prior to the Fountain Liquidation Event
Effective Date, the closing of the transaction of purchase and sale contemplated
by the automatic exchange of Exchangeable Shares for Fountain Common Stock shall
be deemed to have occurred, and each holder of Exchangeable Shares (other than
Fountain) shall be deemed to have transferred to Fountain all of such holder's
right, title and interest in and to such Exchangeable Shares and shall cease to
be a holder of such Exchangeable Shares (unless payment in the form of such
Fountain Common Stock shall not be made in which case the rights of the holders
shall remain unaffected until the full purchase price is paid) and Fountain
shall deliver or cause to be delivered to the Transfer Agent, for delivery to
such holders, the certificates for the number of shares of Fountain Common Stock
deliverable upon the automatic exchange of Exchangeable Shares for Fountain
Common Stock (which shares shall be duly issued as fully paid and non-assessable
and shall be free and clear of any lien, claim or encumbrance, security interest
or
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adverse claim) and a cheque for the balance, if any, of the total purchase price
for such Exchangeable Shares and any interest on such deposit shall belong to
Fountain. Concurrently with each such holder ceasing to be a holder of
Exchangeable Shares, such holder shall be considered and deemed for all purposes
to be the holder of the shares of Fountain Common Stock delivered to it, or to
the Transfer Agent on its behalf, pursuant to the automatic exchange of
Exchangeable Shares for Fountain Common Stock and the certificates held by such
holder previously representing the Exchangeable Shares exchanged by such holder
with Fountain pursuant to such automatic exchange shall thereafter be deemed to
represent the shares of Fountain Common Stock delivered to such holder by
Fountain pursuant to such automatic exchange. Upon the request of any such
former holder of Exchangeable Shares and the surrender by such holder of
Exchangeable Share certificates deemed to represent shares of Fountain Common
Stock, duly endorsed in blank and accompanied by such instruments of transfer as
Fountain may reasonably require, the Transfer Agent shall deliver or cause to be
delivered to such holder certificates representing the shares of Fountain Common
Stock of which such holder is the holder and a cheque in payment of the
remaining portion, if any, of the purchase price.
ARTICLE 6
RETRACTION AT OPTION OF HOLDER
6.1 Retraction at Option of Holder
(1) Subject to applicable law and the due exercise by Fountain of a
Retraction Call Right, a holder of Exchangeable Shares shall be entitled at any
time to require the Corporation to redeem, on the fifth Business Day after the
date on which the Retraction Request is received by the Corporation (the
"Retraction Date"), any or all of the Exchangeable Shares registered in the name
of such holder for an amount per share equal to (a) the Current Market Price of
a share of Fountain Common Stock on the last Business Day prior to the
Retraction Date, which shall be satisfied in full by the Corporation causing to
be delivered to such holder one share of Fountain Common Stock for each
Exchangeable Share presented and surrendered by the holder, plus (b) the
Dividend Amount, if any (collectively, the "Retraction Price"). To effect a
redemption under this Section 6.1, the holder must present and surrender at the
registered office of the Corporation or at any office of the Transfer Agent as
may be specified by the Corporation by notice to the holders of Exchangeable
Shares the certificate representing the Exchangeable Shares that the holder
desires to have the Corporation redeem, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
the OBCA and such additional documents and instruments as the Transfer Agent and
the Corporation may reasonably require, together with a duly executed statement
(the "Retraction Request") in the form of Schedule A hereto or in such other
form as may be acceptable to the Corporation specifying that the holder desires
to have all or any number specified therein of the Exchangeable Shares
represented by such certificate (the "Retracted Shares") redeemed by the
Corporation.
(2) In the case of a redemption of Exchangeable Shares under this
Section 6.1, upon receipt by the Corporation or the Transfer Agent in the manner
specified in Section 6.1(1) hereof of a certificate representing the number of
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with a Retraction Request, and provided that the Retraction Request is
not revoked by the holder in the manner specified in Section 6.1(5), the
Corporation shall redeem the Retracted Shares effective at the close of business
on the Retraction Date. On the Retraction Date, the Corporation shall deliver or
cause the Transfer Agent to deliver to the relevant holder, at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to such holder of Exchangeable Shares, a certificate
representing the number of shares of Fountain Common Stock to which such holder
is entitled (which shares shall be duly issued as fully paid and non-assessable
and shall be free and clear of any lien, claim, encumbrance, security interest
or adverse claim) registered in the name of the holder or in such other name as
the holder may request in payment of the Retraction Price and a cheque of the
Corporation payable at par at any branch of the bankers of the Corporation in
payment of the remaining portion, if any, of the aggregate Retraction Price to
which such holder is entitled and such delivery of such certificate and cheque
on behalf of the Corporation by the Transfer Agent shall be deemed to be payment
of and shall satisfy and discharge all liability for the Retraction Price to the
extent that the same is represented by such share certificates and cheque,
unless such cheque is not paid on due presentation. If only a part of the
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Exchangeable Shares represented by any certificate is redeemed, a new
certificate for the balance of such Exchangeable Shares shall be issued to the
holder at the expense of the Corporation.
(3) On and after the close of business on the Retraction Date, the
holder of the Retracted Shares shall cease to be a holder of such Retracted
Shares and shall not be entitled to exercise any of the rights of a holder in
respect thereof, other than the right to receive the aggregate Retraction Price
for such Retracted Shares, unless upon presentation and surrender of
certificates in accordance with the foregoing provisions, payment of the
aggregate Retraction Price payable to such holder shall not be made, in which
case the rights of such holder shall remain unaffected until such aggregate
Retraction Price has been paid in the manner hereinbefore provided. On and after
the close of business on the Retraction Date, provided that presentation and
surrender of certificates and payment of such aggregate Retraction Price has
been made in accordance with the foregoing provisions, the holder of the
Retracted Shares so redeemed by the Corporation shall thereafter be considered
and deemed for all purposes to be a holder of the shares of Fountain Common
Stock delivered to such holder.
(4) Notwithstanding any other provision of this Section 6.1, the
Corporation shall not be obligated to redeem Retracted Shares specified by a
holder in a Retraction Request to the extent that such redemption of Retracted
Shares would be contrary to solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it would
not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and Fountain has not exercised its
Retraction Call Right with respect to the Retracted Shares, the Corporation
shall only be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent of the maximum number that may be so redeemed
(rounded down to a whole number of shares) as would not be contrary to such
provisions and shall notify the holder at least two Business Days prior to the
Retraction Date as to the number of Retracted Shares which will not be redeemed
by the Corporation. In any case in which the redemption by the Corporation of
Retracted Shares would be contrary to solvency requirements or other provisions
of applicable law and more than one holder has delivered a Retraction Request,
the Corporation shall redeem Retracted Shares in accordance with Section 6.1(2)
on a pro rata basis in relation to the number of Exchangeable Shares specified
in the respective Retraction Requests and shall issue to each such holder of
Retracted Shares a new certificate, at the expense of the Corporation,
representing the Retracted Shares not redeemed by the Corporation pursuant to
Section 6.1(2) hereof. If the Retraction Request is not revoked by the holder in
the manner specified in Section 6.1(5) and Fountain has not exercised its
Retraction Call Right in respect of any such Retracted Shares, an Insolvency
Event (as defined in the Voting, Support and Exchange Trust Agreement) shall, to
the extent it has not theretofore occurred, be deemed thereupon to have occurred
and the holder of any such Retracted Shares not redeemed by the Corporation
pursuant to Section 6.1(2) as a result of solvency requirements or other
provisions of applicable law shall be deemed by giving the Retraction Request to
have exercised its Exchange Right (as defined in the Voting, Support and
Exchange Trust Agreement) so as to require Fountain to purchase the unredeemed
Retracted Shares from such holder on the Retraction Date or as soon as
practicable thereafter on payment by Fountain to such holder of the Purchase
Price for each such Retracted Share, all as more specifically provided in the
Voting, Support and Exchange Trust Agreement.
(5) A holder of Retracted Shares may, by notice in writing given by the
holder to the Corporation before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request in
which event such Retraction Request shall be null and void.
6.2 Retraction Call Rights
(1) In the event that a holder of Exchangeable Shares delivers a
Retraction Request pursuant to Section 6.1 Fountain shall have the overriding
right (a "Retraction Call Right"), notwithstanding the proposed redemption of
the Exchangeable Shares by the Corporation pursuant to Section 6.1 hereof, to
purchase from such holder on the Retraction Date all but not less than all of
the Retracted Shares held by such holder on payment by Fountain of an amount per
share equal to the Retraction Price. In the event of the exercise of a
Retraction Call Right, a holder of Exchangeable Shares who has delivered a
Retraction Request shall be obligated to sell all the Retracted Shares to
Fountain on the Retraction Date on payment by Fountain of an amount per share
equal to (a) the Current Market Price of a share of Fountain Common Stock on the
last Business Day prior to the Retraction Date, which shall be satisfied in full
by Fountain causing to be delivered to such holder one share of Fountain
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Common Stock for each Exchangeable Share presented and surrendered by the
holder, plus (b) the Dividend Amount, if any (collectively, the "Retraction Call
Purchase Price").
(2) Upon receipt of the Corporation of a Retraction Request, the
Corporation shall immediately notify Fountain thereof. In order to exercise its
Retraction Call Right, Fountain must notify the Corporation in writing of its
determination to do so (a "Fountain Call Notice") within two Business Days of
notification to Fountain by the Corporation of the receipt by the Corporation of
the Retraction Request. If Fountain so notifies the Corporation within such two
Business Day period, the Corporation shall notify the holder as soon as possible
thereafter as to the exercise of the Retraction Call Right. If Fountain delivers
a Fountain Call Notice within such two Business Day period to duly exercise its
Retraction Call Right in accordance with this Section 6.2, the obligation of the
Corporation to redeem the Retracted Shares shall terminate and, provided that
the Retraction Request is not revoked by the holder in the manner specified in
Section 6.1(5), Fountain shall purchase from such holder and such holder shall
sell to Fountain on the Retraction Date the Retracted Shares for the Retraction
Call Purchase Price.
(3) For the purpose of completing a purchase of Exchangeable Shares
pursuant to the exercise of a Retraction Call Right, Fountain shall deliver or
cause the Transfer Agent to deliver to the relevant holder, at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by depositing for pick up by the holder at the registered office of
the Corporation or at any office of the Transfer Agent as may be specified by
the Corporation by notice to such holder of Exchangeable Shares, a certificate
representing the number of shares of Fountain Common Stock to which such holder
is entitled (which shares shall be duly issued as fully paid and non-assessable
and shall be free and clear of any lien, claim, encumbrance, security interest
or adverse claim) registered in the name of the holder or in such other name as
the holder may request in payment of the Retraction Call Purchase Price and a
cheque of Fountain payable at par and in Canadian dollars at any branch of the
bankers of Fountain or of the Corporation in Canada in payment of the remaining
portion, if any, of such aggregate Retraction Call Purchase Price and such
delivery of such certificate and cheque on behalf of Fountain to the Transfer
Agent shall be deemed to be payment of and shall satisfy and discharge all
liability for the Retraction Call Purchase Price to the extent that the same is
represented by such share certificates and cheque, unless such cheque is not
paid on due presentation.
(4) On and after the close of business on the Retraction Date, the
holder of the Retracted Shares shall not be entitled to exercise any of the
rights of a holder in respect thereof, other than the right to receive the
Retraction Call Purchase Price unless upon presentation and surrender of
certificates in accordance with the foregoing provisions, payment of the
aggregate Retraction Call Purchase Price payable to such holder shall not be
made, in which case the rights of such holder shall remain unaffected until such
aggregate Retraction Call Purchase Price has been paid in the manner
hereinbefore provided. On and after the close of business on the Retraction
Date, provided that presentation and surrender of certificates and payment of
such aggregate Retraction Call Purchase Price has been made in accordance with
the foregoing provisions, the holder of the Retracted Shares so purchased by
Fountain shall thereafter be considered and deemed for all purposes to be a
holder of the shares of Fountain Common Stock delivered to such holder.
ARTICLE 7
REDEMPTION BY THE CORPORATION
7.1 Redemption by the Corporation
(1) Subject to applicable law and the due exercise by Fountain of a
Redemption Call Right, the Corporation shall on any Optional Redemption Date
redeem all of the then outstanding Exchangeable Shares for an amount per share
equal to (a) the Current Market Price of a share of Fountain Common Stock on the
last Business Day prior to such Optional Redemption Date, which shall be
satisfied in full by the Corporation causing to be delivered to each holder of
Exchangeable Shares one share of Fountain Common Stock for each Exchangeable
Share held by such holder, plus (b) the Dividend Amount, if any (collectively,
the "Redemption Price"). If Fountain exercises a Redemption Call Right and all
of the then outstanding Exchangeable Shares other
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than the Exchangeable Shares held by Fountain are purchased pursuant to Section
7.2, the remaining outstanding Exchangeable Shares continue to be redeemable by
the Corporation on a subsequent Optional Redemption Date pursuant to the
provisions of this Section 7.1.
(2) In case of a redemption of Exchangeable Shares under this Section
7.1, the Corporation shall, at least 120 days before any Optional Redemption
Date, send or cause to be sent to each holder of Exchangeable Shares a notice in
writing of the redemption by the Corporation or the purchase by Fountain under
its Redemption Call Right, as the case may be, of the Exchangeable Shares held
by such holder. Such notice shall set out the formula for determining the
Redemption Price or the Redemption Call Purchase Price, as the case may be, such
Optional Redemption Date and, if applicable, particulars of the Redemption Call
Right.
(3) On or after any Optional Redemption Date and subject to the exercise
by Fountain of a Redemption Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares to be redeemed the
Redemption Price for each such Exchangeable Share upon presentation and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation in such notice of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the OBCA and such additional documents and instruments
as the Transfer Agent and the Corporation may reasonably require. Payment of the
aggregate Redemption Price for Exchangeable Shares held by a holder shall be
made by delivery to such holder, at the address of such holder recorded in the
securities register of the Corporation or by holding for pick up by the holder
at the registered office of the Corporation or at any office of the Transfer
Agent as may be specified by the Corporation in such notice, of a certificate
representing the aggregate number of shares of Fountain Common Stock deliverable
by the Corporation to such holder (which shares shall be duly issued as fully
paid and non-assessable and shall be free and clear of any lien, claim,
encumbrance, security interest or adverse claim) and a cheque of the Corporation
payable at par at any branch of the bankers of the Corporation in respect of the
remaining portion, if any, of such aggregate Redemption Price. On and after any
Optional Redemption Date, the holders of the Exchangeable Shares called for
redemption shall not be entitled to exercise any of the rights of holders in
respect thereof, other than the right to receive their proportionate part of the
total Redemption Price, unless payment of the aggregate Redemption Price
deliverable to a holder for Exchangeable Shares shall not be made upon
presentation and surrender of share certificates in accordance with the
foregoing provisions, in which case the rights of the holder shall remain
unaffected until the aggregate Redemption Price deliverable to such holder has
been paid in the manner hereinbefore provided. The Corporation shall have the
right at any time after the sending of notice of its intention to redeem the
Exchangeable Shares as aforesaid to deposit or cause to be deposited the total
Redemption Price of the Exchangeable Shares so called for redemption, or of such
of the said Exchangeable Shares represented by certificates that have not at the
date of such deposit been surrendered by the holders thereof in connection with
such redemption, in a custodial account with any chartered bank or trust company
in Canada named in such notice and any interest allowed on such deposit shall
belong to the Corporation. Provided that such total Redemption Price has been so
deposited prior to any Optional Redemption Date, on and after such Optional
Redemption Date, the Exchangeable Shares shall be redeemed and the rights of the
holders thereof after such Optional Redemption Date shall be limited to
receiving their proportionate part of the total Redemption Price for such
Exchangeable Shares so deposited, against presentation and surrender of the said
certificates held by them, respectively, in accordance with the foregoing
provisions.
7.2 Redemption Call Rights.
(1) Subject to the limitations set forth in Section 7.2(2), Fountain
shall have the overriding right (a "Redemption Call Right"), notwithstanding the
proposed redemption of the Exchangeable Shares by the Corporation pursuant to
Section 7.1 hereof, to purchase from all but not less than all of the holders of
Exchangeable Shares (other than Fountain) on the last Business Day prior to the
Optional Redemption Date in respect of which the Redemption Call Right is
exercised all but not less than all of the Exchangeable Shares held by each such
holder on payment by Fountain of an amount per share equal to (a) the Current
Market Price of a share of Fountain Common Stock on the last Business Day prior
to such Optional Redemption Date, which shall be satisfied in full by causing to
be delivered to such holder one share of Fountain Common Stock plus (b) the
Dividend Amount, if any (collectively, the "Redemption Call Purchase Price"). In
the event of the exercise of a
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Redemption Call Right, each holder of Exchangeable Shares (other than Fountain)
shall be obligated to sell all the Exchangeable Shares held by such holder to
Fountain on the last Business Day prior to such Optional Redemption Date on
payment by Fountain to such holder of the Redemption Call Purchase Price for
each such share.
(3) For the purposes of completing a purchase of the Exchangeable
Shares pursuant to the exercise of a Redemption Call Right, Fountain shall
deposit with the Transfer Agent, on or before the last Business Day prior to the
Optional Redemption Date, certificates representing the total number of shares
of Fountain Common Stock deliverable by Fountain (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim, encumbrance, security interest or adverse claim) in payment of the total
Redemption Call Purchase Price and a cheque in the amount of the remaining
portion, if any, of the total Redemption Call Purchase Price and any interest
allowed on such deposit shall belong to Fountain. Provided that the total
Redemption Call Purchase Price has been so deposited with the Transfer Agent, on
and after the last Business Day prior to such Optional Redemption Date the
rights of each holder of Exchangeable Shares (other than Fountain) will be
limited to receiving such holder's proportionate part of the total Redemption
Call Purchase Price payable by Fountain upon presentation and surrender by such
holder of certificates representing the Exchangeable Shares held by such holder
in accordance with the following provisions and such holder shall on and after
such Optional Redemption Date be considered and deemed for all purposes to be
the holder of the shares of Fountain Common Stock delivered to such holder. Upon
surrender to the Transfer Agent of a certificate representing Exchangeable
Shares, together with such other documents and instruments as may be required to
effect a transfer of Exchangeable Shares under the OBCA and such additional
documents and instruments as the Transfer Agent and the Corporation may
reasonably require, the holder of such surrendered certificate shall be entitled
to receive in exchange therefor, and the Transfer Agent on behalf of Fountain
shall deliver to such holder, a certificate representing the shares of Fountain
Common Stock to which such holder is entitled and a cheque in payment of the
remaining portion, if any, of the holder's proportionate part of the total
Redemption Call Purchase Price. If Fountain does not exercise the Redemption
Call Right in the manner described above, on the Optional Redemption Date a
holder of Exchangeable Shares shall be entitled to receive in exchange therefor
the redemption price otherwise payable by the Corporation in connection with the
redemption of the Exchangeable Shares pursuant to Section 7.1 hereof.
ARTICLE 8
VOTING RIGHTS
8.1 Except as required by applicable law and the provisions of Sections 9.1,
10.1 and 11.2, the holders of the Exchangeable Shares shall not be entitled as
such to receive notice of or to attend any meeting of the shareholders of the
Corporation or to vote at any such meeting. The holders of the Exchangeable
Shares shall, however, be entitled to notice of meetings of the shareholders
called for the purpose of authorizing the dissolution of the Corporation or the
sale, lease or exchange of all or substantially all the property of the
Corporation other than in the ordinary course of business of the Corporation.
ARTICLE 9
AMENDMENT AND APPROVAL
9.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed only with the approval
of the holders of the Exchangeable Shares given as hereinafter specified.
9.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of the
holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than two-thirds of the votes cast on such resolution at a meeting of
holders of Exchangeable Shares duly called and held at which the holders of at
least 10% of the outstanding Exchangeable Shares at that time are present or
represented by proxy; provided that such approval must be given also by the
affirmative vote of holders of at least two-thirds of the Exchangeable Shares
represented in person or
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by proxy at the meeting excluding Exchangeable Shares beneficially owned by
Fountain or any of its Subsidiaries. If at any such meeting the holders of at
least 10% of the outstanding Exchangeable Shares at that time are not present or
represented by proxy within one-half hour after the time appointed for such
meeting then the meeting shall be adjourned to such date not less than 10 days
thereafter and to such time and place as may be designated by the chairman of
such meeting. At such adjourned meeting the holders of Exchangeable Shares
present or represented by proxy thereat may transact the business for which the
meeting was originally called and a resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution at such
meeting shall constitute the approval or consent of the holders of the
Exchangeable Shares.
ARTICLE 10
RECIPROCAL CHANGES, ETC.
IN RESPECT OF FOUNTAIN COMMON STOCK
10.1(1) Each holder of an Exchangeable Share acknowledges that the Voting,
Support and Exchange Trust Agreement provides, in part, that while any
Exchangeable Shares remain outstanding, Fountain will not, except as provided in
the Voting, Support and Exchange Trust Agreement, without the prior approval of
the Corporation and the prior approval of the holders of the Exchangeable Shares
given in accordance with Section 9.2 hereof:
(a) issue or distribute shares of Fountain Common Stock (or
securities exchangeable for or convertible into or carrying rights to
acquire Fountain Common Stock) to the holders of all or substantially
all of the then outstanding shares of Fountain Common Stock by way of
stock dividend or other distribution, other than an issue of shares of
Fountain Common Stock (or securities exchangeable for or convertible
into or carrying rights to acquire Fountain Common Stock) to holders of
shares of Fountain Common Stock who exercise an option to receive
dividends in shares of Fountain Common Stock (or securities exchangeable
for or convertible into or carrying rights to acquire shares of Fountain
Common Stock) in lieu of receiving cash dividends;
(b) issue or distribute rights, options or warrants to the
holders of all or substantially all of the then outstanding shares of
Fountain Common Stock entitling them to subscribe for or to purchase
shares of Fountain Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire Fountain Common Stock);
or
(c) issue or distribute to the holders of all or substantially
all of the then outstanding shares of Fountain Common Stock (i) shares
or securities of Fountain of any class other than Fountain Common Stock
(other than shares convertible into or exchangeable for or carrying
rights to acquire shares of Fountain Common Stock), (ii) rights, options
or warrants other than those referred to in Section 10.1(1)(b) above,
(iii) evidences of indebtedness of Fountain or (iv) assets of Fountain;
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares.
(2) Each holder of an Exchangeable Share acknowledges that the Voting,
Support and Exchange Trust Agreement further provides, in part, that Fountain
will not, except as provided in the Voting, Support and Exchange Trust
Agreement, without the prior approval of the Corporation and the prior approval
of the holders of the Exchangeable Shares given in accordance with Section 9.2
of these share provisions:
(a) subdivide, redivide or change the then outstanding shares of
Fountain Common Stock into a greater number of shares of Fountain Common
Stock; or
(b) reduce, combine or consolidate or change the then outstanding
shares of Fountain Common Stock into a lesser number of shares of
Fountain Common Stock; or
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(c) reclassify or otherwise change the shares of Fountain Common
Stock or effect an amalgamation, merger, reorganization or other
transaction affecting the Fountain Common Stock;
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Exchangeable Shares.
The Voting, Support and Exchange Trust Agreement further provides, in
part, that the aforesaid provisions of the Voting, Support and Exchange Trust
Agreement shall not be changed without the approval of the holders of the
Exchangeable Shares given in accordance with Section 9.2 hereof.
ARTICLE 11
ACTIONS BY THE CORPORATION UNDER THE VOTING,
SUPPORT AND EXCHANGE TRUST AGREEMENT
11.1 The Corporation shall take all such actions and do all such things as shall
be necessary or advisable to perform and comply with and to ensure performance
and compliance by Fountain with all provisions of the Voting, Support and
Exchange Trust Agreement applicable to the Corporation and Fountain,
respectively, in accordance with the terms thereof including, without
limitation, taking all such actions and doing all such things as shall be
necessary or advisable to enforce to the fullest extent possible for the direct
benefit of the Corporation all rights and benefits in favour of the Corporation
under or pursuant to such agreement.
11.2 The Corporation shall not agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under, the
Voting, Support and Exchange Trust Agreement without the approval of the holders
of the Exchangeable Shares given in accordance with Section 9.2 hereof other
than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares;
(b) making such provisions or modifications not inconsistent with
such agreement as may be necessary or desirable with respect to matters
or questions arising thereunder which, in the opinion of the Board of
Directors, it may be expedient to make, provided that the Board of
Directors shall be of the opinion, after consultation with counsel, that
such provisions and modifications will not be prejudicial to the
interests of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement
which, on the advice of counsel to the Corporation, are required for the
purpose of curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error contained
therein, provided that the Board of Directors shall be of the opinion,
after consultation with counsel, that such changes or corrections will
not be prejudicial to the interests of the holders of the Exchangeable
Shares.
ARTICLE 12
NOTICES
12.1 Subject to applicable law, any notice, request or other communication to be
given to the Corporation by a holder of Exchangeable Shares shall be in writing
and shall be valid and effective if given by mail (postage prepaid) or by
telecopy or by delivery to the registered office of the Corporation and
addressed to the attention of the President. Any such notice, request or other
communication, if given by mail, telecopy or delivery, shall only be deemed to
have been given and received upon actual receipt thereof by the Corporation.
12.2 Any presentation and surrender by a holder of Exchangeable Shares to the
Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding up of the
Corporation or the retraction or redemption of Exchangeable Shares shall be made
by registered mail
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(postage prepaid) or by delivery to the registered office of the Corporation or
to such office of the Transfer Agent as may be specified by the Corporation, in
each case addressed to the attention of the President of the Corporation. Any
such presentation and surrender of certificates shall only be deemed to have
been made and to be effective upon actual receipt thereof by the Corporation or
the Transfer Agent, as the case may be. Any such presentation and surrender of
certificates made by registered mail shall be at the sole risk of the holder
mailing the same.
12.3 Subject to applicable law, any notice, request or other communication to be
given to a holder of Exchangeable Shares by or on behalf of the Corporation
shall be in writing and shall be valid and effective if given by mail (postage
prepaid) or by delivery to the address of the holder recorded in the securities
register of the Corporation or, in the event of the address of any such holder
not being so recorded, then at the last known address of such holder. Any such
notice, request or other communication, if given by mail, shall be deemed to
have been given and received on the fifth Business Day following the date of
mailing and, if given by delivery, shall be deemed to have been given and
received on the date of delivery. Accidental failure or omission to give any
notice, request or other communication to one or more holders of Exchangeable
Shares, or any defect in such notice, shall not invalidate or otherwise alter or
affect any action or proceeding to be taken by the Corporation pursuant thereto.
SCHEDULE A
RETRACTION REQUEST
To the Corporation, Fountain Oil Incorporated
c/o Montreal Trust Company of Canada
[address]
This notice is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the share(s) represented by this certificate and all
capitalized words and expressions used in this notice that are defined in the
Share Provisions have the meanings ascribed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem on the Retraction Date (being the fifth Business Day after
the date upon which this notice is received by the Corporation) in accordance
with Article 6 of the Share Provisions:
all share(s) represented by this certificate; or
_________ share(s) only.
The undersigned acknowledges the Retraction Call Right of Fountain to
purchase all but not less than all the Retracted Shares from the undersigned and
that this notice shall be deemed to be a revocable offer by the undersigned to
sell the Retracted Shares to Fountain, in accordance with the Retraction Call
Right on the Retraction Date for the Retraction Price and on the other terms and
conditions set out in Section 6.2 of the Share Provisions. If Fountain
determines not to exercise its Retraction Call Right, the Corporation will
notify the undersigned of such fact as soon as possible. This notice of
retraction, and offer to sell the Retracted Shares to Fountain, may be revoked
and withdrawn by the undersigned by notice in writing given to the Corporation
at any time before the close of business on the Business Day immediately
preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency
requirements or other provisions of applicable law, the Corporation is unable to
redeem all Retracted Shares an Insolvency Event (as defined in the Voting,
Support and Exchange Trust Agreement) shall, to the extent it shall not
theretofore have occurred, be deemed thereupon to have occurred, and the
undersigned will be deemed to have exercised the Exchange Right (as defined in
the Voting, Support and Exchange Trust Agreement) so as to require Fountain to
purchase the unredeemed Retracted Shares.
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The undersigned hereby represents and warrants to the Corporation and
Fountain that the undersigned has good title to, and owns, the share(s)
represented by this certificate to be acquired by the Corporation or Fountain,
as the case may be, free and clear of all liens, claims and encumbrances.
- ------------------ ------------------------- ------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for
pick-up by the shareholder at the principal transfer office of Transfer
Agent in Toronto, failing which the securities and any cheque will be
mailed to the last address of the shareholder as it appears on the
register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may
require, must be deposited with the Transfer Agent at its principal
transfer office in Toronto. The securities and any cheque resulting from
the retraction or purchase of the Retracted Shares will be issued and
registered in, and made payable to, respectively, the name of the
shareholder as it appears on the register of the Corporation and the
securities and cheque resulting from such retraction or purchase will be
delivered to such shareholder as indicated above, unless the form
appearing immediately below is duly completed, all exigible transfer
taxes are paid and the signature of the registered holder is guaranteed
by a Canadian chartered bank or trust company, member of a recognized
stock exchange in Canada or a member of the Securities Transfer
Association Medallion (STAMP) Program.
- ------------------------------------------- -------------------------------
Name of Person in Whose Name Securities and Date
Cheque Are To Be Registered Issued or
Delivered (please print)
- ------------------------------------------- -------------------------------
Street Address or P.O Box Signature of Registered Holder
- ------------------------------------------- -------------------------------
City - Province Signature of Guaranteed by
NOTE: If the notice of retraction is for less than all of the share(s)
represented by this certificate, a certificate representing the
remaining shares of the Corporation will be issued and registered in the
name of the shareholder as it appears on the register of the
Corporation, unless the Share Transfer Power on the share certificate is
duly completed in respect of such shares.
U.S. Residents/Citizens must provide their Taxpayer Identification Number
here:______________
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ANNEX G
Schedule 1.1(b)(i)
VOTING, SUPPORT AND EXCHANGE TRUST AGREEMENT
AGREEMENT made as of the day of , 1998
BETWEEN:
FOUNTAIN OIL INCORPORATED, a corporation existing under the laws of the
State of Delaware ("Fountain"),
- and -
CANARGO ENERGY INC., a corporation existing under the laws of the
Province of Alberta ("CanArgo"),
- and -
MONTREAL TRUST COMPANY OF CANADA, a trust company existing under the
laws of Canada (the "Trustee").
WHEREAS, pursuant to a combination agreement executed February 2, 1998
between Fountain and CanArgo (such agreement as it may be amended or restated is
hereinafter referred to as the "COMBINATION AGREEMENT"), the parties agreed that
on the Effective Date (as defined in the Combination Agreement), Fountain,
CanArgo and a Canadian trust company would execute and deliver a Voting, Support
and Exchange Trust Agreement substantially in the form set forth in Schedule
1.1(b)(i) to the Combination Agreement;
AND WHEREAS, pursuant to an arrangement (the "ARRANGEMENT") effected by
articles of arrangement dated o , filed pursuant to the Business
Corporations Act (Ontario), each issued and outstanding common share of CanArgo
(a "CANARGO COMMON SHARE"), other than CanArgo Common Shares held by Fountain or
by holders who duly exercised their rights of dissent, was exchanged for
(subject to adjustment for stock splits, reverse stock splits, recapitalization
and other changes in Fountain Common Stock) 1.6 issued and outstanding
Exchangeable Shares of CanArgo (the "EXCHANGEABLE SHARES");
AND WHEREAS Fountain is to grant to and in favour of Non-Affiliated
Holders (as hereinafter defined) from time to time of Exchangeable Shares the
right, in the circumstances set forth herein, to require Fountain to purchase
from each Non-Affiliated Holder all or any part of the Exchangeable Shares held
by the Non-Affiliated Holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in Fountain may be exercisable by
Non-Affiliated Holders from time to time of Exchangeable Shares by and through
the Trustee, which will hold legal title to the Voting Shares (as hereinafter
defined) to which voting rights attach for the benefit of Non-Affiliated Holders
and whereby the rights to require Fountain to purchase Exchangeable Shares from
the Non-Affiliated Holders shall be exercisable by Non-Affiliated Holders from
time to time of Exchangeable Shares by and through the Trustee, which will hold
legal title to such rights for the benefit of Non-Affiliated Holders;
<PAGE> 289
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby Fountain will take certain actions and make
certain payments and deliveries necessary to ensure that CanArgo will be able to
make certain payments and to deliver or cause to be delivered shares of Fountain
Common Stock (as hereinafter defined) in satisfaction of the obligations of
CanArgo under the Exchangeable Share Provisions (as hereinafter defined) and
this trust agreement;
AND WHEREAS these recitals and any statements of fact in this trust
agreement are made by Fountain and CanArgo and not by the Trustee;
NOW THEREFORE, in consideration of the respective covenants and
agreements provided in this trust agreement and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
the parties agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Definitions. In this trust agreement, unless something in the
subject matter or content is inconsistent therewith:
"Applicable Laws" has the meaning set out in section 6.6 hereof.
"Article 4 Subsidiary" means a Subsidiary of Fountain that, under
Section 160 of the Delaware General Corporation Law or any successor provision
thereto, is precluded from voting any shares of Fountain Common Stock held by
it.
"Arrangement" has the meaning set out in the recitals hereto.
"Automatic Exchange Rights" means the automatic exchange of shares of
Fountain Common Stock for Exchangeable Shares pursuant to Section 5.3 of the
Exchangeable Share Provisions.
"Board of Directors" means the board of directors of CanArgo.
"Business Day" means a day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of Houston, Texas and Toronto,
Ontario.
"Canadian Dollar Equivalent" means in respect of an amount expressed in
a foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the official noon
spot exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign currency
as may be deemed by the Board of Directors to be appropriate for such purpose.
"CanArgo Common Shares" has the meaning set out in the recitals hereto.
"Code" means the United States Internal Revenue Code of 1986, as
amended.
"Combination Agreement" has the meaning set out in the recitals hereto.
"Current Market Price" means, in respect of a share of Fountain Common
Stock on any date, the Canadian Dollar Equivalent of the average closing sales
price of shares of Fountain Common Stock during a period of 20 Business Days
ending not more than five trading days before such date on the Nasdaq National
Market System during which the Fountain Common Stock traded or, if the shares of
Fountain Common Stock are not then listed on the Nasdaq National Market System,
on such other stock exchange or automated quotation
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system on which the shares of Fountain Common Stock are listed or quoted, as the
case may be, as may be selected by the Board of Directors for such purpose;
provided, however, that if in the opinion of the Board of Directors the public
distribution or trading activity of Fountain Common Stock during such period is
inadequate to create a market that reflects the fair market value of Fountain
Common Stock, then the Current Market Price of a share of Fountain Common Stock
shall be determined by the Board of Directors based upon the advice of such
qualified independent financial advisors as the Board of Directors may deem to
be appropriate, and provided further that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
"Dividend Amount" has the meaning set out in Section 1.1 of the
Exchangeable Share Provisions.
"Effective Date" has the meaning set out in section 1.1 of the Plan of
Arrangement.
"Exchange Right" has the meaning set out in section 5.1 hereof.
"Exchangeable Share Provisions" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares as set out in
the articles of amendment of CanArgo in the form attached as Appendix A to the
Plan of Arrangement.
"Exchangeable Shares" has the meaning set out in the recitals hereto.
"Fountain Board of Directors" means the board of directors of Fountain.
"Fountain Common Stock" means the shares of common stock of Fountain,
par value US$0.10 per share, having voting rights of one vote per share, and any
other securities into which such shares may be changed or for which such shares
may be exchanged (whether or not Fountain shall be the issuer of such other
securities) or any other consideration which may be received by the holders of
such shares, pursuant to a recapitalization, reconstruction, reorganization or
reclassification of, or amalgamation, merger, liquidation or similar
transaction, affecting such shares.
"Fountain Consent" has the meaning set out in section 4.2 hereof.
"Fountain Meeting" has the meaning set out in section 4.2 hereof.
"Insolvency Event" means the institution by CanArgo of any proceeding to
be adjudicated a bankrupt or insolvent or to be dissolved or wound up, or the
consent of CanArgo to the institution of bankruptcy, insolvency, liquidation,
dissolution or winding-up proceedings against it, or the filing of a petition,
answer or consent seeking liquidation, dissolution or winding-up of CanArgo
under any bankruptcy, insolvency or analogous laws, including without limitation
the Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and
Insolvency Act (Canada), and the failure by CanArgo to contest in good faith any
such proceedings commenced in respect of CanArgo within 15 days of becoming
aware thereof, or the consent by CanArgo to the filing of any such petition or
to the appointment of a receiver, or the making by CanArgo of a general
assignment for the benefit of creditors, or the admission in writing by CanArgo
of its inability to pay its debts generally as they become due, or CanArgo not
being permitted, pursuant to solvency requirements or other provisions of
applicable law, to redeem any Retracted Shares pursuant to Section 6.1 of the
Exchangeable Share Provisions.
"Liquidation Amount" has the meaning set out in Section 5.1(1) of the
Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning set out in Section 5.2(1) of
the Exchangeable Share Provisions.
"List" has the meaning set out in section 4.6 hereof.
"Non-Affiliated Holder Directions " has the meaning set out in section
4.2 hereof.
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"Non-Affiliated Holders", when used in Article 3 or Article 4 or
otherwise with respect to the right to vote or direct the votes to be cast by
the holder of the Voting Shares, means the registered holders of Exchangeable
Shares other than Fountain and its Article 4 Subsidiaries and, for all other
purposes, means the registered holders of Exchangeable Shares other than
Fountain and its Subsidiaries.
"Officer's Certificate" means, with respect to Fountain or CanArgo, as
the case may be, a certificate signed by any one of the Chairman of the Board,
the Vice-Chairman of the Board, the President, any Vice-President or any other
senior officer of Fountain or CanArgo, as the case may be.
"Plan of Arrangement" means the plan of arrangement of CanArgo providing
for the Arrangement.
"Redemption Call Right" has the meaning set out in Section 7.2(1) of the
Exchangeable Share Provisions.
"Redemption Price" has the meaning set out in Section 7.1(1) of the
Exchangeable Share Provisions.
"Retracted Shares" has the meaning set out in section 5.6 hereof.
"Retraction Call Right" has the meaning set out in Section 6.2(1) of the
Exchangeable Share Provisions.
"Retraction Price" has the meaning set out in Section 6.1(1) of the
Exchangeable Share Provisions.
"Subsidiary" of Fountain means any corporation more than 50% of the
outstanding stock of which, by vote or value, is owned, directly or indirectly,
by Fountain, by one or more other Subsidiaries of Fountain or by Fountain and
one or more other Subsidiaries of Fountain.
"Transfer Agent" has the meaning set out in Section 1.1 of the
Exchangeable Share Provisions.
"Trust" means the trust created by this trust agreement.
"Trust Estate" means the Voting Shares, any other securities, the
Exchange Right and any money or other rights or assets that may be held by the
Trustee from time to time pursuant to this trust agreement.
"Trustee" means Montreal Trust Company of Canada and, subject to the
provisions of Article 10 hereof, includes any successor trustee or permitted
assigns.
"Voting Rights" means the voting rights attached to the Voting Shares.
"Voting Shares" means the one hundred shares of Preferred Stock
constituting the Series Voting Preferred Stock of Fountain, par value US$0.10,
issued by Fountain to and deposited with the Trustee, each of which entitles the
holder of record to a number of votes at meetings of holders of Fountain Common
Stock equal to the quotient rounded down to the nearest whole number obtained by
dividing the number of Exchangeable Shares outstanding from time to time that
are held by Non-Affiliated Holders by the number of Voting Shares outstanding.
Each Voting Share may be redeemed by Fountain once all Exchangeable Shares held
by Non-Affiliated holders have been exchanged (but no earlier) for $1.00.
1.2 Interpretation Not Affected by Headings, etc. The division of this
trust agreement into articles and sections and the insertion of headings are for
reference purposes only and shall not affect the interpretation of this trust
agreement. Unless otherwise indicated, any reference in this trust agreement to
an article or section refers to the specified article or section of this trust
agreement.
1.3 Number, Gender and Persons. In this trust agreement, unless the
context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, corporations, partnerships, companies,
associations, trusts, unincorporated organizations, governmental bodies and
other legal or business entities of any kind.
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1.4 Date for Any Action. If any date on which any action is required to
be taken under this trust agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
1.5 Payments. All payments to be made hereunder will be made without
interest and less any tax required by law to be deducted and withheld.
ARTICLE 2
TRUST
2.1 Establishment of Trust. One of the purposes of this trust agreement
is to create the Trust for the benefit of the Non-Affiliated Holders, as herein
provided. The Trustee will hold the Voting Shares in order to enable the Trustee
to exercise the Voting Rights and will hold the Exchange Right in order to
enable the Trustee to exercise such right and will hold the other rights granted
in or resulting from the Trustee being a party to this trust agreement in order
to enable the Trustee to exercise or enforce such rights, in each case as
trustee for and on behalf of the Non-Affiliated Holders as provided in this
trust agreement.
ARTICLE 3
VOTING SHARE
3.1 Issue and Ownership of the Voting Shares. Simultaneously with the
execution and delivery of this trust agreement, Fountain will issue to and
deposit with the Trustee the Voting Shares to be hereafter held of record by the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Non-Affiliated Holders, in accordance with the provisions of this trust
agreement. Fountain hereby acknowledges receipt from the Trustee as trustee for
and on behalf of the Non-Affiliated Holders and from the Non-Affiliated Holders
of $10.00 in cash and other good and valuable consideration (and the adequacy
thereof) for the issuance of the Voting Shares by Fountain to the Trustee.
During the term of the Trust and subject to the terms and conditions of this
trust agreement, the Trustee shall possess and be vested with full legal
ownership of the Voting Shares and shall be entitled to exercise all of the
rights and powers of an owner with respect to the Voting Shares, provided that
the Trustee shall:
(a) hold the Voting Shares and the legal title thereto as trustee
solely for the use and benefit of the Non-Affiliated Holders in
accordance with the provisions of this trust agreement; and
(b) except as specifically authorized by this trust agreement,
have no power or authority to sell, transfer, vote or otherwise deal in
or with the Voting Shares and the Voting Shares shall not be used or
disposed of by the Trustee for any purpose other than the purposes for
which the Trust is created pursuant to this trust agreement.
3.2 Legended Share Certificates. CanArgo will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Non-Affiliated Holders of their right to instruct the Trustee with respect to
the exercise of the Voting Rights with respect to the Exchangeable Shares held
by a Non-Affiliated Holder.
3.3 Safekeeping of Certificate. The certificates representing the Voting
Shares shall at all times be held in safe keeping by the Trustee or its agent.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 Voting Rights. The Trustee, as the holder of record of the Voting
Shares, shall be entitled to all of the Voting Rights, including the right to
consent with respect to or to vote in person or by proxy the Voting
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Shares, on any matter, question or proposition whatsoever that may come before
the stockholders of Fountain at a Fountain Meeting or in connection with a
Fountain Consent. The Voting Rights shall be and remain vested in and
exercisable by the Trustee. Subject to section 7.15 hereof, the Trustee shall
exercise the Voting Rights only on the basis of instructions received pursuant
to this Article 4 from Non-Affiliated Holders entitled to instruct the Trustee
as to the voting thereof at the time at which a Fountain Consent is sought or a
Fountain Meeting is held. To the extent that no instructions are received from a
Non-Affiliated Holder with respect to the Voting Rights to which such
Non-Affiliated Holder is entitled, the Trustee shall not exercise or permit the
exercise of the Voting Rights relating to such Non-Affiliated Holder's
Exchangeable Shares, except that the Trustee may cause each Voting Share to be
present in person or by proxy at a Fountain Meeting, even if it does not, in
whole or in part, vote such Voting Share on matters presented to the
stockholders of Fountain at such Fountain Meeting.
4.2 Number of Votes. With respect to all meetings of stockholders of
Fountain at which holders of shares of Fountain Common Stock are entitled to
vote (a "FOUNTAIN MEETING") and with respect to all written consents sought from
the holders of shares of Fountain Common Stock (a "FOUNTAIN CONSENT"), the
Trustee shall cast all votes arising under a single Voting Share with respect to
any matter, question or proposition in the same manner, and that manner shall be
determined by directions provided to the Trustee by the Non-Affiliated Holders.
Each Non-Affiliated Holder shall be entitled to direct the Trustee with respect
to one vote for each Exchangeable Share owned of record by such Non-Affiliated
Holder on the record date established by Fountain or by applicable law for such
Fountain Meeting or Fountain Consent, as the case may be (the "NON-AFFILIATED
HOLDER DIRECTIONS") in respect of each matter, question or proposition to be
voted on at such Fountain Meeting or to be consented to in connection with such
Fountain Consent. The Trustee shall tally the aggregate number of Non-Affiliated
Holder Directions received indicating a vote in a particular manner (in favour
of, against, abstain or other choices offered) with respect to each such matter,
question or proposition. The Trustee shall then exercise the Voting Rights with
respect to such a matter, question or proposition so that the Trustee shall vote
in a particular manner all of the votes attaching to that number of Voting
Shares equal to the percentage (rounded down to the nearest whole percentage) of
Exchangeable Shares held by Non-Affiliated Holders with respect to which
Non-Affiliated Holder Directions were issued directing a vote in that particular
manner.
4.3 Mailings to Shareholders. With respect to each Fountain Meeting and
Fountain Consent, the Trustee will mail or cause to be mailed (or otherwise
communicate in the same manner that Fountain utilizes in communications to
holders of Fountain Common Stock, subject to the Trustee being advised in
writing of such method and its ability to provide this method of communication)
to each of the Non-Affiliated Holders named in the List on the same day as the
initial mailing or notice (or other communication) with respect thereto is given
by Fountain to its stockholders:
(a) a copy of such notice, together with any proxy or information
statement and related materials to be provided to stockholders of
Fountain;
(b) a statement that such Non-Affiliated Holder is entitled,
subject to the provisions of section 4.7 hereof, to provide the Trustee
with Non-Affiliated Holder Directions with respect to matters to be
determined at or through such Fountain Meeting or Fountain Consent, as
the case may be;
(c) a statement as to the manner in which such directions may be
given to the Trustee, including an express indication that the Trustee
may give a proxy to a designated agent or other representative of the
management of Fountain to exercise Voting Rights in a manner consistent
with the Non-Affiliated Holder Directions;
(d) a statement that if no such directions are received from a
Non-Affiliated Holder, the votes associated with the Exchangeable Shares
held by such Non-Affiliated Holder will not be exercised;
(e) a form of direction whereby the Non-Affiliated Holder may
provide Non-Affiliate Holder Directions to the Trustee as contemplated
herein; and
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(f) a statement of (i) the time and date by which such
Non-Affiliated Holder Directions must be received by the Trustee in
order to be binding upon it, which in the case of a Fountain Meeting
shall not be earlier than the close of business on the second Business
Day prior to such meeting, and (ii) the method for revoking or amending
such instructions.
The materials referred to above are to be provided by Fountain to the
Trustee, but shall be subject to review and comment by the Trustee. For the
purpose of determining the votes in respect of which a Non-Affiliated Holder is
entitled to give Non-Affiliated Holder Directions in connection with any such
Fountain Meeting or Fountain Consent, the number of Exchangeable Shares owned of
record by the Non-Affiliated Holder shall be determined at the close of business
on the record date established by Fountain or by applicable law for purposes of
determining stockholders entitled to vote at such Fountain Meeting or to give
written consent in connection with such Fountain Consent. Fountain will notify
the Trustee in writing of any decision of the board of directors of Fountain
with respect to the calling of any such Fountain Meeting or the seeking of any
such Fountain Consent and shall provide all necessary information and materials
to the Trustee in each case promptly and in any event in sufficient time to
enable the Trustee to perform its obligations contemplated by this section 4.3.
4.4 Copies of Stockholder Information. Fountain will deliver to the
Trustee copies of all proxy materials (including notices of Fountain Meetings
but excluding proxies to vote shares of Fountain Common Stock), information
statements, reports (including without limitation all interim and annual
financial statements) and other written communications that are to be
distributed from time to time to holders of Fountain Common Stock in sufficient
quantities and in sufficient time so as to enable the Trustee to send those
materials to each Non-Affiliated Holder at approximately the same time as such
materials are first sent to holders of Fountain Common Stock. The Trustee will
mail or otherwise send to each Non-Affiliated Holder, at the expense of
Fountain, copies of all such materials (and all materials specifically directed
to the Non-Affiliated Holders or to the Trustee for the benefit of the
Non-Affiliated Holders by Fountain) received by the Trustee from Fountain at the
same time as such materials are first sent to holders of Fountain Common Stock.
The Trustee will make copies of all such materials available for inspection by
any Non-Affiliated Holder at the Trustee's principal office in the cities of
Toronto and Calgary.
4.5 Other Materials. Immediately after receipt by Fountain or any
stockholder of Fountain of any material sent or given generally to the holders
of Fountain Common Stock by or on behalf of a third party, including without
limitation dissident proxy and information circulars (and related information
and material) and tender and exchange offer circulars (and related information
and material), Fountain shall use reasonable efforts to obtain and deliver to
the Trustee copies thereof in sufficient quantities so as to enable the Trustee
to forward such material (unless the same has been provided directly to
Non-Affiliated Holders by such third party) to each Non-Affiliated Holder as
soon as practicable thereafter. As soon as practicable after receipt thereof,
the Trustee will mail or otherwise send to each Non-Affiliated Holder, at the
expense of Fountain, copies of all such materials received by the Trustee from
Fountain. The Trustee will also make copies of all such materials available for
inspection by any Non-Affiliated Holder at the Trustee's principal office in the
cities of, Toronto and Calgary.
4.6 List of Persons Entitled to Vote. CanArgo shall, (a) prior to each
annual, general and special Fountain Meeting or the seeking of any Fountain
Consent and (b) forthwith upon each request made at any time by the Trustee in
writing, prepare or cause to be prepared a list (a "LIST") of the names and
addresses of the Non-Affiliated Holders arranged in alphabetical order and
showing the number of Exchangeable Shares held of record by each such
Non-Affiliated Holder, in each case at the close of business on the date
specified by the Trustee in such request or, in the case of a List prepared in
connection with a Fountain Meeting or a Fountain Consent, at the close of
business on the record date established by Fountain or pursuant to applicable
law for determining the holders of Fountain Common Stock entitled to receive
notice of and/or to vote at such Fountain Meeting or to give consent in
connection with such Fountain Consent. Each such List shall be delivered to the
Trustee promptly after receipt by CanArgo of such request or the record date for
such meeting or seeking of consent, as the case may be, and, in any event,
within sufficient time as to enable the Trustee to perform its obligations under
this trust agreement. Fountain agrees to give CanArgo written notice (with a
copy to the Trustee) of the calling of any Fountain Meeting or the seeking of
any Fountain Consent, together with the record dates therefor, promptly and to
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the extent practicable, sufficiently prior to the date of the calling of such
meeting or seeking of such consent so as to enable CanArgo to perform its
obligations under this section 4.6.
4.7 Entitlement to Direct Votes. Any Non-Affiliated Holder named in a
List prepared in connection with any Fountain Meeting or any Fountain Consent
will be entitled to provide to the Trustee in the manner described in section
4.3 hereof the Non-Affiliated Holder Directions to which such Non-Affiliated
Holder is so entitled.
4.8 Voting by Trustee, and Attendance of Trustee Representative, at
Meeting In connection with each Fountain Meeting and Fountain Consent, the
Trustee shall exercise, either in person or by proxy, in accordance with the
Non-Affiliated Holder Directions received from Non-Affiliated Holders pursuant
to section 4.3 hereof and subject to section 4.2 hereof, the Voting Rights; the
provided, however, that such Non-Affiliated Holder Directions are received by
the Trustee from the Non-Affiliated Holders prior to the time and date fixed by
it for receipt of such instructions in the notice given by the Trustee to the
Non-Affiliated Holders pursuant to section 4.3 hereof or such later time as the
Trustee in its sole discretion may permit.
4.9 Distribution of Written Materials. Any written materials to be
distributed by the Trustee to the Non-Affiliated Holders pursuant to this trust
agreement shall be delivered or sent by mail (or otherwise communicated in the
same manner as Fountain utilizes in communications to holders of Fountain Common
Stock, subject to the Trustee being advised in writing of such method of
communication and its ability to provide same) to each Non-Affiliated Holder at
its address as shown on the books of CanArgo. CanArgo shall provide or cause to
be provided to the Trustee for this purpose, on a timely basis and without
charge or other expense:
(a) current lists of the Non-Affiliated Holders; and
(b) upon the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this trust agreement.
The materials referred to above are to be provided by Fountain to the
Trustee, but shall be subject to review and comment by the Trustee.
4.10 Termination of Voting Rights. All the rights of a Non-Affiliated
Holder with respect to the Non-Affiliated Holder Directions exercisable in
respect of the Exchangeable Shares held by such Non-Affiliated Holder, shall be
deemed to be surrendered by the Non-Affiliated Holder and shall cease
immediately upon the delivery by such Non-Affiliated Holder to the Trustee of
the certificates representing such Exchangeable Shares in connection with the
exercise by the Non-Affiliated Holder of the Exchange Right or the occurrence of
the automatic exchange of Exchangeable Shares for shares of Fountain Common
Stock, as specified in Article 5 hereof, or upon the redemption of Exchangeable
Shares pursuant to Article 6 or Article 7 of the Exchangeable Share Provisions,
or upon the effective date of the liquidation, dissolution or winding-up of
CanArgo pursuant to Article 5 of the Exchangeable Share Provisions, or upon the
purchase of Exchangeable Shares from the holder thereof by Fountain pursuant to
the exercise by Fountain of the Retraction Call Right, the Redemption Call Right
or the Liquidation Call Right (unless in any case CanArgo or Fountain, as the
case may be, shall not have delivered the requisite shares of Fountain Common
Stock and cheques, if any, deliverable in exchange therefor to the Transfer
Agent or the Trustee for delivery to the Non-Affiliated Holders).
ARTICLE 5
EXCHANGE RIGHT
5.1 Grant and Ownership of the Exchange Right. Fountain hereby grants to
the Trustee as trustee for and on behalf of, and for the use and benefit of, the
Non-Affiliated Holders, the right (the "Exchange Right"), to
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require Fountain to purchase from each or any Non-Affiliated Holder all or any
part of the Exchangeable Shares held by the Non-Affiliated Holder, all in
accordance with the provisions of this trust agreement:
(a) at any time, including upon the occurrence and during the
continuance of an Insolvency Event, or upon receipt of exercise
instructions from any Non-Affiliated Holder in accordance with Section
5.4 hereof; or
(b) in the circumstances contemplated in Section 5.6 or 5.9
hereof.
Fountain hereby acknowledges receipt from the Trustee, as trustee for and on
behalf of the Non-Affiliated Holders, of good and valuable consideration (and
the adequacy thereof) for the grant of the Exchange Right by Fountain to the
Trustee. During the term of the Trust and subject to the terms and conditions of
this trust agreement, the Trustee shall possess and be vested with full legal
ownership of the Exchange Right and shall be entitled to exercise all of the
rights and powers of an owner with respect to the Exchange Right, provided that
the Trustee shall:
(c) hold the Exchange Right and the legal title thereto as
trustee solely for the use and benefit of the Non-Affiliated Holders in
accordance with the provisions of this trust agreement; and
(d) except as specifically authorized by this trust agreement,
have no power or authority to exercise or otherwise deal in or with the
Exchange Right, and the Trustee shall not exercise such right for any
purpose other than the purposes for which this Trust is created pursuant
to this trust agreement.
5.2 General Exercise of Exchange Right. The Exchange Right shall be and
remain vested in and exercisable by the Trustee. Subject to section 7.15 hereof,
the Trustee shall exercise the Exchange Right only on the basis of instructions
received pursuant to this Article 5 from Non-Affiliated Holders entitled to
instruct the Trustee as to the exercise thereof. To the extent that no
instructions are received from a Non-Affiliated Holder with respect to the
Exchange Right, the Trustee shall not exercise or permit the exercise of the
Exchange Right.
5.3 Purchase Price. The purchase price payable by Fountain for each
Exchangeable Share to be purchased by Fountain under the Exchange Right shall be
an amount per share equal to (a) the Current Market Price of a share of Fountain
Common Stock on the last Business Day prior to the day of closing of the
purchase and sale of such Exchangeable Share under the Exchange Right, which
shall be satisfied in full by causing to be delivered to such holder one share
of Fountain Common Stock, plus (b) the Dividend Amount, if any. The purchase
price for each such Exchangeable Share so purchased may be satisfied only by
Fountain delivering or causing to be delivered to the Trustee, on behalf of the
relevant Non-Affiliated Holder, one share of Fountain Common Stock and a cheque
for the balance, if any, of the purchase price.
5.4 Exercise Instructions. Subject to the terms and conditions herein
set forth, a Non-Affiliated Holder shall be entitled, to instruct the Trustee to
exercise the Exchange Right with respect to all or any part of the Exchangeable
Shares registered in the name of such Non-Affiliated Holder on the books of
CanArgo. To cause the exercise of the Exchange Right by the Trustee, the
Non-Affiliated Holder shall deliver to the Trustee, in person or by certified or
registered mail, at its principal office in Toronto, Ontario or at such other
place in Canada as the Trustee may from time to time designate by written notice
to the Non-Affiliated Holders, the certificates representing the Exchangeable
Shares which such Non-Affiliated Holder desires Fountain to purchase, duly
endorsed in blank, and accompanied by such other documents and instruments as
may be required to effect a transfer of Exchangeable Shares under the Business
Corporations Act (Ontario) and such additional documents and instruments as the
Trustee or CanArgo may reasonably require together with (a) a duly completed
form of notice of exercise (a "Notice of Exercise") of the Exchange Right,
contained on the reverse of or attached to the Exchangeable Share certificates,
stating (i) that the Non-Affiliated Holder thereby instructs the Trustee to
exercise the Exchange Right so as to require Fountain to purchase from the
Non-Affiliated Holder the number of Exchangeable Shares specified therein, (ii)
that such Non-Affiliated Holder has good title to and owns all such
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Exchangeable Shares to be acquired by Fountain free and clear of all liens,
claims and encumbrances, (iii) the names in which the certificates representing
Fountain Common Stock issuable in connection with the exercise of the Exchange
Right are to be issued, (iv) that the Non-Affiliated Holder represents and
warrants that he is not a non-resident of Canada within the meaning of the
Income Tax Act (Canada); if such representation is not made, the provisions of
section 5.11 shall apply, and (v) the names and addresses of the persons to whom
such new certificates should be delivered and (b) payment (or evidence
satisfactory to the Trustee, CanArgo and Fountain of payment) of the taxes (if
any) payable as contemplated by section 5.7 of this trust agreement. If only a
portion of the Exchangeable Shares represented by any certificate delivered to
the Trustee are to be purchased by Fountain under the Exchange Right, a new
certificate for the balance of such Exchangeable Shares shall be issued to the
holder at the expense of CanArgo.
5.5 Delivery of Fountain Common Stock; Effect of Exercise. Promptly
after receipt of the certificates representing the Exchangeable Shares that a
Non-Affiliated Holder desires Fountain to purchase under the Exchange Right
(together with such documents and instruments of transfer and a duly completed
form of notice of exercise of the Exchange Right and payment of taxes payable as
contemplated by section 5.7, if any, or evidence thereof), duly endorsed for
transfer to Fountain, the Trustee shall notify Fountain and CanArgo of its
receipt of the same, which notice to Fountain and CanArgo shall constitute
exercise of the Exchange Right by the Trustee on behalf of the holder of such
Exchangeable Shares, and Fountain shall as promptly as practicable thereafter
deliver or cause to be delivered to the Trustee, for delivery to the
Non-Affiliated Holder of such Exchangeable Shares (or to such other persons, if
any, properly designated by such Non-Affiliated Holder), a certificate for the
number of shares of Fountain Common Stock deliverable in connection with such
exercise of the Exchange Right (which shares shall be duly issued as fully paid
and non-assessable and shall when issued be free and clear of any lien, claim or
encumbrance, security interest or adverse claim) and a cheque for the balance,
if any, of the purchase price therefor; provided, however, that no such delivery
shall be made unless and until the Non-Affiliated Holder requesting the same
shall have paid (or provided evidence satisfactory to the Trustee, CanArgo and
Fountain of the payment of) the taxes (if any) payable as contemplated by
section 5.7 of this trust agreement. Immediately upon the giving of notice by
the Trustee to Fountain and CanArgo of the exercise of the Exchange Right, as
provided in this section 5.5, the closing of the transaction of purchase and
sale contemplated by the Exchange Right shall be deemed to have occurred, and
the Non-Affiliated Holder of such Exchangeable Shares shall be deemed to have
transferred to Fountain all of its right, title and interest in and to such
Exchangeable Shares and to have surrendered the related interest in the Trust
Estate and shall not be entitled to exercise any of the rights of a holder in
respect thereof, other than the right to receive the purchase price therefor,
unless the requisite number of shares of Fountain Common Stock (together with a
cheque for the balance, if any, of the total purchase price therefor) is not
delivered by Fountain to the Trustee, for delivery to such Non-Affiliated Holder
(or to such other persons, if any, properly designated by such Non-Affiliated
Holder), within five Business Days of the date of the giving of such notice by
the Trustee, in which case the rights of the Non-Affiliated Holder shall remain
unaffected until such shares of Fountain Common Stock are so delivered by
Fountain and any such cheque is so delivered and paid. Concurrently with the
closing of the transaction of purchase and sale contemplated by the Exchange
Right, such Non-Affiliated Holder shall be considered and deemed for all
purposes to be the holder of the shares of Fountain Common Stock delivered to it
pursuant to the Exchange Right.
5.6 Exercise of Exchange Right Subsequent to Retraction. In the event
that a Non-Affiliated Holder has exercised its right under Article 6 of the
Exchangeable Share Provisions to require CanArgo to redeem any or all of the
Exchangeable Shares held by the Non-Affiliated Holder (the "Retracted Shares")
and is notified by CanArgo pursuant to Section 6.1(4) of the Exchangeable Share
Provisions that CanArgo will not be permitted as a result of solvency
requirements of applicable law to redeem all such Retracted Shares, subject to
receipt by the Trustee of written notice to that effect from CanArgo and
provided that Fountain shall not have exercised its Retraction Call Right with
respect to the Retracted Shares and that the Non-Affiliated Holder shall not
have revoked the retraction request delivered by the Non-Affiliated Holder to
CanArgo pursuant to Section 6.1 of the Exchangeable Share Provisions, the
retraction request will constitute and will be deemed to constitute notice from
the Non-Affiliated Holder to the Trustee instructing the Trustee to exercise the
Exchange Right with respect to those Retracted Shares that CanArgo is unable to
redeem. In any such event, CanArgo hereby agrees with the Trustee and in favour
of the Non-Affiliated Holder immediately to notify the Trustee of any such
prohibition against CanArgo redeeming all of the Retracted Shares and
immediately to forward or cause to be forwarded to the
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Trustee all relevant materials delivered by the Non-Affiliated Holder to CanArgo
or to the Transfer Agent (including without limitation a copy of the retraction
request delivered pursuant to Section 6.1(1) of the Exchangeable Share
Provisions) in connection with such proposed redemption of the Retracted Shares
and the Trustee will thereupon exercise the Exchange Right with respect to the
Retracted Shares that CanArgo is not permitted to redeem and will require
Fountain to purchase and Fountain agrees to purchase such shares in accordance
with the provisions of this Article 5.
5.7 Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares
to Fountain pursuant to the Exchange Right, the share certificate or
certificates representing Fountain Common Stock to be delivered in connection
with the payment of the total purchase price therefor shall be issued in the
name of the Non-Affiliated Holder of the Exchangeable Shares so sold or in such
names as such Non-Affiliated Holder may otherwise direct in writing without
charge to the holder of the Exchangeable Shares so sold, provided, however, that
such Non-Affiliated Holder (a) shall pay (and neither Fountain, CanArgo nor the
Trustee shall be required to pay) any documentary, stamp, transfer or other
similar taxes that may be payable in respect of any transfer involved in the
issuance or delivery of such shares to a person other than such Non-Affiliated
Holder or (b) shall have established to the satisfaction of the Trustee,
Fountain and CanArgo that such taxes, if any, have been paid.
5.8 Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event that with the giving of notice or the passage of
time or both would be an Insolvency Event, CanArgo and, if known by Fountain,
Fountain shall give written notice thereof to the Trustee. As soon as
practicable after receiving notice from CanArgo or Fountain or from any other
person of the occurrence of an Insolvency Event, the Trustee will mail to each
Non-Affiliated Holder, at the expense of Fountain, a notice of such Insolvency
Event in the form provided by Fountain, which notice shall contain a brief
statement of the right of the Non-Affiliated Holders with respect to the
Exchange Right.
5.9 Automatic Exchange on Liquidation of Fountain
(1) Fountain shall give the Trustee written notice of each of the
following events (each a "Fountain Liquidation Event") at the time set forth
below:
(a) in the event of any determination by the board of
directors of Fountain to institute voluntary liquidation,
dissolution or winding-up proceedings with respect to Fountain or
to effect any other distribution of assets of Fountain among its
stockholders for the purpose of winding up it affairs, at least
60 days prior to the proposed effective date of such liquidation,
dissolution, winding up or other distribution; and
(b) immediately, upon the earlier of (i) receipt by
Fountain of notice of and (ii) Fountain otherwise becoming aware
of any threatened or instituted claim, suit, petition or other
proceedings with respect to the involuntary liquidation,
dissolution or winding up of Fountain or to effect any other
distribution of assets of Fountain among its stockholders for the
purpose of winding up its affairs.
(2) Immediately following receipt by the Trustee from Fountain of
notice of any Fountain Liquidation Event contemplated by Section 5.9(1)(a) or
5.9(1)(b), the Trustee will give notice thereof to the holders of Exchangeable
Shares. Such notice shall be provided by Fountain to the trustee and shall
include a brief description of the automatic exchange of Exchangeable Shares for
shares of Fountain Common Stock provided for in Section 5.3(4) of the
Exchangeable Share Provisions (the "Automatic Exchange Right").
(3) In order that the holders of Exchangeable Shares (other than
Fountain) will be able to participate on a pro rata basis with the holders of
Fountain Common Stock in the distribution of assets of Fountain in connection
with a Fountain Liquidation Event, on the fifth Business Day prior to the
effective date (the "Fountain Liquidation Event Effective Date") of a Fountain
Liquidation Event all of the then outstanding Exchangeable Shares (other than
Exchangeable Shares held by Fountain) shall be automatically exchanged for
shares of Fountain Common Stock. To effect such automatic exchange, Fountain
shall purchase each
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Exchangeable Share outstanding on the fifth Business Day prior to the Fountain
Liquidation Event Effective Date and held by a holder of Exchangeable Shares
(other than Fountain), and each such holder shall sell the Exchangeable Shares
held by it at such time, for a purchase price per share equal to (a) the Current
Market Price of a share of Fountain Common Stock on the fifth Business Day prior
to the Fountain Liquidation Event Effective Date, which shall be satisfied in
full by Fountain delivering to such holder one share of Fountain Common Stock,
plus (b) the Dividend Amount, if any.
(4) On the fifth Business Day prior to the Fountain Liquidation
Event Effective Date, the closing of the transaction of purchase and sale
contemplated by the automatic exchange of Exchangeable Shares for Fountain
Common Stock shall be deemed to have occurred, and each holder of Exchangeable
Shares (other than Fountain) shall be deemed to have transferred to Fountain all
of such holder's right, title and interest in and to such Exchangeable Shares
and shall cease to be a holder of such Exchangeable Shares (unless payment in
the form of such Fountain Common Stock shall not be made in which case the
rights of the holders shall remain unaffected until the full purchase price is
paid) and Fountain shall deliver or cause to be delivered to theTrustee , for
delivery to such holders against delivery of the certificates representing such
Exchangeable Shares free and clear of any liens, claims, encumbrances, security
interest or adverse claim and duly endorsed to Fountain, the certificates for
the number of shares of Fountain Common Stock (which shares shall be duly issued
as fully paid and non-assessable and shall be free and clear of any lien,
claim,encumbrance, security interest or adverse claim) and a cheque for a
balance, if any, of the total purchase price for such Exchangeable Shares and
any interest on such deposit shall belong to Fountain. Concurrently with each
such holder ceasing to be a holder of Exchangeable Shares, such holder shall be
considered and deemed for all purposes to be the holder of the shares of
Fountain Common Stock delivered to it, or to the Trustee on its behalf, pursuant
to the automatic exchange of Exchangeable Shares for Fountain Common Stock and
the certificates held by such holder previously representing the Exchangeable
Shares exchanged by such holder with Fountain Common Stock delivered to such
holder by Fountain pursuant to such automatic exchange shall thereafter be
deemed to represent the shares of Fountain Common Stock delivered to such holder
by Fountain pursuant to such automatic exchange. Upon the request of any such
former holder of Exchangeable Shares and the surrender by such holder of
Exchangeable Share certificates deemed to represent shares of Fountain Common
Stock, duly endorsed in blank and accompanied by such instruments of transfer as
Fountain may reasonably require, the Trustee shall deliver or cause to be
delivered to such holder certificates representing the shares of Fountain Common
Stock of which such holder is the holder and a cheque in payment of the
remaining portion, if any, of the purchase price.
5.10 Call Rights. The Liquidation Call Right, the Redemption Call Right,
the Retraction Call Right and the Automatic Exchange Right are hereby agreed,
acknowledged and confirmed, and it is agreed and acknowledged that such rights
are granted in part in consideration of the obligations of Fountain under this
trust agreement.
5.11 Non-Resident of Canada at Time of Exchange. Notwithstanding the
provisions of any section of this trust agreement, in the event that a
Non-Affiliated Holder does not represent and warrant that he is not a
non-resident of Canada within the meaning of the Income Tax Act (Canada) when
such Non-Affiliated Holder or Fountain is entitled to exercise any Exchange
Right, such Non-Affiliated Holder shall provide to Fountain a certificate
pursuant to section 116 of the Income Tax Act (Canada) or any successor
provision thereto (such certificate being hereinafter referred to as a
"Certificate") having a certificate limit that is not less than fair-market
value of such Non-Affiliated Holder's Fountain Common Stock which such
Non-Affiliated Holder is entitled to receive upon such exchange and otherwise
conforming in all respects with the provisions of section 116 of the Income Tax
Act (Canada) or any successor provisions thereto. If a Non-Affiliated Holder
does not provide such Certificate to Fountain on or before the date on which the
exchange is to occur, Fountain shall be entitled to hold back shares of Fountain
Common Stock having a fair-market value equal to the amount of any taxes that
Fountain would be required to pay on behalf of such Non-Affiliated Holder
pursuant to section 116 of the Income Tax Act (Canada) or any successor thereto.
Fountain shall be entitled to sell such shares of Fountain Common Stock and to
remit the sale price to Revenue Canada on account of any such taxes within such
time (determined by Fountain acting reasonably) as will enable it to comply with
the requirements of subsection 116(5) of the Income Tax Act (Canada) or any
successor thereto in the event that such Non-Affiliated Holder fails to provide
such Certificate before such time and such Non-Affiliated Holder hereby appoints
Fountain as his lawful attorney with full and
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irrevocable power and authority to execute all agreements, documents and
instruments and to take such other action as may be required to effect such
sale. If such Non-Affiliated Holder provides such Certificate before such time,
Fountain shall release to such Non-Affiliated Holder any shares of Fountain
Common Stock so held back or the proceeds from a sale thereof if not remitted to
Revenue Canada.
ARTICLE 6
COVENANTS , REPRESENTATIONS AND WARRANTIES
6.1 Covenants of Fountain Regarding Exchangeable Shares. So long as any
Exchangeable Shares are outstanding, Fountain will:
(a) not declare or pay any dividend on Fountain Common Stock
unless (i) CanArgo will have sufficient money or other assets or
authorized but unissued securities available to enable the due
declaration and the due and punctual payment in accordance with
applicable law, of an equivalent dividend on the Exchangeable Shares and
(ii) CanArgo shall simultaneously declare or pay, as the case may be, an
equivalent dividend on the Exchangeable Shares;
(b) advise CanArgo sufficiently in advance of the declaration by
Fountain of any dividend on Fountain Common Stock and take all such
other actions as are necessary, in cooperation with CanArgo, to ensure
that the respective declaration date, record date and payment date for a
dividend on the Exchangeable Shares shall be the same as the declaration
date, record date and payment date for the corresponding dividend on
Fountain Common Stock and that such dividend on the Exchangeable Shares
shall correspond with any requirements of the stock exchange on which
the Exchangeable Shares may be listed;
(c) ensure that the record date for determining shareholders
entitled to receive any dividend declared on Fountain Common Stock is
not less than 10 Business Days after the declaration date for such
dividend or such shorter period within which applicable law may be
complied with;
(d) take all such actions and do all such things as are necessary
or desirable to enable and permit CanArgo, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Amount in respect of each issued and
outstanding Exchangeable Share upon the liquidation, dissolution or
winding up of CanArgo, including without limitation all such actions and
all such things as are necessary or desirable to enable and permit
CanArgo to cause to be delivered shares of Fountain Common Stock to the
holders of Exchangeable Shares in accordance with the provisions of
Article 5 of the Exchangeable Share Provisions;
(e) take all such actions and do all such things as are necessary
or desirable to enable and permit CanArgo, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Retraction Price and the Redemption Price, including
without limitation all such actions and all such things as are necessary
or desirable to enable and permit CanArgo to cause to be delivered
shares of Fountain Common Stock to the holders of Exchangeable Shares,
upon the retraction or redemption of the Exchangeable Shares in
accordance with the provisions of Article 6 or Article 7 of the
Exchangeable Share Provisions, as the case may be; and
(f) not exercise its vote as a shareholder to initiate the
voluntary liquidation, dissolution or winding up of CanArgo nor take any
action or omit to take any action which action or omission is designed
to result in the liquidation, dissolution or winding up of CanArgo.
6.2 [Intentionally Omitted]
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6.3 Certain Representations. Fountain hereby represents, warrants and
covenants that it has reserved for issuance and will at all times keep
available, free from pre-emptive and other rights, out of its authorized and
unissued capital stock such number of shares of Fountain Common Stock (or other
shares or securities into which Fountain Common Stock may be reclassified or
changed as contemplated by section 6.7 hereof) (i) as is equal to the sum of (x)
the number of Exchangeable Shares issued and outstanding from time to time and
(y) the number of Exchangeable Shares issuable upon the exercise of all rights
to acquire Exchangeable Shares outstanding from time to time and (ii) as are now
and may hereafter be required to enable and permit each of CanArgo and Fountain
to meet its obligations hereunder, under the Exchangeable Share Provisions and
under any other security or commitment pursuant to which CanArgo or Fountain may
now or hereafter be required to issue and/or deliver shares of Fountain Common
Stock;
6.4 Notification of Certain Events. In order to assist Fountain to
comply with its obligations hereunder, CanArgo will give Fountain notice of each
of the following events at the time set forth below:
(a) any determination by the Board of Directors to institute
voluntary liquidation, dissolution or winding-up proceedings with
respect to CanArgo or to effect any other distribution of the assets of
CanArgo among its shareholders for the purpose of winding up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution;
(b) immediately, upon the earlier of (i) receipt by CanArgo of
notice of, and (ii) CanArgo otherwise becoming aware of, any threatened
or instituted claim, suit, petition or other proceedings with respect to
the involuntary liquidation, dissolution or winding up of CanArgo or to
effect any other distribution of the assets of CanArgo among its
shareholders for the purpose of winding up its affairs;
(c) immediately, upon receipt by CanArgo of a Retraction Request
(as defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any Optional Redemption Date
determined by the Board of Directors in accordance with the Exchangeable
Share Provisions;
(e) immediately, upon receipt by CanArgo of a Notice of Exercise;
and
(f) as soon as practicable upon the issuance by CanArgo of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
6.5 Delivery of Shares of Fountain Common Stock. Upon notice of any
event that requires CanArgo to cause to be delivered shares of Fountain Common
Stock to any holder of Exchangeable Shares, Fountain shall, in any manner deemed
appropriate by it, provide such shares or cause such shares to be provided to
CanArgo, which shall forthwith deliver the requisite shares of Fountain Common
Stock to or to the order of the former holder of the surrendered Exchangeable
Shares, as CanArgo shall direct. All such shares of Fountain Common Stock shall
be duly issued as fully paid, non-assessable, free of pre-emptive rights and
when issued shall be free and clear of any lien, claim, encumbrance, security
interest or adverse claim.
6.6 Qualification of Shares of Fountain Common Stock. Fountain covenants
that if any shares of Fountain Common Stock (or other shares or securities into
which Fountain Common Stock may be reclassified or changed as contemplated by
section 6.7 hereof) to be issued and delivered hereunder, including pursuant to
the Plan of Arrangement, the Exchangeable Share Provisions or the Exchange
Right, require registration or qualification with or approval of or the filing
of any document including any prospectus or similar document or the taking of
any proceeding with or the obtaining of any order, ruling or consent from any
governmental or regulatory authority under any Canadian or United States
federal, provincial or state law or regulation or pursuant to the rules and
regulations of any regulatory authority or the fulfillment of any other legal
requirement (collectively, the "APPLICABLE LAWS") before such shares (or other
shares or securities into which Fountain Common Stock may be reclassified or
changed as contemplated by section 6.7 hereof) may be issued and delivered by
Fountain to the
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initial holder thereof or in order that such shares may be freely traded
thereafter (other than any restrictions on transfer by reason of a holder being
a "control person" of Fountain for purposes of Canadian federal or provincial
securities law or an "affiliate" of Fountain or, prior to the Effective Date, of
CanArgo for purposes of United States federal or state securities law), Fountain
will in good faith expeditiously take all such actions and do all such things as
are necessary to cause such shares of Fountain Common Stock (or other shares or
securities into which Fountain Common Stock may be reclassified or changed as
contemplated by section 6.7 hereof) to be and remain duly registered, qualified
or approved. Fountain represents and warrants that it has in good faith taken
all actions and done all things as are necessary under Applicable Laws as they
exist on the date hereof to cause the shares of Fountain Common Stock (or other
shares or securities into which Fountain Common Stock may be reclassified or
changed as contemplated by section 6.7 hereof) to be issued and delivered
hereunder, including pursuant to the Plan of Arrangement, the Exchangeable Share
Provisions or the Exchange Right, to be freely tradeable thereafter (other than
restrictions on transfer by reason of a holder being a "control person" of
Fountain for the purposes of Canadian federal and provincial securities law or
an "affiliate" of Fountain or, prior to the Effective Date, of CanArgo for the
purposes of United States federal or state securities law). Fountain will in
good faith expeditiously take all such actions and do all such things as are
necessary to cause all shares of Fountain Common Stock (or other shares or
securities into which Fountain Common Stock may be reclassified or changed as
contemplated by section 6.7 hereof) to be delivered hereunder, including
pursuant to the Plan of Arrangement, the Exchangeable Share Provisions or the
Exchange Right, to be listed, quoted or posted for trading, or eligible to be so
listed, quoted or posted, on all stock exchanges and quotation systems on which
such shares are listed, quoted or posted for trading at such time.
6.7 Economic Equivalence.
(1) Fountain will not without the prior approval of CanArgo and the
prior approval of the holders of the Exchangeable Shares given in accordance
with Section 9.2 of the Exchangeable Share Provisions:
(a) issue or distribute shares of Fountain Common Stock (or
securities exchangeable for or convertible into or carrying rights to
acquire shares of Fountain Common Stock) to the holders of all or
substantially all of the then outstanding Fountain Common Stock by way
of stock dividend or other distribution, other than an issue of shares
of Fountain Common Stock (or securities exchangeable for or convertible
into or carrying rights to acquire shares of Fountain Common Stock) to
holders of shares of Fountain Common Stock who exercise an option to
receive dividends in Fountain Common Stock (or securities exchangeable
for or convertible into or carrying rights to acquire shares of Fountain
Common Stock) in lieu of receiving cash dividends;
(b) issue or distribute rights, options or warrants to the
holders of all or substantially all of the then outstanding shares of
Fountain Common Stock entitling them to subscribe for or to purchase
shares of Fountain Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire shares of Fountain Common
Stock); or
(c) issue or distribute to the holders of all or substantially
all of the then outstanding shares of Fountain Common Stock (i) shares
or securities of Fountain of any class other than Fountain Common Stock
(other than shares convertible into or exchangeable for or carrying
rights to acquire shares of Fountain Common Stock), (ii) rights, options
or warrants other than those referred to in section 6.7(1)(b) above,
(iii) evidences of indebtedness of Fountain or (iv) assets of Fountain;
unless (x) CanArgo is permitted under applicable law to issue or distribute the
economic equivalent on a per share basis of such rights, options, securities,
shares, evidences of indebtedness or other assets to holders of the Exchangeable
Shares and (y) CanArgo shall issue or distribute such rights, options,
securities, shares, evidences of indebtedness or other assets simultaneously to
holders of the Exchangeable Shares.
(2) Fountain will not without the prior approval of CanArgo and the
prior approval of the holders of the Exchangeable Shares given in accordance
with Section 9.2 of the Exchangeable Share Provisions:
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(a) subdivide, redivide or change the then outstanding shares of
Fountain Common Stock into a greater number of shares of Fountain Common
Stock; or
(b) reduce, combine or consolidate or change the then outstanding
shares of Fountain Common Stock into a lesser number of shares of
Fountain Common Stock; or
(c) reclassify or otherwise change the shares of Fountain Common
Stock or effect an amalgamation, merger, reorganization or other
transaction affecting the shares of Fountain Common Stock;
unless (x) CanArgo is permitted under applicable law to simultaneously make the
same or an economically equivalent change to, or in the rights of holders of,
the Exchangeable Shares and (y) the same or an economically equivalent change is
made to, or in the rights of the holders of, the Exchangeable Shares.
(3) Fountain will ensure that the record date for any event referred to
in section 6.7(1) or 6.7(2) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business Days
after the date on which such event is declared or announced by Fountain (with
simultaneous notice thereof to be given by Fountain to CanArgo).
(4) The Board of Directors shall determine, in good faith and in its
sole discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the board may require), economic
equivalence for the purposes of any event referred to in section 6.7(1) or
6.7(2) and each such determination shall be conclusive and binding on Fountain.
6.8 Fountain Not to Vote Exchangeable Shares. Fountain covenants and
agrees that it will appoint and cause to be appointed proxyholders with respect
to all Exchangeable Shares held by Fountain and its Subsidiaries for the sole
purpose of attending each meeting of holders of Exchangeable Shares in order to
be counted as part of the quorum for each such meeting. Fountain further
covenants and agrees that it will not, and will cause its Subsidiaries not to,
exercise any voting rights that may be exercisable by holders of Exchangeable
Shares from time to time pursuant to the Exchangeable Share Provisions or
pursuant to the provisions of the Business Corporations Act (Ontario) (or any
successor or other corporate statute by which CanArgo may in the future be
governed) with respect to any Exchangeable Shares held by it or by its direct or
indirect Subsidiaries in respect of any matter considered at any meeting of
holders of Exchangeable Shares.
6.9 Due Performance. On and after the Effective Date of the Plan of
Arrangement, Fountain shall duly and timely perform all of its obligations
provided for in the Plan of Arrangement, including any obligations that may
arise upon the exercise of rights by any holder of Exchangeable Shares or under
the Exchangeable Share Provisions.
ARTICLE 7
CONCERNING THE TRUSTEE
7.1 Powers and Duties of the Trustee. The rights, powers and authorities
of the Trustee under this trust agreement, in its capacity as trustee of the
trust, shall include:
(a) receiving the Voting Shares from Fountain and holding them as
trustee for and on behalf of the Non-Affiliated Holders in accordance
with the provisions of this trust agreement;
(b) granting proxies and distributing materials to Non-Affiliated
Holders as provided in this trust agreement;
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(c) attending Fountain Meetings in order that the Voting Shares
be counted as part of the quorum for such Fountain Meeting and
exercising the Voting Rights in accordance with the provisions of this
trust agreement;
(d) receiving the grant of the Exchange Right and the Automatic
Exchange Rights from Fountain as trustee for and on behalf of the
Non-Affiliated Holders in accordance with the provisions of this trust
agreement;
(e) exercising the Exchange Right in accordance with the
provisions of this trust agreement, and in connection therewith
receiving from Non-Affiliated Holders Exchangeable Shares and other
requisite documents and distributing to such Non-Affiliated Holders the
shares of Fountain Common Stock and cheques, if any, to which such
Non-Affiliated Holders are entitled upon the exercise of the Exchange
Right;
(f) holding title to the Trust Estate;
(g) investing any money forming, from time to time, a part of the
Trust Estate as provided in this trust agreement;
(h) taking action at the direction of a Non-Affiliated Holder to
enforce the obligations of CanArgo and/or Fountain under this trust
agreement and/or under the Plan of Arrangement, including the
Exchangeable Share Provisions; and
(i) taking such other actions and doing such other things as are
specifically provided in this trust agreement.
In the exercise of such rights, powers and authorities the Trustee shall
have (and is granted) such incidental and additional rights, powers and
authority not in conflict with any of the provisions of this trust agreement as
the Trustee, acting in good faith and in the reasonable exercise of its
discretion, may deem necessary, appropriate or desirable to effect the purpose
of the Trust. Any exercise of such discretionary rights, powers and authorities
by the Trustee shall be final, conclusive and binding upon all persons. For
greater certainty, the Trustee shall have only those duties as are set out
specifically in this trust agreement. The Trustee in exercising its rights,
powers, duties and authorities hereunder shall act honestly and in good faith
with a view to the best interests of the Non-Affiliated Holders and shall
exercise the care, diligence and skill that a reasonably prudent trustee would
exercise in comparable circumstances. The Trustee shall not be bound to give any
notice or to do or to take any act, action or proceeding by virtue of the powers
conferred on it hereby unless and until it shall be specifically required to do
so under the terms hereof; nor shall the Trustee be required to give any notice
of, or to do or to take any act, action or proceeding as a result of any default
or breach of any provision hereunder, unless and until notified in writing of
such default or breach, which notice shall distinctly specify the default or
breach desired to be brought to the attention of the Trustee and in the absence
of such notice the Trustee may for all purposes of this trust agreement
conclusively assume that no default or breach has been made in the observance or
performance of any of the representations, warranties, covenants, agreements or
conditions contained herein.
7.2 No Conflict of Interest. The Trustee represents to CanArgo and
Fountain that at the date of execution and delivery of this trust agreement
there exists no material conflict of interest in the role of the Trustee as a
fiduciary hereunder and the role of the Trustee in any other capacity. The
Trustee shall, within 90 days after it becomes aware that such a material
conflict of interest exists, either eliminate such material conflict of interest
or resign in the manner and with the effect specified in Article 10 hereof. If,
notwithstanding the foregoing provisions of this section 7.2, the Trustee has
such a material conflict of interest, the validity and enforceability of this
trust agreement shall not be affected in any manner whatsoever by reason only of
the existence of such material conflict of interest. If the Trustee contravenes
the foregoing provisions of this section 7.2, any interested party may apply to
the Ontario Court of Justice (General Division) for an order that the Trustee be
replaced as trustee hereunder.
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7.3 Dealings with Transfer Agents, Registrars, etc. CanArgo and Fountain
irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar
or transfer agent, of the Exchangeable Shares and Fountain Common Stock;
and
(b) requisition, from time to time, from any such registrar or
Trustee any information readily available from the records maintained by
it which the Trustee may reasonably require for the discharge of its
duties and responsibilities under this trust agreement. Fountain
covenants that it will supply the Trustee, or the Trustee, as the case
may be, in a timely manner with duly executed share certificates for the
purpose of completing the exercise from time to time of all rights to
acquire Fountain Common Stock hereunder, under the Plan of Arrangement,
under the Exchangeable Share Provisions and under any other security or
commitment given to the Non-Affiliated Holders pursuant thereto, in each
case pursuant to the provisions hereof, of the Plan of Arrangement, of
the Exchangeable Share Provisions or otherwise.
7.4 Books and Records. The Trustee shall keep available for inspection
by Fountain and CanArgo, at the Trustee's principal office in Calgary, Alberta,
correct and complete books and records of account relating to the Trustee's
actions under this trust agreement, including without limitation all information
relating to mailings and instructions to and from Non-Affiliated Holders and all
transactions pursuant to the Voting Rights and the Exchange Right for the term
of this Agreement. On or before February 28 in every year (commencing with
February 28, 1998), so long as the Voting Shares are on deposit with the
Trustee, the Trustee shall transmit to Fountain and CanArgo a brief report,
dated as of the preceding December 31, with respect to: (a) the property and
funds comprising the Trust Estate as of that date; (b) the number of exercises
of the Exchange Right, if any, and the aggregate number of Exchangeable Shares
received by the Trustee on behalf of Non-Affiliated Holders in consideration of
the issue and delivery by Fountain of shares of Fountain Common Stock in
connection with the Exchange Right, during the calendar year ended on such date;
and (c) all other actions taken by the Trustee in the performance of its duties
under this trust agreement which it had not previously reported.
7.5 Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States and
Canadian income tax returns and any other returns or reports as may be required
by applicable law or pursuant to the rules and regulations of any securities
exchange or other trading system through which the Exchangeable Shares are
traded and, in connection therewith, may obtain the advice and assistance of
such experts as the Trustee may consider necessary or advisable. If requested by
the Trustee, Fountain shall retain such experts as may be required for the
purposes of providing such advice and assistance.
7.6 Indemnification Prior to Certain Actions by Trustee. The Trustee
shall exercise any or all of the rights, duties, powers or authorities vested in
it by this trust agreement at the request, order or direction of any
Non-Affiliated Holder upon such Non-Affiliated Holder furnishing to the Trustee
reasonable funding, security and indemnity against the costs, expenses and
liabilities that may be incurred by the Trustee therein or thereby, provided
that no Non-Affiliated Holder shall be obligated to furnish to the Trustee any
such funding, security or indemnity in connection with the exercise by the
Trustee of any of its rights, duties, powers and authorities with respect to the
Voting Share pursuant to Article 4 hereof and with respect to the Exchange Right
pursuant to Article 5 hereof, subject to the provisions of section 7.15 hereof.
None of the provisions contained in this trust agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the exercise of any of its rights, powers, duties or authorities unless
funded, given funds, security and indemnified as aforesaid.
7.7 Actions by Non-Affiliated Holders. No Non-Affiliated Holder shall
have the right to institute any action, suit or proceeding or to exercise any
other remedy authorized by this trust agreement for the purpose of enforcing any
of its rights or for the execution of any trust or power hereunder unless the
Non-Affiliated Holder has requested the Trustee to take or institute such
action, suit or proceeding and furnished the Trustee with the funding, security
and indemnity referred to in section 7.6 hereof and the Trustee shall have
failed to act within a
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reasonable time thereafter. In such case, but not otherwise, the Non-Affiliated
Holder shall be entitled to take proceedings in any court of competent
jurisdiction such as the Trustee might have taken; it being understood and
intended that no one or more Non-Affiliated Holders shall have any right in any
manner whatsoever to affect, disturb or prejudice the rights hereby created by
any such action, or to enforce any right hereunder or under the Voting Rights or
the Exchange Right except subject to the conditions and in the manner herein
provided, and that all powers and trusts hereunder shall be exercised and all
proceedings at law shall be instituted, had and maintained by the Trustee,
except only as herein provided, and in any event for the equal benefit of all
Non-Affiliated Holders.
7.8 Reliance upon Declarations. The Trustee shall not be considered to
be in contravention of any of its rights, powers, duties and authorities
hereunder if, when required, it acts and relies in good faith upon lists,
mailing labels, notices, statutory declarations, certificates, opinions, reports
or other papers or documents furnished pursuant to the provisions hereof or
required by the Trustee to be furnished to it in the exercise of its rights,
powers, duties and authorities hereunder and such lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other papers
or documents comply with the provisions of section 7.9 hereof, if applicable,
and with any other applicable provisions of this trust agreement.
7.9 Evidence and Authority to Trustee. CanArgo and/or Fountain shall
furnish to the Trustee evidence of compliance with the conditions provided for
in this trust agreement relating to any action or step required or permitted to
be taken by CanArgo and/or Fountain or the Trustee under this trust agreement or
as a result of any obligation imposed under this trust agreement, including,
without limitation, in respect of the Voting Rights or the Exchange Right and
the taking of any other action to be taken by the Trustee at the request of or
on the application of CanArgo and/or Fountain forthwith if and when:
(a) such evidence is required by any other section of this trust
agreement to be furnished to the Trustee in accordance with the terms of
this section 7.9; or
(b) the Trustee, in the exercise of its rights, powers, duties
and authorities under this trust agreement, gives CanArgo and/or
Fountain written notice requiring it to furnish such evidence in
relation to any particular action or obligation specified in such
notice.
Such evidence shall consist of an Officer's Certificate of CanArgo
and/or Fountain or a statutory declaration or a certificate made by persons
entitled to sign an Officer's Certificate stating that any such condition has
been complied with in accordance with the terms of this trust agreement.
Whenever such evidence relates to a matter other than the Voting Rights or the
Exchange Right and except as otherwise specifically provided herein, such
evidence may consist of a report or opinion of any solicitor, attorney, auditor,
accountant, appraiser, valuer, engineer or other expert or any other person
whose qualifications give authority to a statement made by such person, provided
that if such report or opinion is furnished by a director, officer or employee
of CanArgo and/or Fountain it shall be in the form of an Officer's Certificate
or a statutory declaration. Each statutory declaration, certificate, opinion or
report furnished to the Trustee as evidence of compliance with a condition
provided for in this trust agreement shall include a statement by the person
giving the evidence:
(a) declaring that such person has read and understands the
provisions of this trust agreement relating to the condition in
question;
(b) describing the nature and scope of the examination or
investigation upon which such person based the statutory declaration,
certificate, statement or opinion; and
(c) declaring that such person has made such examination or
investigation as such person believes is necessary to enable such person
to make the statements or give the opinions contained or expressed
therein.
7.10 Experts, Advisers and Agents. The Trustee may:
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(a) in relation to these presents act and rely on the opinion or
advice of or information obtained from or prepared by any solicitor,
attorney, auditor, accountant, appraiser, valuer, engineer or other
expert, whether retained by the Trustee or by CanArgo and/or Fountain or
otherwise, and may employ such assistants as may be necessary to the
proper determination and discharge of its powers and duties and
determination of its rights hereunder and may pay proper and reasonable
compensation for all such legal and other advice or assistance as
aforesaid; and
(b) employ such agents and other assistants as it may reasonably
require for the proper determination and discharge of its powers and
duties hereunder, and may pay reasonable remuneration for all services
performed for it (and shall be entitled to receive reasonable
remuneration for all services performed by it) in the discharge of the
trusts hereof and compensation for all disbursements, costs and expenses
made or incurred by it in the determination and discharge of its duties
hereunder and in the management of the Trust.
7.11 [Intentionally Omitted]
7.12 Trustee Not Required to Give Security. The Trustee shall not be
required to give any bond or security in respect of the execution of the trusts,
rights, duties, powers and authorities of this trust agreement or otherwise in
respect of the premises.
7.13 Trustee Not Bound to Act on Corporation's Request. Except as in
this trust agreement otherwise specifically provided, the Trustee shall not be
bound to act in accordance with any direction or request of CanArgo and/or
Fountain or of the directors thereof until a duly authenticated copy of the
instrument or resolution containing such direction or request shall have been
delivered to the Trustee, and the Trustee shall be empowered to act and rely
upon any such copy purporting to be authenticated and believed by the Trustee to
be genuine.
7.14 Authority to Carry on Business. The Trustee represents to CanArgo
and Fountain that at the date of execution and delivery by it of this trust
agreement it is authorized to carry on the business of a trust company in the
Province of Ontario but if, notwithstanding the provisions of this section 7.14,
it ceases to be so authorized to carry on business, the validity and
enforceability of this trust agreement and the Voting Rights, the Exchange Right
and the other rights granted in or resulting from the Trustee being a party to
this trust agreement shall not be affected in any manner whatsoever by reason
only of such event but the Trustee shall, within 90 days after ceasing to be
authorized to carry on the business of a trust company in the Province of
Ontario, either become so authorized or resign in the manner and with the effect
specified in Article 10 hereof.
7.15 Conflicting Claims. If conflicting claims or demands are made or
asserted with respect to any interest of any Non-Affiliated Holder in any
Exchangeable Shares, including any disagreement between the heirs,
representatives, successors or assigns succeeding to all or any part of the
interest of any Non-Affiliated Holder in any Exchangeable Shares resulting in
conflicting claims or demands being made in connection with such interest, then
the Trustee shall be entitled, at its sole discretion, to refuse to recognize or
to comply with any such claim or demand. In so refusing, the Trustee may elect
not to exercise any Voting Rights, the Exchange Right or other rights subject to
such conflicting claims or demands and, in so doing, the Trustee shall not be or
become liable to any person on account of such election or its failure or
refusal to comply with any such conflicting claims or demands. The Trustee shall
be entitled to continue to refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the
Voting Rights, Exchange Right or other rights subject to such
conflicting claims or demands have been adjudicated by a final judgment
of a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange
Right or other rights subject to such conflicting claims or demands have
been conclusively settled by a valid written agreement binding on all
such adverse claimants, and the Trustee shall have been furnished with
an executed copy of such agreement.
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If the Trustee elects to recognize any claim or comply with any demand made by
any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
7.16 Acceptance of Trust. The Trustee hereby accepts the Trust created
and provided for by and in this trust agreement and agrees to perform the same
upon the terms and conditions herein set forth and to hold all rights,
privileges and benefits conferred hereby and by law in trust for the various
persons who shall from time to time be Non-Affiliated Holders, subject to all
the terms and conditions herein set forth.
ARTICLE 8
COMPENSATION
8.1 Fees and Expenses of the Trustee. Fountain and CanArgo jointly and
severally agree to pay to the Trustee reasonable compensation for all of the
services rendered by it under this trust agreement and will reimburse the
Trustee for all reasonable expenses (including but not limited to taxes,
compensation paid to experts, agents and advisors and travel expenses) and
disbursements, including the cost and expense of any suit or litigation of any
character and any proceedings before any governmental agency reasonably incurred
by the Trustee in connection with its rights and duties under this trust
agreement; provided that Fountain and CanArgo shall have no obligation to
reimburse the Trustee for any expenses or disbursements paid, incurred or
suffered by the Trustee in any suit or litigation in which the Trustee is
determined to have acted in bad faith or with negligence or wilful misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 Indemnification of the Trustee. Fountain and CanArgo jointly and
severally agree to indemnify and hold harmless the Trustee and each of its
directors, officers, employees and agents appointed and acting in accordance
with this trust agreement (collectively, the "Indemnified Parties") against all
claims, losses, damages, costs, penalties, fines and reasonable expenses
(including reasonable expenses of the Trustee's legal counsel) which, without
fraud, negligence, wilful misconduct or bad faith on the part of such
Indemnified Party, may be paid, incurred or suffered by the Indemnified Party by
reason of or as a result of the Trustee's acceptance or administration of the
Trust, its compliance with its duties set forth in this trust agreement, or any
written or oral instructions delivered to the Trustee by Fountain or CanArgo
pursuant hereto. In no case shall Fountain or CanArgo be liable under this
indemnity for any claim against any of the Indemnified Parties if such claim is
incurred or suffered by reason of or as a result of the fraud, negligence,
wilful misconduct or bad faith of an Indemnified Party and unless Fountain and
CanArgo shall be notified by the Trustee of the written assertion of a claim or
of any action commenced against the Indemnified Parties, promptly after any of
the Indemnified Parties shall have received any such written assertion of a
claim or shall have been served with a summons or other first legal process
giving information as to the nature and basis of the claim. Subject to (ii),
below, Fountain and CanArgo shall be entitled to participate at their own
expense in the defense and, if Fountain or CanArgo so elect at any time after
receipt of such notice, any of them may assume the defense of any suit brought
to enforce any such claim. The Trustee shall have the right to employ separate
counsel in any such suit and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of the Trustee unless: (i) the
employment of such counsel has been authorized by Fountain or CanArgo, such
authorization not to be unreasonably withheld; or (ii) the named parties to any
such suit include both the Trustee and Fountain or CanArgo and the Trustee shall
have been advised by counsel acceptable to Fountain or CanArgo that there may be
one or more legal defenses available to the Trustee that are different from or
in addition to those available to Fountain or CanArgo and that an actual or
potential conflict of interest exists (in which case Fountain and CanArgo shall
not have the right to assume the defense of such suit on behalf of the Trustee
but shall be liable to pay the reasonable fees and expenses of counsel for the
Trustee). Such indemnification shall survive the resignation or removal of the
Trustee and the termination of this trust agreement.
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9.2 Limitation of Liability. The Trustee shall not be held liable for
any loss which may occur by reason of depreciation of the value of any part of
the Trust Estate or any loss incurred on any investment of funds pursuant to
this trust agreement, except to the extent that such loss is attributable to the
fraud, negligence, wilful misconduct or bad faith on the part of the Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 Resignation. The Trustee, or any trustee hereafter appointed, may
at any time resign by giving written notice of such resignation to Fountain and
CanArgo specifying the date on which it desires to resign, provided that such
notice shall never be given less than 60 days before such desired resignation
date unless Fountain and CanArgo otherwise agree and provided further that such
resignation shall not take effect until the date of the appointment of a
successor trustee and the acceptance of such appointment by the successor
trustee. Upon receiving such notice of resignation, Fountain and CanArgo shall
promptly appoint a successor trustee by written instrument in duplicate, one
copy of which shall be delivered to the resigning trustee and one copy to the
successor trustee. Failing acceptance by a successor trustee, a successor
trustee may be appointed by an order of the Ontario Court of Justice (General
Division) upon application of one or more of the parties hereto.
10.2 Removal. The Trustee, or any trustee hereafter appointed, may be
removed with or without cause, at any time on 60 days' prior notice by written
instrument executed by Fountain and CanArgo, in duplicate, one copy of which
shall be delivered to the trustee so removed and one copy to the successor
trustee.
10.3 Successor Trustee. Any successor trustee appointed as provided
under this trust agreement shall execute, acknowledge and deliver to Fountain
and CanArgo and to its predecessor trustee an instrument accepting such
appointment. Thereupon the resignation or removal of the predecessor trustee
shall become effective and such successor trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor under this trust agreement, with like effect as
if originally named as trustee in this trust agreement. However, on the written
request of Fountain and CanArgo or of the successor trustee, the trustee ceasing
to act shall, upon payment of any amounts then due it pursuant to the provisions
of this trust agreement, execute and deliver an instrument transferring to such
successor trustee all the rights and powers of the trustee so ceasing to act.
Upon the request of any such successor trustee, Fountain and CanArgo and such
predecessor trustee shall execute any and all instruments in writing for more
fully and certainly vesting in and confirming to such successor trustee all such
rights and powers.
10.4 Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, Fountain and CanArgo shall cause to be
mailed notice of the succession of such trustee hereunder to each Non-Affiliated
Holder specified in a List. If Fountain or CanArgo shall fail to cause such
notice to be mailed within 10 days after acceptance of appointment by the
successor trustee, the successor trustee shall cause such notice to be mailed at
the expense of Fountain and CanArgo.
ARTICLE 11
AMENDMENTS AND SUPPLEMENTAL TRUST AGREEMENTS
11.1 Amendments, Modifications, etc. This trust agreement may not be
amended or modified except by an agreement in writing executed by CanArgo,
Fountain and the Trustee and approved by the Non-Affiliated Holders in
accordance with Section 9.2 of the Exchangeable Share Provisions.
11.2 Ministerial Amendments. Notwithstanding the provisions of section
11.1 hereof, the parties to this trust agreement may in writing, at any time and
from time to time, without the approval of the Non-Affiliated Holders, amend or
modify this trust agreement for the purposes of:
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(a) adding to the covenants of any or all of the parties hereto
for the protection of the Non-Affiliated Holders hereunder;
(b) making such amendments or modifications not inconsistent with
this trust agreement as may be necessary or desirable with respect to
matters or questions which, in the opinion of the Board of Directors and
the Fountain Board of Directors and in the opinion of the Trustee and
its counsel, having in mind the best interests of the Non-Affiliated
Holders as a whole, it may be expedient to make, provided that such
boards of directors and the Trustee and its counsel shall be of the
opinion that such amendments and modifications will not be prejudicial
to the interests of the Non-Affiliated Holders as a whole; or
(c) making such changes or corrections which, on the advice of
counsel to CanArgo, Fountain and the Trustee, are required for the
purpose of curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error, provided
that the Trustee and its counsel and the Board of Directors and the
board of directors of Fountain shall be of the opinion that such changes
or corrections will not be prejudicial to the interests of the
Non-Affiliated Holders as a whole.
11.3 Meeting to Consider Amendments. CanArgo, at the request of
Fountain, shall call a meeting or meetings of the Non-Affiliated Holders for the
purpose of considering any proposed amendment or modification requiring approval
pursuant hereto. Any such meeting or meetings shall be called and held in
accordance with the by-laws of CanArgo, the Exchangeable Share Provisions and
all applicable laws.
11.4 Changes in Capital of Fountain and CanArgo. At all times after the
occurrence of any event effected pursuant to section 6.7 of this trust
agreement, as a result of which either Fountain Common Stock or the Exchangeable
Shares or both are in any way changed, this trust agreement shall forthwith be
amended and modified as necessary in order that it shall apply with full force
and effect, mutatis mutandis, to all new securities into which Fountain Common
Stock or the Exchangeable Shares or both are so changed and the parties hereto
shall execute and deliver a supplemental trust agreement giving effect to and
evidencing such necessary amendments and modifications.
12.5 Execution of Supplemental Trust Agreements. No amendment to or
modification or waiver of any of the provisions of this trust agreement
otherwise permitted hereunder shall be effective unless made in writing and
signed by all of the parties hereto. From time to time CanArgo (when authorized
by a resolution of its Board of Directors), Fountain (when authorized by a
resolution of the Fountain Board of Directors) and the Trustee may, subject to
the provisions of these presents, and they shall, when so directed by these
presents, execute and deliver by their proper officers, trust agreements or
other instruments supplemental hereto, which thereafter shall form part hereof,
for any one or more of the following purposes:
(a) evidencing the succession of any successor trustee in
accordance with the provisions of Article 10;
(b) making any additions to, deletions from or alterations of the
provisions of this trust agreement or the Voting Rights or the Exchange
Right which, in the opinion of the Trustee and its counsel, will not be
prejudicial to the interests of the Non-Affiliated Holders as a whole or
are in the opinion of counsel to the Trustee necessary or advisable in
order to incorporate, reflect or comply with any legislation the
provisions of which apply to Fountain, CanArgo, the Trustee or this
trust agreement; and
(c) for any other purposes not inconsistent with the provisions
of this trust agreement, including without limitation to make or
evidence any amendment or modification to this trust agreement as
contemplated hereby, provided that, in the opinion of the Trustee and
its counsel, the rights of the Trustee and the Non-Affiliated Holders as
a whole will not be prejudiced thereby.
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ARTICLE 13
TERMINATION
13.1 Term. The Trust created by this trust agreement shall continue
until the earliest to occur of the following events:
(a) no outstanding Exchangeable Shares are held by any
Non-Affiliated Holder;
(b) each of CanArgo and Fountain elects in writing to terminate
the Trust and such termination is approved by the Non-Affiliated Holders
of the Exchangeable Shares in accordance with Section 9.2 of the
Exchangeable Share Provisions; and
(c) 21 years after the death of the last survivor of the
descendants of His Majesty King George Vl of the United Kingdom of Great
Britain and Northern Ireland living on the date of the creation of the
Trust.
13.2 Survival of Agreement. This trust agreement shall survive any
termination of the Trust and shall continue until there are no Exchangeable
Shares outstanding held by any Non-Affiliated Holder; provided, however, that
the provisions of Articles 8 and 9 shall survive any such termination of this
trust agreement.
ARTICLE 14
GENERAL
14.1 Severability. If any provision of this trust agreement is held to
be invalid, illegal or unenforceable, the validity, legality or enforceability
of the remainder of this trust agreement shall not in any way be affected or
impaired thereby and this trust agreement shall be carried out as nearly as
possible in accordance with its original terms and conditions.
14.2 Enurement. This trust agreement shall be binding upon and enure to
the benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Non-Affiliated Holders.
14.3 Notices to Parties. All notices and other communications between
the parties hereunder shall be in writing and shall be deemed to have been given
if delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in like
notice):
(a) if to Fountain at:
(b) if to CanArgo at:
(c) if to the Trustee at:
Any notice or other communication given personally shall be deemed to
have been given and received upon delivery thereof and if given by telecopy
shall be deemed to have been given and received on the date of receipt thereof
unless such day is not a Business Day in which case it shall be deemed to have
been given and received upon the immediately following Business Day.
14.4 Notice of Non-Affiliated Holders. Any and all notices to be given
and any documents to be sent to any Non-Affiliated Holders may be given or sent
to the address of such holder shown on the register of holders of Exchangeable
Shares in any manner permitted by the Business Corporations Act (Ontario) from
time to time in force in respect of notices to shareholders and shall be deemed
to be received (if given or sent in such manner) at the time specified in such
Act, the provisions of which Act shall apply mutatis mutandis to notices or
documents as aforesaid sent to such holders.
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14.5 Risk of Payments by Post. Whenever payments are to be made or
documents are to be sent to any Non-Affiliated Holder by the Trustee or by
CanArgo, Fountain or by such Non-Affiliated Holder to the Trustee or to Fountain
or CanArgo, the making of such payment or sending of such document sent through
the post shall be at the risk of CanArgo, in the case of payments made or
documents sent by the Trustee or CanArgo or Fountain and the Non-Affiliated
Holder, in the case of payments made or documents sent by the Non-Affiliated
Holder.
14.6 Counterparts. This trust agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
14.7 Jurisdiction. This trust agreement shall be construed and enforced
in accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
14.8 Attornment. Fountain agrees that any action or proceeding arising
out of or relating to this trust agreement may be instituted in the courts of
Ontario, waives any objection which it may have now or hereafter to the venue of
any such action or proceeding, irrevocably submits to the jurisdiction of the
said courts in any such action or proceeding, agrees to be bound by any judgment
of the said courts and agrees not to seek, and hereby waives, any review of the
merits of any such judgment by the courts of any other jurisdiction and hereby
appoints CanArgo at its registered office in the Province of Ontario as its
attorney for service of process.
<PAGE> 313
IN WITNESS WHEREOF, the parties hereto have caused this trust agreement
to be duly executed as of the date first above written.
FOUNTAIN OIL INCORPORATED
By:_____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
CANARGO ENERGY INC.
By:_____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
MONTREAL TRUST COMPANY OF CANADA
By:_____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
<PAGE> 314
ANNEX H
[Letterhead of CIBC Oppenheimer Corp.]
March 13, 1998
PERSONAL AND CONFIDENTIAL
The Board of Directors
Fountain Oil Incorporated
Skysstasjon II B
P.O. Box 87
1371 Asker, Norway
Gentlemen:
You have requested CIBC Oppenheimer Corp. ("CIBC Oppenheimer") to render
an opinion (the "Opinion") as to the fairness to Fountain Oil Incorporated
("Fountain" or the "Company"), from a financial point of view, of the Offer (as
defined below) provided for in the Plan of Arrangement (the "Plan of
Arrangement") proposed under section 182 of the Business Corporations Act
(Ontario), as amended, providing for the reorganization of the capital of
CanArgo Energy Inc. ("CanArgo"), and the Combination Agreement as of February 2,
1998 (the "Combination Agreement"), by and among Fountain and CanArgo.
Pursuant to the Plan of Arrangement, CanArgo will, among other things,
(i) issue 100 shares of common stock of CanArgo ("CanArgo Common Stock") to
Fountain in exchange for a cash payment of $160 by Fountain and (ii) each
existing share of CanArgo Common Stock (other than shares of CanArgo Common
Stock held by holders who have properly exercised their rights of dissent and
shares held by Fountain) will be exchanged for 1.6 shares (subject to adjustment
for dilution) of a new class of Exchangeable Shares of CanArgo (the
"Exchangeable Shares"). The Exchangeable Shares, by their terms, will be
exchangeable on a share-for-share basis into shares of common stock, par value
$0.10 per share, of Fountain ("Fountain Common Stock"). Upon the consummation of
the transactions contemplated by the Plan of Arrangement and the Combination
Agreement, CanArgo will become a wholly owned subsidiary of Fountain. The offer
to (i) pay $160 in exchange for 100 shares of CanArgo Common Stock and (ii)
exchange each outstanding share of CanArgo Common Stock (other shares held by
Fountain) for 1.6 Exchangeable Shares is referred to herein as the "Offer."
In arriving at our Opinion, we reviewed the latest draft of the Plan of
Arrangement and the definitive Combination Agreement and held discussions with
certain senior officers, directors and other representatives and advisors of the
Company and CanArgo concerning their respective operations, historic financial
performance and prospects. We examined certain publicly available business and
financial information relating to the Company and CanArgo as well as certain
financial forecasts, reserve reports and other data which were provided to us by
senior management of Fountain and CanArgo and their respective advisors. We
reviewed the Offer and related financial terms set forth in the Plan of
Arrangement and the Combination Agreement in relation to, among other things,
the current and historic market prices and related trading volumes of Fountain's
and CanArgo's common stock, the historic and projected earnings and cash flow of
the Company and CanArgo, and the capitalization and financial condition of the
Company and CanArgo. We also considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which we
considered comparable to the transaction set forth in the Plan of Arrangement
and the Combination Agreement, and we analyzed certain financial, stock market
and other publicly available information relating to the business of other
companies whose operations we considered comparable to those of the Company and
CanArgo. With respect to CanArgo's reserve estimates, predicted production
profiles, estimated exploration and development drilling success and related
information furnished to us by, and discussed with us by CanArgo, we have
assumed that this information has been reasonably prepared and reflects the best
currently available judgment of CanArgo's management as to CanArgo's reserve
estimates, predicted production profiles and exploration and drilling success
and related information, as the case may be, and we have relied, with your
consent, upon the foregoing in preparing our Opinion. In addition to the
foregoing, we
<PAGE> 315
Fountian Oil Incorporated
March 13, 1998
Page 2
conducted such other analyses and examinations and considered such other
financial, economic, market and other criteria as we deemed necessary to arrive
at the Opinion.
In rendering our Opinion, we have relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
financial and other information available to us from public sources and provided
to us by Fountain, CanArgo and their representatives. With respect to financial
forecasts and other information so provided or otherwise discussed with us by
Fountain and CanArgo, we assumed with the consent of Fountain's Board of
Directors, that such forecasts and other information were reasonably prepared to
reflect the best currently available estimates and good faith judgments of the
Company and CanArgo's management as to their respective companies' expected
fixture financial performance. Other than the reserve report prepared for
CanArgo by AMH Group Ltd. (the "AMH Group"), as of January 1, 1998, and its
associated addendum dated March 6, 1998, we have not been provided with, nor
have we made any, independent evaluations or appraisals of the Company's or
CanArgo's assets or liabilities (contingent or otherwise). With respect to such
reserve information, we are not experts in the evaluation of oil and gas
properties and, with your consent, have relied without independent verification
solely upon the reserve reports and internal estimates prepared by the AMH Group
and senior management of CanArgo. In addition, we have not made a physical
inspection of Fountain's properties or other assets and have made only a limited
inspection of CanArgo's properties and other assets. Our Opinion is necessarily
based upon financial, economic, stock market and other conditions and
circumstances existing and disclosed to us as of the date hereof and changes in
such conditions and circumstances would require the re-evaluation of this
Opinion. We disclaim any obligations to update, revise or reaffirm this Opinion.
We have assumed that in the course of obtaining the necessary regulatory or
other consents or approvals (contractual or otherwise) for the consummation of
the transactions contemplated by the Plan of Arrangement and the Combination
Agreement, no restrictions, including any divestiture requirements or amendments
or modifications, will be imposed that will have a material adverse effect on
the contemplated benefits of such transactions, CIBC Oppenheimer has been
engaged to render financial advisory services to Fountain in connection with the
transaction and activities leading up to the execution of the Plan of
Arrangement and the Combination Agreement. CIBC Oppenheimer will receive a
separate fee for both the transaction and the delivery of this Opinion with the
payment of the former contingent upon the consummation of the transaction. In
the ordinary course of our business, we and our affiliates may actively trade
the securities of Fountain (the "Security"), for our own account or for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in the Security.
Our advisory services and the Opinion expressed herein are provided for
the use of Fountain's Board of Directors in its evaluation of the Plan of
Arrangement and the Combination Agreement. The Opinion may not be published or
otherwise used or referred to, in whole or in part, nor shall any public
reference to CIBC Oppenheimer be made without our prior written consent;
provided that this Opinion may be included in its entirety in any filing made by
Fountain or CanArgo with the Securities and Exchange Commission with respect to
the transactions contemplated by the Plan of Arrangement and the Combination
Agreement. This Opinion does not constitute a recommendation to any stockholder
of the Company as to how such stockholder should vote with respect to the
transactions contemplated by or related to the Plan of Arrangement and the
Combination Agreement.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Offer is fair from a
financial point of view, to Fountain.
Very truly yours,
/s/ CIBC Oppenheimer Corp.
CIBC OPPENHEIMER CORP.
<PAGE> 316
ANNEX I
[Letterhead of Orkla Finans (Fondsmegling) A.S.]
To the Board of Directors of
Fountain Oil Incorporated
Oslo, March 26, 1998
FAIRNESS OPINION IN CONNECTION WITH THE PROPOSED BUSINESS COMBINATION WITH
CANARGO ENERGY INC.
You have requested Orkla Finans (Fondsmegling) A.S. ("Orkla Finans") to
render an opinion (the "Opinion") as to the fairness to Fountain Oil
Incorporated ("Fountain" or the "Company"), from a financial point of view, of
the Offer (as defined below) provided for in the Plan of Arrangement (the "Plan
of Arrangement") proposed under section 182 of the Business Corporations Act
(Ontario), as amended, providing for the reorganization of the capital of
CanArgo Energy Inc. ("CanArgo"), and the Combination Agreement as amended and
restated as of February 2, 1998 (the "Combination Agreement"), by and among
Fountain and CanArgo.
Pursuant to the Plan of Arrangement, CanArgo will, among other things,
(i) issue 100 shares of common stock of CanArgo ("CanArgo Common Stock") to
Fountain in exchange for a cash payment of $160 by Fountain and (ii) each
existing share of CanArgo Common Stock (other than shares of CanArgo Common
Stock held by holders who have properly exercised their rights of dissent and
shares held by Fountain) will be exchanged for 1.6 shares (subject to adjustment
for dilution) of a new class of Exchangeable Shares of CanArgo (the
"Exchangeable Shares"). The Exchangeable Shares, by their terms, will be
exchangeable on a share-for-share basis into shares of common stock, par value
$0.10 per share, of Fountain ("Fountain Common Stock"). Upon the consummation of
the transactions contemplated by the Plan of Arrangement and the Combination
Agreement, CanArgo will become a subsidiary of Fountain, which will own all the
ordinary voting stock of CanArgo. The offer to (i) pay $160 in exchange for 100
shares of CanArgo Common Stock and (ii) exchange each outstanding share of
CanArgo Common Stock (other than shares held by Fountain) for 1.6 Exchangeable
Shares is referred to herein as the "Offer."
Our evaluation is primarily based on the following information:
1. Public available information pertaining to CanArgo and Fountain such as
annual reports, interim reports, reserve reports and other data which
were provided to us by senior management of Fountain and CanArgo and
their respective advisors.
2. The Plan of Arrangement and the Combination Agreement.
3. Discussions with CanArgo's and Fountain's management and directors
regarding related topics such as the operations of the company, cash
flow development, budgets, financial standing, strategy and business
prospects.
4. Information regarding historic price development in CanArgo and Fountain
shares.
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5. Discussions with representatives from Fountain's management and
directors and other advisors participating in the due diligence process
regarding CanArgo's balance sheet, business outlook, possible synergies
related to the business combination, and financial standing.
We have also considered, to the extent publicly available, the financial
terms of certain other similar transactions recently effected which we
considered comparable to the transaction set forth in the Plan of Arrangement
and the Combination Agreement, and we analyzed certain financial, stock market
and other publicly available information relating to the business of other
companies whose operations we considered comparable to those of the Company and
CanArgo. With respect to CanArgo's reserve estimates, predicted production
profiles, estimated exploration and development drilling success and related
information furnished to us by, and discussed with us by CanArgo, we have
assumed that this information has been reasonably prepared and reflects the best
currently available judgment of CanArgo's management as to CanArgo's reserve
estimated, predicted production profiles and exploration and drilling success
and related information, as the case may be, and we have relied, with your
consent, upon the foregoing in preparing our Opinion. In addition to the
foregoing, we conducted such other analyses and examinations and considered such
other financial, economic, market and other criteria as we deemed necessary to
arrive at the Opinion.
We have assumed that all information regarding Fountain and CanArgo
presented to us from the senior management of Fountain and CanArgo and their
respective advisors is complete and accurate, without having verified this
through independent investigations or having the information verified or
confirmed by any independent third party. We have as yet had no access to any
legal or financial accounting due diligence reports of the companies. We have
only been able to have limited discussions with the management of CanArgo. We
have further assumed the accuracy of all representations and warranties made by
Fountain and CanArgo in the Combination Agreement.
Our opinion is necessarily based upon financial, economic, stock market
and other conditions and circumstances existing and disclosed to us as of the
date hereof and changes in such conditions and circumstances would require the
re-evaluation of this Opinion. We disclaim any obligations to update, revise or
reaffirm this Opinion. We have assumed that in the course of obtaining the
necessary regulatory and other consents or approvals (contractual or otherwise)
for the consummation of the transactions contemplated by the Plan of Arrangement
and the Combination Agreement, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of such transactions.
Orkla Finans has been engaged to render financial advisory services to
Fountain in connection with the transaction and activities leading up to the
execution of the Plan of Arrangement and the Combination Agreement. In the
ordinary courses of our business, we and our affiliates may actively trade the
securities of Fountain (the "Security"), for our own account or for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in the Security.
It is understood that this letter is for the information of the Board of
Directors of Fountain only and shall not be referred to or discussed with or
relied upon by any third party or used for any other purpose without our prior
written consent. The Opinion may not be published or otherwise used or referred
to, in whole or in part, nor shall any public reference to Orkla Finans be made
without prior written consent, provided that this Opinion may be included in its
entirety in any filing made by Fountain with the Securities and Exchange
Commission with respect to the transactions contemplated by or related to the
Plan of Arrangement and the Combination Agreement.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Offer is fair, from a
financial point of view, to Fountain.
This letter reflects our assessment of relevant facts and circumstances
based on certain assumptions as set out above, but does not, and is not,
intended to constitute any form of guarantee or warranty as to the future
performance of CanArgo and/or effect of the proposed business combination of
CanArgo and Fountain's joint
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future earnings or cash flow per share. This Opinion does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the transaction contemplated by or related to the
Plan of Arrangement and the Combination Agreement.
Yours sincerely,
for Orkla Finans (Fondsmegling) A.S.
/s/ Inge K. Hansen
Inge K. Hansen
Managing Director
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<PAGE> 319
ANNEX J
[Letterhead of Roche Securities Limited]
CanArgo Energy Inc.
Suite 1580 Guinness House
727 - 7th Avenue S.W.
Calgary, Alberta
T2P 0Z5 27 February 1998
ATTENTION: MR. MICHAEL R. BINNION
FINANCE DIRECTOR
Dear Sirs:
RE: PROPOSED BUSINESS COMBINATION -
CANARGO ENERGY INC. AND FOUNTAIN OIL INCORPORATED
We understand that CanArgo Energy Inc. ("CanArgo") has entered into a business
combination agreement dated 2 February 1998 (the "Agreement") with Fountain Oil
Incorporated ("Fountain") which contemplates an arrangement (the "Arrangement")
whereby each holder of common shares of CanArgo (the "CanArgo Common Shares")
will receive 1.6 exchangeable shares of CanArgo (the "Exchangeable Shares") for
each CanArgo Common Share held (the "Exchange Ratio"). The Exchangeable Shares
are exchangeable at the option of the holder for common stock of Fountain (the
"Fountain Common Stock") on a share-for-share basis. The terms and conditions of
the Arrangement (the "Plan of Arrangement") are more fully set out in the Joint
Management Information Circular and Proxy Statement dated 27 February 1998 (the
"Joint Proxy Circular"). All capitalized terms not otherwise defined herein
shall have the meaning ascribed to such terms in the Joint Proxy Circular.
We further understand that the board of directors of CanArgo has agreed to
submit the Plan of Arrangement and other transactions contemplated in the
Agreement to its shareholders for approval.
ENGAGEMENT OF ROCHE SECURITIES LIMITED
In connection with the Plan of Arrangement, Roche Securities Limited has been
engaged by the board of directors of CanArgo to prepare a fairness opinion (the
"Fairness Opinion") as to whether the Exchange Ratio is fair and reasonable,
from a financial point of view, to the shareholders of CanArgo.
QUALIFICATIONS OF ROCHE SECURITIES LIMITED
Roche Securities Limited is a member of The Alberta Stock Exchange, the
Investment Dealers Association of Canada and the Canadian Investor Protection
Fund. Roche Securities was founded by D. Francis Roche in January 1993. The firm
is an independent, full service investment dealer headquartered in Edmonton,
Alberta that specializes in providing investment banking services to emerging
growth companies in Canada and abroad.
In addition to underwriting both private and public offerings of debt and equity
securities, Roche Securities offers a full range of corporate finance advisory
services, including advising on mergers & acquisitions, business valuations
<PAGE> 320
and corporate restructurings. Roche Securities has acted as either lead agent or
co-agent on several financings for junior oil & gas companies with major
properties in Alberta, the former Soviet Union and Romania.
RELATIONSHIP OF ROCHE SECURITIES LIMITED WITH INTERESTED PARTIES
Roche Securities is not an insider, associate or affiliate of either CanArgo or
Fountain and has not previously provided financial advisory services or
participated in any financings for either CanArgo or Fountain. The fee payable
to Roche Securities with respect to the provision of this Fairness Opinion is a
fixed amount and is not contingent on any event.
Roche Securities acts as trader and dealer, both as principal and as agent, in
all major North American financial markets and as such has had, or may have,
positions in the securities of CanArgo or Fountain from time to time and has
executed, or may execute, positions in the securities of such corporations for
which it receives compensation. In addition, as an investment dealer, Roche
Securities conducts research on securities and may, in the ordinary course of
its business, be expected to provide research reports and investment advice to
its clients on investment matters, including the securities of CanArgo and
Fountain. To-date, Roche Securities has never undertaken a research report on
either CanArgo or Fountain.
There are no understandings or agreements between Roche Securities and either of
CanArgo and Fountain with respect to any future business dealings.
SCOPE OF REVIEW CONDUCTED BY ROCHE SECURITIES LIMITED
For the purpose of preparing this Fairness Opinion, we have recently analyzed
certain publicly available and confidential financial, operational and other
information relating to CanArgo and Fountain, including information derived from
discussions with members of the management and the independent auditors, legal
counsel and engineering consultants of such companies. Except as expressly
described herein, Roche Securities has not conducted any independent
investigations to verify the accuracy and completeness thereof. In addition,
Roche Securities has not visited any of the major properties of CanArgo or
Fountain and makes no representations to that effect.
In carrying out this engagement and in formulating our opinion, we have reviewed
and relied upon, among other things:
IN THE CASE OF CANARGO:
1. an Offer and Circular dated 5 June 1997 in connection with the reverse
take-over of CanArgo Ltd. by Money Works Inc.;
2. an Offering Memorandum dated 31 October 1997 in connection with a private
placement of special warrants;
3. the Management Discussion and Analysis for the years ended 31 December 1997
and 31 December 1996 together with the audited financial statements for the
years ended 31 December 1997 and 31 December 1996;
4. the unaudited financial statements for the three month period ended March
31, 1997, the six month period ended June 30, 1997 and the nine month
period ended September 30, 1997;
5. the report of AMH Group Ltd., independent petroleum consultants, dated 28
January 1998, evaluating the Ninotsminda Oil Interests owned by CanArgo as
at 1 January 1998;
6. the Production Sharing Contract dated 15 February 1996 between Ninotsminda
Oil Company Limited, a Cyprus company in which CanArgo holds a 55.9%
interest, and Georgian Oil, a Georgian state corporation;
7. the Production Sharing Contract between CanArgo and Georgian Oil, a
Georgian state corporation, for the right to negotiate a Production Sharing
Contract covering the Nazvrevi and Block XIII areas of east Georgia,
adjacent to the Ninotsminda and West Rustavi fields;
8. a Shareholders' Agreement dated 17 March 1996 among Ninotsminda Oil Company
and its two shareholders, CanArgo and JKX Nederland B.V.;
9. a solicitor's opinion dated 2 October 1997 concerning the lawsuit of JKX
Nederland B.V. against CanArgo;
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<PAGE> 321
10. a Joint Venture Agreement among CanArgo, Terrenex Acquisition Corporation
and Creative Energy Systems Inc. for a pilot project to provide independent
electric power production in the Republic of Georgia;
11. a mandate letter dated 28 July 1997 between Ninotsminda Oil Company and
International Finance Corporation in relation to a proposed debt financing
of up to US$25 million for the development of the Ninotsminda oil field
project in the Republic of Georgia;
12. the summary budget and forecast for 1998 prepared by the management of
CanArgo;
13. CanArgo's November 1997 corporate presentation;
14. certain other confidential financial, operational, legal, corporate and
other information prepared by the management of CanArgo; and
15. a letter of representation dated 27 February 1998 from certain senior
officers of CanArgo.
IN THE CASE OF FOUNTAIN:
1. the Management Discussion and Analysis for the years ended 31 December 1997
and 31 December 1996 together with the audited financial statements for the
years ended 31 December 1997 and 31 December 1996;
2. the Annual Reports for the years ended 1996, 1995 and 1994 together with
the audited financial statements for the years ended 1996, 1995 and 1994.
3. the interim report and unaudited financial statements for the three month
period ended March 31, 1997, the six month period ended June 30, 1997 and
the nine month period ended September 30, 1997;
4. a Confidential Memorandum prepared by Oppenheimer & Co. Inc. and Orkla
Finans (Fondsmegling) A.S. in October 1997
5. the Concession Agreement between Kashtan Petroleum Ltd., a company in which
Fountain holds an effective 40.5% ownership interest, and the Government of
Ukraine;
6. a Joint Venture Agreement dated 17 May 1996 between Fountain and Albpetrol,
the Albanian state oil company;
7. the Concession Agreement dated 12 January 1995 between Intergas JSC, a
company in which Fountain owns 37% of the issued and outstanding common
stock, and the Government of Russia;
8. a Joint Venture Agreement dated 15 November 1996 between Fountain and
Ukranafta, the Ukrainian state oil company;
9. the report of R.T. Garcia & Co. Inc., independent petroleum consultants,
evaluating the interests of Fountain in West Texas, U.S.A. as at 31 August
1995;
10. the report of Reliance Engineering Group Ltd., independent petroleum
consultants, evaluating the interests of Fountain in Sylvan Lake, Alberta,
Canada as at 18 November 1996;
11. the report of R.T. Garcia & Co. Inc., independent petroleum consultants,
evaluating the interests of Fountain in the Stynawske field, Ukraine as at
31 December 1995;
12. an October 1994 report of Gaffney, Cline & Associates assessing the
redevelopment options for the Stynawske oilfield;
13. a report of Roll 'n Oilfield Industries Ltd. dated 26 January 1998
appraising the value of Fountain oilfield rigs and related equipment;
14. a license agreement dated 27 October 1986 and amended on 15 May 1989 and 31
July 1995 with Illinois Institute of Technology Research concerning a
proprietary technology for thermal stimulation of oil wells by electric
heating;
15. the summary budget and forecast for 1998 prepared by the management of
Fountain;
16. certain other confidential financial, operational, legal, corporate and
other information prepared by the management of Fountain; and
17. a letter of representation dated 27 February 1998 from certain senior
officers of Fountain.
IN ADDITION TO THE INFORMATION ABOVE, WE HAVE:
1. reviewed the Combination Agreement dated 2 February 1998 between Fountain
and CanArgo;
2. reviewed and relied upon the Joint Proxy Circular dated 27 February 1998;
3. reviewed the unaudited pro forma consolidated statement of income for the
combined entity for the periods ended 31 December 1995, 1996 and 1997;
4. reviewed the unaudited pro forma consolidated balance sheet for the
combined entity as of 31 December 1997;
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5. conducted, and relied upon, various discussions with management of CanArgo
and Fountain with respect to, among other things, the business, financial
position, operations, quality of assets and future potential of CanArgo and
Fountain, including their views as to the nature of CanArgo's and
Fountain's respective exploration, development, exploitation and
acquisition programs;
6. reviewed certain publicly available information pertaining to current and
expected future oil & gas prices and other economic factors;
7. reviewed certain publicly available information pertaining to current and
expected political and economic conditions in each of the countries in
which CanArgo and Fountain operate;
8. discussed certain matters with the legal advisors, auditors and various
consultants of CanArgo and Fountain;
9. reviewed publicly available information concerning the trading of, and the
trading market for, the CanArgo Common Shares and the Fountain Common
Stock, as well as the common shares of certain other public oil & gas
companies that we believe to be comparable to CanArgo and Fountain;
10. reviewed the operating and financial performance and business
characteristics of CanArgo and Fountain relative to the performance and
characteristics of other oil & gas companies comparable to CanArgo and
Fountain in terms of size and operations; and
11. reviewed other financial, market and industry information and carried out
such other analyses and investigations as we considered appropriate in the
circumstances.
Roche Securities conducted such analyses, investigations, research and testing
of assumptions as were deemed by us to be necessary in the circumstances. Roche
Securities was granted access by CanArgo and Fountain to their senior management
groups and consultants and we were not, to the best of our knowledge, denied any
type of material information or access which we requested.
METHODOLOGICAL BASIS OF THE FAIRNESS OPINION
In preparing this Fairness Opinion, we performed the following quantitative and
qualitative assessments:
1. Net asset value considerations: We made an assessment of each major class
of assets and liabilities in the manner we deemed most appropriate to the
nature of the particular asset or liability. This included, as appropriate
and available: an analysis of financial assets and liabilities; an
examination of the evaluations of the oil & gas reserves of CanArgo and
Fountain (and the commodity price, interest rate and exchange rate
forecasts applied in such evaluations); an analysis of undeveloped land
holdings; a comparison of cash flows projected in the reserve report with
recent production performance; an assessment of the potential marketability
and trading value of major properties; an analysis of the concentration of
values in major properties; and further consideration of additional
material factors such as operatorship, the size of working interests, the
geographic focus of properties, general and administrative expenses
necessary to produce reserves, the capital expenditures required to deplete
reserves, and future reclamation and site restoration costs.
2. Market trading price analysis: We performed an analysis of the stock market
trading prices and trading volumes of the CanArgo Common Shares and the
Fountain Common Stock at different points in time.
3. Cash flow considerations: We performed an analysis of current and projected
cash flows for CanArgo and Fountain. We also analyzed the sustainability of
these cash flow multiples, given a variety of factors characterizing
CanArgo and Fountain, such as historical and projected production growth,
financial leverage, market capitalization, reserve life indices, royalty
rates, production costs, general and administrative costs and other
factors. We applied market multiples, based on a comparison of cash flow
multiples with those of an industry peer group, to the cash flows of
CanArgo and Fountain.
4. Other qualitative factors: In addition to the above, we are of the opinion
that the combination of the businesses of CanArgo and Fountain through the
Plan of Arrangement will result in the CanArgo shareholders participating
in an entity that will have:
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(a) a larger market capitalization and market float than CanArgo itself;
(b) a larger and more liquid public market for its shares;
(c) a potentially larger asset and cash flow base with greater financial
resources, which is strategically, financially and operationally
advantageous for CanArgo to undertake more significant oil & gas
exploration and development programs and to compete in the business of
exploring for, developing and producing oil and natural gas primarily
in Albania, Georgia and Ukraine and other east European countries and
in North America;
(d) an ability to realize certain administrative efficiencies and overhead
savings from the completion of the integration of CanArgo and Fountain
as a result of the Plan of Arrangement;
(e) a greater ability for CanArgo to readily capture international
concessions and access financings of such; and
(f) other business alternatives for the shareholders of CanArgo.
Although, in arriving at our opinion, we have reviewed financial and other data
and performed financial tests, calculations and estimates as we considered
appropriate and necessary in the circumstances, we have not been engaged to
perform a formal valuation of CanArgo or Fountain or any of their assets,
liabilities or securities and this Fairness Opinion should not be construed as
such.
Roche Securities believes that our analysis must be considered as a whole and
that selecting portions of our analysis and of the factors considered by us,
without considering all factors and analyses together, could create a misleading
view of the process employed and that our analysis is not necessarily amenable
to partial analysis or summary description. Any attempt to do so could lead to
undue emphasis on any particular factor or analysis.
ASSUMPTIONS AND LIMITATIONS
This Fairness Opinion is rendered on the basis of securities market, economic
and general business and financial conditions prevailing as at the date hereof
and the conditions and prospects, financial and otherwise, of CanArgo and
Fountain as reflected in the information and documents reviewed by us and as
represented to us in our discussions with the management of CanArgo and Fountain
and their advisors and consultants. In our analyses, numerous assumptions were
made with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of any party
involved.
We have assumed and relied upon the accuracy, completeness and fair presentation
of all the financial and other information, data, advice, material,
representations and opinions obtained by us from public sources or received from
CanArgo and Fountain and have not attempted to independently verify the accuracy
or completeness of any such information, data, advice, material, representations
or opinions. We have been advised by management of CanArgo and Fountain that no
undisclosed changes have occurred in the facts provided or referred to in any
such information subsequent to the date thereof which would have a material
effect on our opinion.
On 25 February 1998, we received notice of a civil claim filed in Texas on 20
February 1998 by Zhoda Corporation ("Zhoda"). We have not seen copies of the
pleadings and have not received a legal opinion as to Fountain's legal exposure
with respect to such claim. We are advised that the pleadings filed by Zhoda
claim damages in an amount of approximately US$7,000,000 plus costs and relate
to Fountain's participation in the Lelyaky field project in Ukraine. We are
advised by management and assume for the purposes of this opinion that there is
no exposure to Fountain for material costs or damages associated with the claim
by Zhoda.
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In addition, we are advised by management of Fountain and have assumed that
there are no additional material costs or damages to be incurred by Fountain in
connection with the abandonment or windup of the Maykop field project in Russia.
FAIRNESS OPINION AND RELIANCE
BASED UPON OUR ANALYSIS AND SUBJECT TO THE FOREGOING, WE ARE OF THE OPINION THAT
THE EXCHANGE RATIO IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO THE SHAREHOLDERS
OF CANARGO.
This Fairness Opinion may be relied upon by the board of directors of CanArgo
for the purpose of considering the Arrangement and its recommendation to the
shareholders of CanArgo with respect to the Arrangement, but may not be used or
relied upon by any other person without our express prior written consent.
Yours truly,
/s/ Roche Securities Limited
Roche Securities Limited
<PAGE> 325
ANNEX K
SECTION 184 OF THE BUSINESS CORPORATIONS ACT (ALBERTA),
S.A. 1981, C. B-15, AS AMENDED
184 (1) Subject to sections 185 and 234, a holder of shares of any class of a
corporation may dissent if the corporation resolves to,
(a) amend its articles under section 167 or 168 to add, change or
remove any provisions restricting or constraining the issue or
transfer of shares of that class,
(b) amend its articles under section 167 to add, change or remove
any restrictions on the business or businesses that the
corporation may carry on,
(c) amalgamate with another corporation, otherwise than under
section 178 or 180.1,
(d) be continued under the laws of another jurisdiction under
section 182, or
(e) sell, lease or exchange all or substantially all its property
under section 183.
(2) A holder of shares of any class or series of shares entitled to vote
under section 170, other than section 170(1)(a), may dissent if the
corporation resolves to amend its articles in a manner described in that
section.
(3) In addition to any other right he may have, but subject to subsection
(20), a shareholder entitled to dissent under this section and who
complies with this section is entitled to be paid by the corporation the
fair value of the shares held by him in respect of which he dissents,
determined as of the close of business on the last business day before
the day on which the resolution from which he dissents was adopted.
(4) A dissenting shareholder may only claim under this section with respect
to all the shares of a class held by him or on behalf of any one
beneficial owner and registered in the name of the dissenting
shareholder.
(5) A dissenting shareholder shall send to the corporation a written
objection to a resolution referred to in subsection (1) or (2),
(a) at or before any meeting of shareholders at which the resolution
is to be voted on, or
(b) if the corporation did not send notice to the shareholder of the
purpose of the meeting or of his right to dissent, within a
reasonable time after he learns that the resolution was adopted
and of his right to dissent.
(6) An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2),
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the corporation
under subsection (5),
to fix the fair value in accordance with subsection (3) of the shares of
a shareholder who dissents under this section.
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(7) If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting shareholder a
written offer to pay him an amount considered by the directors to be the
fair value of the shares.
(8) Unless the Court otherwise orders, an offer referred to in subsection
(7) shall be sent to each dissenting shareholder,
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of
the originating notice, if a shareholder is the applicant.
(9) Every offer made under subsection (7) shall,
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair
value was determined.
(10) A dissenting shareholder may make an agreement with the corporation for
the purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time
before the Court pronounces an order fixing the fair value of the
shares.
(11) A dissenting shareholder,
(a) is not required to give security for costs in respect of an
application under subsection (6), and
(b) except in special circumstances shall not be required to pay the
costs of the application or appraisal.
(12) In connection with an application under subsection (6), the Court may
give directions for,
(a) joining as parties all dissenting shareholders whose shares have
not been purchased by the corporation and for the representation
of dissenting shareholders who, in the opinion of the Court, are
in need of representation,
(b) the trial of issues and interlocutory matters, including
pleadings and examinations for discovery,
(c) the payment to the shareholder of all or part of the sum offered
by the corporation for the shares,
(d) the deposit of the share certificates with the Court or with the
corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and the
procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with
subsection (3) of all dissenting shareholders who are parties to
the application,
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(b) giving judgment in that amount against the corporation and in
favour of each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that
amount to a shareholder.
(14) On,
(a) the action approved by the resolution from which the shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting shareholder as to the payment to
be made by the corporation for his shares, whether by the
acceptance of the corporation's offer under subsection (7) or
otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of his shares
in the amount agreed to between the corporation and the shareholder or
in the amount of the judgment, as the case may be.
(15) Subsection (14)(a) does not apply to a shareholder referred to in
subsection (5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the shareholder may withdraw his dissent, or
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be
discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest on
the amount payable to each dissenting shareholder, from the date on
which the shareholder ceases to have any rights as a shareholder by
reason of subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the
corporation as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to pay
dissenting shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favour of a dissenting
shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation
within 30 days after receiving the notice under subsection (18), may
withdraw his notice of objection, in which case the corporation is
deemed to consent to the withdrawal and the shareholder is reinstated to
his full rights as a shareholder, failing which he retains a status as a
claimant against the corporation, to be paid as soon as the corporation
is lawfully able to do so or, in a liquidation, to be ranked subordinate
to the rights of creditors of the corporation but in priority to its
shareholders.
(20) A corporation shall not make a payment to a dissenting shareholder under
this section if there are reasonable grounds for believing that
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<PAGE> 328
(a) the corporation is or would after the payment be unable to pay
its liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby
be less than the aggregate of its liabilities.
SECTION 185 OF THE BUSINESS CORPORATIONS ACT, (ONTARIO),
R.S.O.1990, C.B-16
185. (1) RIGHTS OF DISSENTING SHAREHOLDERS. Subject to subsection (3) and to
sections 186 and 248, if a corporation resolves to,
(a) amend its articles under section 168 to add, remove or change
restrictions on the issue, transfer of ownership of shares of a
class or series of the shares of the corporation;
(b) amend its articles under section 168 to add, remove or change
any restriction upon the business or businesses that the
corporation may carry on or upon the powers that the corporation
may exercise;
(c) amalgamate with another corporation under sections 175 and 176;
(d) be continued under the laws of another jurisdiction under
section 181; or
(e) sell, lease or exchange all or substantially all its property
under subsection 184(3),
a holder of shares of any class or series entitled to vote on the resolution may
dissent.
(2) IDEM. If a corporation resolves to amend its articles in a
manner referred to in subsection 170(1), a holder of shares of any class or
series entitled to vote on the amendment under section 168 or 170 may dissent,
except in respect of an amendment referred to in,
(a) clause 170(1)(a), (b) or (e) where the articles provide that the
holders of shares of such class or series are not entitled to
dissent; or
(b) subsection 170(5) or (6).
(3) EXCEPTION. A shareholder of a corporation incorporated before
the 29th day of July, 1983 is not entitled to dissent under this section in
respect of an amendment of the articles of the corporation to the extent that
the amendment,
(a) amends the express terms of any provision of the articles of the
corporation to conform to the terms of the provision as deemed
to be amended by section 277; or
(b) deletes from the articles of the corporation all of the objects
of the corporation set out in its articles, provided that the
deletion is made by the 29th day of July, 1986.
(4) SHAREHOLDER'S RIGHT TO BE PAID FAIR VALUE. In addition to any
other right the shareholder may have, but subject to subsection (30), a
shareholder who complies with this section is entitled, when the action approved
by the resolution from which the shareholder dissents becomes effective, to be
paid by the corporation the
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<PAGE> 329
fair value of the shares held by the shareholder in respect of which the
shareholder dissents, determined as of the close of business on the day before
the resolution was adopted.
(5) NO PARTIAL DISSENT. A dissenting shareholder may only claim
under this section with respect to all the shares of a class held by the
dissenting shareholder on behalf of any one beneficial owner and registered in
the name of the dissenting shareholder.
(6) OBJECTION. A dissenting shareholder shall send to the
corporation, at or before any meeting of shareholders at which a resolution
referred to in subsection (1) or (2) is to be voted on, a written objection to
the resolution, unless the corporation did not give notice to the shareholder of
the purpose of the meeting or of the shareholder's right to dissent.
(7) IDEM. The execution or exercise of a proxy does not constitute a
written objection for purposes of subsection (6).
(8) NOTICE OF ADOPTION OF RESOLUTION. The corporation shall, within
ten days after the shareholders adopt the resolution, send to each shareholder
who has filed the objection referred to in subsection (6) notice that the
resolution has been adopted, but such notice is not required to be sent to any
shareholder who voted for the resolution or who has withdrawn the objection.
(9) IDEM. A notice sent under subsection (8) shall set out the
rights of the dissenting shareholder and the procedures to be followed to
exercise those rights.
(10) DEMAND FOR PAYMENT OF FAIR VALUE. A dissenting shareholder
entitled to receive notice under subsection (8) shall, within twenty days after
receiving such notice, or, if the shareholder does not receive such notice,
within twenty days after learning that the resolution has been adopted, send to
the corporation a written notice containing,
(a) the shareholder's name and address;
(b) the number and class of shares in respect of which the
shareholder dissents; and
(c) a demand for payment of the fair value of such shares.
(11) CERTIFICATES TO BE SENT IN. Not later than the thirtieth day
after the sending of a notice under subsection (10), a dissenting shareholder
shall send the certificates representing the shares in respect of which the
shareholder dissents to the corporation or its transfer agent.
(12) IDEM. A dissenting shareholder who fails to comply with
subsections (6), (10) and (11) has no right to make a claim under this section.
(13) ENDORSEMENT ON CERTIFICATE. A corporation or its transfer agent
shall endorse on any share certificate received under subsection (11) a notice
that the holder is a dissenting shareholder under this section and shall return
forthwith the share certificates to the dissenting shareholder.
(14) RIGHTS OF DISSENTING SHAREHOLDER. On sending a notice under
subsection (10), a dissenting shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of the shares as
determined under this section except where,
(a) the dissenting shareholder withdraws notice before the
corporation makes an offer under subsection (15);
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<PAGE> 330
(b) the corporation fails to make an offer in accordance with
subsection (15) and the dissenting shareholder withdraws notice;
or
(c) the directors revoke a resolution to amend the articles under
subsection 168(3), terminate an amalgamation agreement under
subsection 176(5) or an application for continuance under
subsection 181(5), or abandon a sale, lease or exchange under
subsection 184(8),
in which case the dissenting shareholder's rights are reinstated as of the date
the dissenting shareholder sent the notice referred to in subsection (10), and
the dissenting shareholder is entitled upon presentation and surrender to the
corporation or its transfer agent of any certificate representing the shares
that has been endorsed in accordance with subsection (13), to be issued a new
certificate representing the same number of shares as the certificate so
presented, without payment of any fee.
(15) OFFER TO PAY. A corporation shall, not later than seven days
after the later of the day on which the action approved by the resolution is
effective or the day the corporation received the notice referred to in
subsection (10), send to each dissenting shareholder who has sent such notice,
(a) a written offer to pay for the dissenting shareholder's shares
in an amount considered by the directors of the corporation to
be the fair value thereof, accompanied by a statement showing
how the fair value was determined; or
(b) if subsection (30) applies, a notification that is unable
lawfully to pay dissenting shareholders for their shares.
(16) IDEM. Every offer made under subsection (15) for shares of the
same class or series shall be on the same terms.
(17) IDEM. Subject to subsection (30), a corporation shall pay for
the shares of a dissenting shareholder within ten days after an offer made under
subsection (15) has been accepted, but any such offer lapses if the corporation
does not receive an acceptance thereof within thirty days after the offer has
been made.
(18) APPLICATION TO COURT TO FIX FAIR VALUE. Where a corporation
fails to make an offer under subsection (15) or if a dissenting shareholder
fails to accept an offer, the corporation may, within fifty days after the
action approved by the resolution is effective or within such further period as
the court may allow, apply to the court to fix a fair value for the shares of
any dissenting shareholder.
(19) IDEM. If a corporation fails to apply to the court under
subsection (18), a dissenting shareholder may apply to the court for the same
purpose within a further period of twenty days or within such further period as
the court may allow.
(20) IDEM. A dissenting shareholder is not required to give security
for costs in an application made under subsection (18) or (19).
(21) COSTS. If a corporation fails to comply with subsection (15),
then the costs of a shareholder application under subsection (19) are to be
borne by the corporation unless the court otherwise orders.
(22) NOTICE TO SHAREHOLDERS. Before making application to the court
under subsection (18) or not later than seven days after receiving notice of an
application to the court under subsection (19), as the case may be, a
corporation shall give notice to each dissenting shareholder who, at the date
upon which the notice is given.
(a) has sent to the corporation the notice referred to in subsection
(10); and
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<PAGE> 331
(b) has not accepted an offer made by the corporation under
subsection (15), if such an offer was made,
of the date, place and consequences of the application and of the dissenting
shareholder's right to appear and be heard in person or by counsel, and a
similar notice shall be given to each dissenting shareholder who, after the date
of such first mentioned notice and before termination of the proceedings
commenced by the application, satisfies the conditions set out in clauses (a)
and (b) within three days after the dissenting shareholder satisfies such
conditions.
(23) PARTIES JOINED. All dissenting shareholders who satisfy the
conditions set out in clauses (22)(a) and (b) shall be deemed to be joined as
parties to an application under subsection (18) or (19) on the later of the date
upon which the application is brought and the date upon which they satisfy the
conditions, and shall be bound by the decision rendered by the court in the
proceedings commenced by the application.
(24) IDEM. Upon an application to the court under subsection (18) or
(19), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court shall fix a fair
value for the shares of all dissenting shareholders.
(25) APPRAISERS. The court may in its discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(26) FINAL ORDER. The final order of the court in the proceedings
commenced by an application under subsection (18) or (19) shall be rendered
against the corporation and in favour of each dissenting shareholder who,
whether before or after the date of the order, complies with the conditions set
out in clauses (22)(a) and (b).
(27) INTEREST. The court may in its discretion allow a reasonable
rate of interest on the amount payable to each dissenting shareholder from the
date the action approved by the resolution is effective until the date of
payment.
(28) WHERE CORPORATION UNABLE TO PAY. Where subsection (30) applies,
the corporation shall, within ten days after the pronouncement of an order under
subsection (26), notify each dissenting shareholder that it is unable lawfully
to pay dissenting shareholders for their shares.
(29) IDEM. Where subsection (30) applies, a dissenting shareholder,
by written notice sent to the corporation within thirty days after receiving a
notice under subsection (28), may,
(a) withdraw a notice of dissent, in which case the corporation is
deemed to consent to the withdrawal and the shareholder's full
rights are reinstated; or
(b) retain a status as a claimant against the corporation, to be
paid as soon as the corporation is lawfully able to do so or, in
a liquidation, to be ranked subordinate to the rights of
creditors of the corporation but in priority to its
shareholders.
(30) IDEM. A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds for believing
that,
(a) the corporation is or, after the payment, would be unable to pay
its liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby
be less than the aggregate of its liabilities.
-7-
<PAGE> 332
(31) COURT ORDER. Upon application by a corporation that proposes to
take any of the actions referred to in subsection (1) or (2), the court may, if
satisfied that the proposed action is not in all the circumstances one that
should give rise to the rights arising under subsection (4), by order declare
that those rights will not arise upon the taking of the proposed action, and the
order may be subject to compliance with such terms and conditions as the court
thinks fit and, if the corporation is an offering corporation, notice of any
such application and a copy of any order made by the court upon such application
shall be served upon the Commission.
(32) COMMISSION MAY APPEAR. The Commission may appoint counsel to
assist the court upon the hearing of an application under subsection (31), if
the corporation is an offering corporation.
-8-
<PAGE> 333
ANNEX L
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
OF FOUNTAIN OIL INCORPORATED
Fountain Oil Incorporated, a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
1. The Board of Directors of the Corporation has adopted a
resolution setting forth the amendment to the Corporation's Certificate of
Incorporation set forth below and declaring its advisability.
2. Pursuant to a resolution of the Corporation's Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment set forth
below.
3. Article First of the Corporation's Certificate of Incorporation
is amended to read in its entirety as follows:
"First: The name of the Corporation is CanArgo Energy
Corporation."
4. The foregoing amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Fountain Oil Incorporated has caused this
Certificate to be executed by Nils N. Trulsvik, its President and Chief
Executive Officer, on this day of , 1998.
--------------------------------------
Nils N. Trulsvik, President and Chief
Executive Officer
<PAGE> 334
ANNEX M
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
OF FOUNTAIN OIL INCORPORATED
Fountain Oil Incorporated, a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
1. The Board of Directors of the Corporation has adopted a
resolution setting forth the amendment to the Corporation's Certificate of
Incorporation set forth below and declaring its advisability.
2. Pursuant to a resolution of the Corporation's Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment set forth
below.
3. Paragraph (a) of Article Fourth of the Corporation's
Certificate of Incorporation is amended to read in its entirety as follows:
"(a) The total number of shares of all classes of stock which the
Corporation shall have to issue is fifty-five million (55,000,000),
consisting of:
(1) Five million (5,000,000) shares of Preferred Stock,
par value ten cents ($.10) per share (the "Preferred Stock"); and
(2) Fifty million (50,000,000) shares of Common Stock, par
value ten cents ($.10) per share (the "Common Stock").
Upon amendment of this paragraph (a) of Article Fourth, each two
(2) issued and outstanding shares of the Corporation's Common Stock
shall be combined into one (1) outstanding share of Common Stock of the
Corporation. No fractional shares shall be issued pursuant to this
amendment. Each stockholder who would otherwise be entitled to receive a
fractional share shall receive, in lieu thereof, a cash payment equal to
such fraction multiplied by four times the fair market value of one
share of the Corporation's Common Stock as of the business day
immediately preceding the effective date of this amendment. For this
purpose, fair market value shall be deemed to be the mean between the
high and low price at which the Corporation's Common Stock trades on the
National Market System of the Nasdaq Stock Market, Inc. on the trading
day immediately preceding such effective date, or if it does not so
trade, then the price determined by the Corporation's Board of Directors
based upon recent trades and bid and asked prices of the Common Stock."
4. The foregoing amendment was duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, Fountain Oil Incorporated has caused this
Certificate to be executed by Nils N. Trulsvik, its President and Chief
Executive Officer, on this day of , 1998.
----------------------------------------
Nils N. Trulsvik, President and Chief
Executive Officer
<PAGE> 335
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table set forth the costs and expenses of the sale and
distribution of the securities being registered, all of which are being borne by
the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee .............. $ 5,800.81
Printing expenses .......................................... *
Legal fees and expenses .................................... *
Accounting fees and expenses ............................... *
NASD filing fee ............................................ 17,500.00
---------
Miscellaneous .............................................. *
Total .............................................. $23,506.32
==========
</TABLE>
- ----------
* To be filed by amendment.
All of the amounts shown are estimates except for the fees payable to
the Securities and Exchange Commission.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify its present and former directors, officers, employees
and agents (each, an "indemnitee") against all reasonable expenses (including
attorneys' fees) and, except in actions initiated by or in the right of the
corporation, against all judgments, fines and amounts paid in settlement in
actions brought against them, if such individual acted in good faith and in a
manner which he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. A corporation must
indemnify an indemnitee to the extent that he or she is successful on the merits
or otherwise in the defense of any claim, issue or matter associated with an
action, suit or proceeding, including one initiated by or in the right of the
corporation. The Fountain Bylaws provide for indemnification of directors and
officers to the fullest extent permitted by the DGCL.
The DGCL permits, and Fountain's Bylaws require, the advance payment of
an indemnity for expenses prior to the final disposition of an action, provided
that the indemnitee undertakes to repay any such amount advanced if it is later
determined that the indemnitee is not entitled to indemnification with regard to
the action for which the expenses were advanced.
ITEM 16. EXHIBITS.
The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
2 Combination Agreement (Exhibit C to Joint Proxy
Statement/Prospectus in Part I above).
</TABLE>
II-1
<PAGE> 336
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
4(a) Form of 8% Convertible Subordinated Debenture (incorporated herein
by reference from February 29, 1996 Form 10-QSB).
4(b) Fountain's Certificate of Incorporation and amendments thereto
(incorporated herein by reference from December 16, 1994 Form 8-K).
4(c) Fountain's Bylaws (incorporated herein by reference from December
31, 1996 Form 10-K).
5 Opinion of Gibson, Dunn & Crutcher LLP re: legality of securities
being issued.*
8(a) Opinion of Gibson, Dunn & Crutcher LLP re: tax matters.
8(b) Opinion of Lang Michener re: tax matters.
8(c) Opinion of Wikborg, Rein & Co. re: tax matters.
23(a) Consent of Coopers & Lybrand L.L.P., independent accountants.*
23(b)(i) Consent of Ernst & Young, Chartered Accountants, Calgary, Canada.*
23(b)(ii) Consent of Ernst & Young, Chartered Accountants, Limassol, Cyprus.
23(c) Consent of Gibson, Dunn & Crutcher LLP (included in Exhibits 5 and
8(a)).
23(d) Consent of Lang Michener (included in Exhibit 8(b)).
23(e) Consent of Wikborg, Rein & Co. (included in Exhibit 8(c)).
23(f) Consent of CIBC Oppenheimer Corp.
23(g) Consent of Orkla Finans (Fondsmegling) ASA
23(h) Consent of Roche Securities Limited.
23(i) Consent of AMH Group Ltd.*
23(j) Consent of Michael Binnion.*
23(k) Consent of Russell Hammond.*
23(l) Consent of Peder Paus.*
23(m) Consent of David Robson.*
27 Financial Data Schedule.*
99(a) Fountain Shareholders Agreement.
99(b) CanArgo Shareholders Agreement.
</TABLE>
* Previously filed.
II-2
<PAGE> 337
ITEM 17. UNDERTAKINGS.
Fountain hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase of decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; provided, however, that paragraphs (i) and (ii) above do not
apply if the registration statement is on Form S-3, Form S-8 or Form
F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
Fountain pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Fountain hereby also undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of Fountain's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to securities offering therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 338
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Fountain has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in
Oslo, Norway, on May 8, 1998.
FOUNTAIN OIL INCORPORATED
By: /s/ NILS N. TRULSVIK
---------------------------------------
Nils N. Trulsvik
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Nils N. Trulsvik his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all pre-
and post-effective amendments to this Registration Statement, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto such attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ NILS N. TRULSVIK Director, President and Chief May 8, 1998
- ----------------------------- Executive Officer (Principal
Nils N. Trulsvik Executive Officer)
/s/ RUNE FALSTAD Vice President and Acting Chief May 8, 1998
- ----------------------------- Financial Officer (Principal
Rune Falstad Financial and Accounting Officer)
/s/ OISTEIN NYBERG Chairman of the Board of May 12, 1998
- ----------------------------- Directors
Oistein Nyberg
/s/ ROBERT A. HALPIN Vice Chairman of the Board of May 8, 1998
- ----------------------------- Directors
Robert A. Halpin
/s/ EINAR H. BANDLIEN Director and Executive Vice May 8, 1998
- ----------------------------- President
Einar H. Bandlien
</TABLE>
II-4
<PAGE> 339
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ STANLEY D. HECKMAN Director May 8, 1998
- -----------------------------
Stanley D. Heckman
/s/ EUGENE J. MEYERS Director May 7, 1998
- -----------------------------
Eugene J. Meyers
</TABLE>
II-5
<PAGE> 340
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
2 Combination Agreement (Exhibit C to Joint Proxy
Statement/Prospectus in Part I above).
8(a) Opinion of Gibson, Dunn & Crutcher LLP re: tax matters.
8(b) Opinion of Lang Michener re: tax matters.
8(c) Opinion of Wikborg, Rein & Co. re: tax matters.
23(b)(ii) Consent of Ernst & Young, Chartered Accountants, Limassol, Cyprus.
23(c) Consent of Gibson, Dunn & Crutcher LLP (included in Exhibits 5 and
8(a)).
23(d) Consent of Lang Michener (included in Exhibit 8(b)).
23(e) Consent of Wikborg, Rein & Co. (included in Exhibit 8(c)).
23(f) Consent of CIBC Oppenheimer Corp.
23(g) Consent of Orkla Finans (Fondsmegling) ASA
23(h) Consent of Roche Securities Limited.
99(a) Fountain Shareholders Agreement.
99(b) CanArgo Shareholders Agreement.
</TABLE>
<PAGE> 1
EXHIBIT 8(a)
[Letterhead of Gibson, Dunn & Crutcher LLP]
May 7, 1998
(213) 229-7000 C 30664-00001
Fountain Oil Incorporated
1400 Broadfield Boulevard
Suite 100
Houston, TX 77084
U.S.A.
Ladies and Gentlemen:
We are acting as special tax counsel to Fountain Oil Incorporated, a
Delaware corporation ("Fountain"), in connection with the proposed transaction
(the "Transaction") between Fountain and CanArgo Energy Inc. ("CanArgo") as
described in the Joint Proxy Statement and Prospectus, included in the
Registration Statement on Form S-3 (File No.
333-48287) (the "Registration Statement").
In rendering our opinion, we have, with your permission, relied upon and
assumed as correct now and as of the effective time of the Transaction, (i) the
factual information contained in the Registration Statement, (ii) certain
factual representations made by Fountain and CanArgo, and (iii) such other
materials as we have deemed necessary or appropriate as a basis for our opinion.
On the basis of the information and representations contained in the
foregoing materials, we confirm that the discussion under the caption "TAX
CONSIDERATIONS - United States Federal Income Tax Considerations" in the
Registration Statement, to the extent it constitutes matters of United States
federal income tax law or legal conclusions, is our opinion.
This opinion expresses our views as to federal income tax laws in effect
as of the date hereof, including the Code, applicable Treasury Regulations,
published rulings and administrative practices of the Internal Revenue Service
(the "Service") and court decisions. This opinion represents our best legal
judgment as to the matters addressed herein, but is not binding on the Service
or the courts. Furthermore, the legal authorities upon which we rely are subject
to change either prospectively or retroactively. Any change in such authorities
or any change in the facts or representations, or any past or future actions by
Fountain or CanArgo contrary to such representations, might adversely affect the
conclusions stated herein.
<PAGE> 2
Fountain Oil Incorporated
May 7, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption "TAX
CONSIDERATIONS - United States Federal Tax Considerations."
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
GIBSON, DUNN & CRUTCHER LLP
<PAGE> 1
EXHIBIT 8(b)
[Lang Michener Letterhead]
May 7, 1998
CanArgo Energy Inc.
1580 Guinness House
7277th Avenue S.W.
Calgary, Alberta
T2P 0Z5
Dear Sirs:
We are acting as Canadian counsel to CanArgo Energy Inc., an Alberta
corporation ("CanArgo"), in connection with the proposed transaction (the
"Transaction") between Fountain Oil Incorporated ("Fountain") and CanArgo as
described in the Joint Proxy Statement and Prospectus, included in the
Registration Statement on Form S-3 (File No. 333-48287) (the "Registration
Statement").
In rendering our opinion, we have, with your permission, relied upon and
assumed as correct now and as of the effective time of the Transaction, (i) the
factual information contained in the Registration Statement, (ii) certain
factual representations made by Fountain and CanArgo referred to in the
Registration Statement and in documents which are attached as Exhibits to the
Registration Statement all of which are made a part hereof, and (iii) such other
materials as we have deemed necessary or appropriate as a basis for our opinion.
On the basis of the information and representations contained in the
foregoing materials, we confirm that the discussion under the caption "TAX
CONSIDERATIONS - Canadian Federal Income Tax Considerations" in the Registration
Statement, to the extent it constitutes matters of Canadian law or legal
conclusions, is our opinion.
This opinion expresses our views as to Canadian federal income tax laws
in effect as of the date hereof, including the Income Tax Act (Canada), the
regulations thereunder, the Canada-United States Income Tax Convention and the
administrative practices published by Revenue Canada, Customs, Excise and
Taxation as well as specific proposals to amend the Income Tax Act (Canada) and
regulations announced prior to the date hereof. This opinion represents our best
legal judgment as to the matters addressed herein, but is not binding on Revenue
Canada or the courts. Furthermore, the legal authorities upon which we rely are
to change either prospectively or retroactively. Any change in such authorities
or any change in the facts or representations, or any past or future actions by
Fountain or CanArgo contrary to such representations might adversely affect the
conclusions stated herein.
We hereby consent to the filing of this Opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption "TAX
CONSIDERATIONS - Canadian Federal Income Tax Considerations."
Yours truly,
/s/ Lang Michener
Lang Michener
<PAGE> 1
EXHIBIT 8(c)
[Letterhead of Wikborg, Rein & Co.]
Fountain Oil Incorporated
1400 Broadfield Boulevard
Suite 100
Houston, TX 77084
USA
Our ref: 971290 HMY/kjo
Responsible partner: Helge Myhre Oslo, 4 May 1998
Dear Sirs:
We are acting as special tax counsel to Fountain Oil Incorporated, a
Delaware corporation ("Fountain"), in connection with the proposed transaction
(the "Transaction") between Fountain and CanArgo Energy Inc. ("CanArgo") as
described in the Joint Proxy Statement/Prospectus, included in the Registration
on Form S-3 as amended (File No. 333-48287) (the "Registration Statement").
The following opinion is based on our review of the Registration
Statement and such other materials and documents as we have deemed appropriate.
In rendering our opinion, we have, with your permission, assumed the accuracy of
the matters described in the Registration Statement as of now and as of the
effective time of the transaction and the transactions described therein will
take place as stated therein. We have also relied on certain representations
that we have received from the company.
On the basis of the information and representation contained in the
foregoing materials, we confirm that the discussion under the caption "TAX
CONSIDERATIONS - Norwegian Tax Considerations" in the Registration Statement, to
the extent it constitutes matters of law or legal conclusions, represents our
opinion.
This opinion expresses our views as to Norwegian income tax laws in
effect as of the date hereof, including Norwegian applicable regulations,
published rulings and administrative practices of the Norwegian Internal Revenue
Service (the "Service") and court decisions. This opinion represents our best
legal judgment as to the matters addressed herein, but is not binding on the
Service or the courts. Furthermore, the legal authorities upon which we rely are
subject to change either prospectively or retroactively. Any change in such
authorities or any change in the facts or representations, or any past or future
actions by Fountain or CanArgo contrary to such representations might adversely
affect the conclusion stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption "TAX
CONSIDERATIONS - Norwegian Tax Considerations."
Yours sincerely,
WIKBORG, REIN & CO.
/s/ Helge Myhre
Helge Myhre
<PAGE> 1
EXHIBIT 23(b)(ii)
[Letterhead of Ernst & Young]
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 18, 1998 with respect to the consolidated
financial statements of Ninotsminda Oil Company Limited (formerly "JKX
(Ninotsminda) Limited") included in the Registration Statement (Form S-3) and
related prospectus of Fountain Oil Inc. for the registration of 22,472,860
shares of its common stock.
/s/ Ernst & Young
Ernst & Young
Chartered Accountants
Limassol, Cyprus
May 12 1998
<PAGE> 1
EXHIBIT 23(f)
[Letterhead of CIBC Oppenheimer Corp.]
CONSENT OF CIBC OPPENHEIMER CORP.
CIBC Oppenheimer Corp. hereby consents to the use of its name in the
registration statement on Form S-3 (the "Registration Statement") filed by
Fountain Oil Incorporated ("Fountain") in connection with the proposed
transaction between Fountain and CanArgo Energy Inc., as described in Part I of
the Registration Statement.
/s/ CIBC Oppenheimer Corp.
CIBC Oppenheimer Corp.
May 5, 1998
<PAGE> 1
EXHIBIT 23(g)
CONSENT OF ORKLA FINANS (FONDSMEGLING) ASA
Orkla Finans (Fondsmegling) A.S. hereby consents to the use of its name
in the registration statement on Form S-3 (the "Registration Statement") filed
by Fountain Oil Incorporated ("Fountain") in connection with the proposed
transaction between Fountain and CanArgo Energy Inc., as described in Part I of
the Registration Statement.
/s/ INGE K. HANSEN
-----------------------------------
Orkla Finans (Fondsmegling) ASA
May 11, 1998
<PAGE> 1
EXHIBIT 23(h)
CONSENT OF ROCHE SECURITIES LIMITED
Roche Securities Limited hereby consents to the use of its name in the
registration statement on Form S-3 (the "Registration Statement") filed by
Fountain Oil Incorporated ("Fountain") in connection with the proposed
transaction between Fountain and CanArgo Energy Inc., as described in Part I of
the Registration Statement.
/s/ Roche Securities Limited
Roche Securities Limited
May 6, 1998
<PAGE> 1
EXHIBIT 99(a)
FOUNTAIN SHAREHOLDER AGREEMENT
This Shareholder Agreement (this "Agreement") dated as of January 31,
1998 is made by and among Fountain Oil Incorporated, a Delaware corporation (the
"Company"), the undersigned Shareholders (the "Shareholders") of the Company,
and CanArgo Energy Inc., an Alberta corporation ( "CanArgo").
WHEREAS the Shareholders are the record and beneficial owners and have
the power to vote the respective number of shares of the Company's common stock
set forth opposite their respective names in Schedule "A" hereto (collectively,
the "Shares");
WHEREAS the Shareholders desire that the Company and CanArgo enter into
a Combination Agreement (the "Combination Agreement") with respect to the
acquisition by the Company of all voting stock of CanArgo (the "Combination");
and
WHEREAS in addition to obligating themselves to each other, the
Shareholders are executing this Agreement as an inducement to CanArgo to enter
into and execute the Combination Agreement,
NOW THEREFORE in consideration of the execution and delivery by CanArgo
of the Combination Agreement and the mutual covenants, conditions and agreements
contained herein and therein, the Company, the Shareholders and CanArgo agree as
follows:
1. At any meeting of Company's Shareholders held prior to the
termination of the Combination Agreement and called to vote upon the
Combination, the Combination Agreement or any of the transactions contemplated
in the Combination Agreement, at any adjournment thereof or in any other
circumstances upon which such vote or other approval of the Combination, the
Combination Agreement or any of the transactions contemplated in the Combination
Agreement is sought, the Shareholders severally shall vote (or cause to be
voted) the Shares set forth opposite their respective names in Schedule "A"
hereto in favour of the Combination, the Combination Agreement and such
transactions.
2. During the period commencing on the date of this Agreement and ending
on the earlier of either (a) the date that the Combination Agreement terminates
in accordance with its terms or (b) the Effective Date (as such term is defined
in the Combination Agreement), each Shareholder shall not transfer (which term
shall include, without limitation, for the purposes of this Agreement any sale,
gift or pledge) any or all of such Shareholder's Shares or any interest therein,
except pursuant to the Combination, unless the transferee agrees with CanArgo to
be bound by this Agreement as if such transferee were a Shareholder and had
executed this Agreement. Subject to Section 8 hereof, during such period the
Shareholders shall not engage or cooperate in any discussion or negotiations
with any person or entity other than CanArgo, or make or solicit any offers,
with respect to the transfer of any or all of the Shares (except as permitted by
the preceding sentence) or the acquisition (by merger, tender offer or
otherwise) of the Company or all or substantially all of its stock, business or
assets.
3. Each of the Shareholders severally represents and warrants to CanArgo
that such Shareholder is the beneficial and record owner of, and has power and
authority to dispose of, and the unrestricted right to vote, the number of
Shares set forth opposite such Shareholder's name in Schedule "A" hereto.
4. The Shareholders hereby agree to provide each of the undertakings
contemplated by the Combination Agreement to be undertaken by "affiliates" of
the Company.
5. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to have
been duly received if so given) by delivery, by cable, telecopier, telegram or
telex, or by registered or certified mail, postage prepaid, return receipt
requested, to the respective parties as follows:
<PAGE> 2
If to the Shareholders or any of them the address or addresses, as
appropriate, as set forth on Schedule "A" hereto.
If to the Company:
Fountain Oil Incorporated
Skysstasjon 11B (4th floor)
1370 Asker, Norway
Attention: Nils N. Trulsvik, President
With a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Bruce D. Meyer, Esq.
If to CanArgo:
CanArgo Energy Inc.
1580, 727 7th Avenue S. W.
Calgary, Alberta
T2P 0Z5
Attention: Michael R. Binnion, Esq., Chief Financial Officer
With a copy to:
Lang Michener
181 Bay Street, Suite 2500
Toronto, Ontario
M5J 2T7
Attention: Philippe Tardif, Esq.
or to such other address as any of the foregoing parties may have furnished to
the others in writing in accordance herewith, except that notices of change of
address shall only be effective upon receipt.
6. Each of the Shareholders agrees that this Agreement and the
obligations hereunder shall attach to the Shares and shall be binding upon any
person or entity to whom legal or beneficial ownership of the Shares shall pass,
whether by operation of law or otherwise, including without limitation their
respective heirs, guardian, administrator or successor. In the event of any
stock split, stock dividend, merger, reorganization, recapitalization,
conversion or other change in the capital structure of the Company affecting the
common shares of the Company or acquisition of additional common shares by any
of the Shareholders, the number of Shares listed in Schedule "A" beside the name
of each Shareholder shall be adjusted appropriately and this Agreement and the
obligations hereunder shall attach to any additional common shares or other
securities issued to or acquired by the Shareholders.
7. The Company and the Shareholders hereby agree that each of the
Shareholders will tender to the Company any and all certificates representing
the Shares and the Company will inscribe upon those certificates the following
legend: "The shares of common stock of Fountain Oil Incorporated represented by
this certificate are
-2-
<PAGE> 3
subject to a Shareholder Agreement dated as of January 31, 1998. Copies of such
Shareholder Agreement may be obtained at the principal executive offices of
Fountain Oil Incorporated."
8. No Shareholder executing this Agreement who is or becomes during the
term hereof a director of the Company makes any agreement or understanding
herein in his or her capacity as such director and specifically reserves all
rights to act as a director in conformity with his or her fiduciary duties in
connection therewith. The Shareholders sign solely in their capacities as owners
or holders of the power to vote common shares.
9. Each of the provisions of this Agreement is subject to compliance
with applicable regulatory conditions.
10. This Agreement may be executed in two or more counterparts, each of
which shall be considered an original but all of which together shall constitute
the same instrument.
11. This Agreement is intended as an exclusive statement of the terms of
the agreement among the parties with respect to its subject matter, supersedes
all prior agreements with respect thereto, cannot be changed or terminated by
the parties hereto, except by written instrument executed by the party or
parties against whom enforcement thereof is sought, and shall be governed by and
construed in accordance with the substantive laws of the State of Delaware
without giving effect to the principles of conflicts of law thereof. This
Agreement, and all obligations of the Shareholders hereunder, shall terminate
upon the determination by the Board of Directors of the Company (i) to withdraw
its recommendation to the shareholders of the Company that they approve the
Combination, the Combination Agreement and the transactions contemplated by the
Combination Agreement and (ii) to recommend to such shareholders that they
approve an Alternative Transaction (as defined in the Combination Agreement).
FOUNTAIN OIL INCORPORATED
By: /s/ Nils N. Trulsvik
-------------------------------
Name: Nils N. Trulsvik
Title: President and Chief Executive
Officer
CANARGO ENERGY INC.
By: /s/ David Robson
-------------------------------
Name: David Robson
Title: Chairman
SHAREHOLDERS
/s/ Einar H. Bandlien
- -------------------------------
Einar H. Bandlien
/s/ Nils N. Trulsvik
- -------------------------------
Nils N. Trulsvik
-3-
<PAGE> 4
/s/ Stanley D. Heckman
- -------------------------------
Stanley D. Heckman
/s/ Eugene J. Meyers
- -------------------------------
Eugene J. Meyers
/s/ Oistein Nyberg
- -------------------------------
Oistein Nyberg
/s/ Robert A. Halpin
- -------------------------------
Robert A. Halpin
/s/ Svein E. Johansen
- -------------------------------
Svein E. Johansen
/s/ Rune Falstad
- -------------------------------
Rune Falstad
- -------------------------------
- -------------------------------
-4-
<PAGE> 5
SCHEDULE "A"
<TABLE>
<CAPTION>
SHAREHOLDERS
(NAME AND ADDRESS) SHARES OF COMMON STOCK
- ------------------ ----------------------
<S> <C>
Nils N. Trulsvik 135,400
Einar H. Bandlein 161,968
Stanley D. Heckman 100,793
Eugene J. Meyers 532,728
Oistein Nyberg 132,000
Robert A. Halpin 12,000
Svein E. Johansen 203,161
Rune Falstad 21,000
</TABLE>
-5-
<PAGE> 1
EXHIBIT 99(b)
CANARGO SHAREHOLDER AGREEMENT
This Shareholder Agreement (this "Agreement") dated as of January 31,
1998 is made by and among Fountain Oil Incorporated, a Delaware corporation
("Fountain"), the undersigned Shareholders (the "Shareholders") of CanArgo
Energy Inc., an Alberta corporation (the "Company"), and the Company.
WHEREAS the Shareholders are the record and beneficial owners and have
the power to vote the respective number of shares of the Company's common shares
set forth opposite their respective names in Schedule "A" hereto (collectively,
the "Shares");
WHEREAS the Shareholders desire that the Company and Fountain enter into
a Combination Agreement (the "Combination Agreement") with respect to the
acquisition by Fountain of all voting stock of the Company (the "Combination");
and
WHEREAS in addition to obligating themselves to each other, the
Shareholders are executing this Agreement as an inducement to Fountain to enter
into and execute the Combination Agreement,
NOW THEREFORE in consideration of the execution and delivery by Fountain
of the Combination Agreement and the mutual covenants, conditions and agreements
contained herein and therein, Fountain, the Shareholders and the Company agree
as follows:
1. At any meeting of Company's Shareholders held prior to the
termination of the Combination Agreement and called to vote upon the
Combination, the Combination Agreement or any of the transactions contemplated
in the Combination Agreement, at any adjournment thereof or in any other
circumstances upon which such vote or other approval of the Combination, the
Combination Agreement or any of the transactions contemplated in the Combination
Agreement is sought, the Shareholders severally shall vote (or cause to be
voted) the Shares set forth opposite their respective names in Schedule "A"
hereto in favour of the Combination, the Combination Agreement and such
transactions.
2. During the period commencing on the date of this Agreement and ending
on the earlier of either (a) the date that the Combination Agreement terminates
in accordance with its terms or (b) the Effective Date (as such term is defined
in the Combination Agreement), each Shareholder shall not transfer (which term
shall include, without limitation, for the purposes of this Agreement any sale,
gift or pledge) any or all of such Shareholder's Shares or any interest therein,
except pursuant to the Combination, unless the transferee agrees with Fountain
to be bound by this Agreement as if such transferee were a Shareholder and had
executed this Agreement. Subject to Section 8 hereof, during such period the
Shareholders shall not engage or cooperate in any discussion or negotiations
with any person or entity other than Fountain, or make or solicit any offers,
with respect to the transfer of any or all of the Shares (except as permitted by
the preceding sentence) or the acquisition (by merger, tender offer or
otherwise) of the Company or all or substantially all of its stock, business or
assets.
3. Each of the Shareholders severally represents and warrants to
Fountain that such Shareholder is the beneficial and record owner of, and has
power and authority to dispose of, and the unrestricted right to vote, the
number of Shares set forth opposite such Shareholder's name in Schedule "A"
hereto.
4. The Shareholders hereby agree to provide each of the undertakings
contemplated by the Combination Agreement to be undertaken by "affiliates" of
the Company.
5. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to have
been duly received if so given) by delivery, by cable, telecopier, telegram or
telex, or by registered or certified mail, postage prepaid, return receipt
requested, to the respective parties as follows:
<PAGE> 2
If to the Shareholders or any of them the address or addresses, as
appropriate, as set forth on Schedule "A" hereto.
If to Fountain:
Fountain Oil Incorporated
Skysstasjon 11B (4th floor)
1370 Asker, Norway
Attention: Nils N. Trulsvik, President
With a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Bruce D. Meyer, Esq.
If to the Company:
CanArgo Energy Inc.
1580, 727 7th Avenue S. W.
Calgary, Alberta
T2P 0Z5
Attention: Michael R. Binnion, Esq., Chief Financial Officer
With a copy to:
Lang Michener
181 Bay Street, Suite 2500
Toronto, Ontario
M5J 2T7
Attention: Philippe Tardif, Esq.
or to such other address as any of the foregoing parties may have furnished to
the others in writing in accordance herewith, except that notices of change of
address shall only be effective upon receipt.
6. Each of the Shareholders agrees that this Agreement and the
obligations hereunder shall attach to the Shares and shall be binding upon any
person or entity to whom legal or beneficial ownership of the Shares shall pass,
whether by operation of law or otherwise, including without limitation their
respective heirs, guardian, administrator or successor. In the event of any
stock split, stock dividend, merger, reorganization, recapitalization,
conversion or other change in the capital structure of the Company affecting the
common shares of the Company or acquisition of additional common shares by any
of the Shareholders, the number of Shares listed in Schedule "A" beside the name
of each Shareholder shall be adjusted appropriately and this Agreement and the
obligations hereunder shall attach to any additional common shares or other
securities issued to or acquired by the Shareholders.
7. The Company and the Shareholders hereby agree that each of the
Shareholders will tender to the Company any and all certificates representing
the Shares and the Company will inscribe upon those certificates the following
legend: "The Common Shares of CanArgo Energy Inc. represented by this
certificate are subject to a
-2-
<PAGE> 3
Shareholder Agreement dated as of January 31, 1998. Copies of such Shareholder
Agreement may be obtained at the principal executive offices of CanArgo Energy
Inc."
8. No Shareholder executing this Agreement who is or becomes during the
term hereof a director of the Company makes any agreement or understanding
herein in his or her capacity as such director and specifically reserves all
rights to act as a director in conformity with his or her fiduciary duties in
connection therewith. The Shareholders sign solely in their capacities as owners
or holders of the power to vote common shares.
9. Each of the provisions of this Agreement is subject to compliance
with applicable regulatory conditions.
10. This Agreement may be executed in two or more counterparts, each of
which shall be considered an original but all of which together shall constitute
the same instrument.
11. This Agreement is intended as an exclusive statement of the terms of
the agreement among the parties with respect to its subject matter, supersedes
all prior agreements with respect thereto, cannot be changed or terminated by
the parties hereto, except by written instrument executed by the party or
parties against whom enforcement thereof is sought, and shall be governed by and
construed in accordance with the substantive laws of the Province of Ontario
without giving effect to the principles of conflicts of law thereof. This
Agreement, and all obligations of the Shareholders hereunder, shall terminate
upon the determination by the Board of Directors of the Company (i) to withdraw
its recommendation to the shareholders of the Company that they approve the
Combination, the Combination Agreement and the transactions contemplated by the
Combination Agreement and (ii) to recommend to such shareholders that they
approve an Alternative Transaction (as defined in the Combination Agreement).
FOUNTAIN OIL INCORPORATED
By: /s/ Nils N. Trulsvik
-------------------------------
Name: Nils N. Trulsvik
Title: President and Chief Executive
Officer
CANARGO ENERGY INC.
By: /s/ Michael Binnion
-------------------------------
Name: Michael Binnion
Title: Chief Financial Officer
-3-
<PAGE> 4
SHAREHOLDERS
TERRENEX ACQUISITION CORPORATION
By: /s/ Michael Binnion
-------------------------------
PROVINCIAL SECURITIES LTD.
By: /s/ Russell Hammond
-------------------------------
/s/ Michael Binnion
-------------------------------
/s/ John McLeod
-------------------------------
-4-
<PAGE> 5
SCHEDULE "A"
<TABLE>
<CAPTION>
SHAREHOLDER
(NAME AND ADDRESS) SHARES OF COMMON STOCK
- ------------------ ----------------------
<S> <C>
Provincial Securities Ltd. 2,089,063
Terrenex Acquisition Corporation 2,797,040
John McLeod 40,000
Michael Binnion 260,095
</TABLE>
-5-
