<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO _______________
COMMISSION FILE NUMBER 0-9147
------------
CANARGO ENERGY CORPORATION
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1580, 727 - 7th Avenue SW, Calgary, Alberta T2P 0Z5
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
403-777-1185
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of Registrant's common stock outstanding on July 31, 1998
(after a one-for-two reverse stock split effected on July 15, 1998) was
11,223,744.
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
-----------------------------
JUNE 30, December 31,
1998 1997
-----------------------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 10,380,351 $ 14,164,177
Restricted cash --- 9,700,000
Accounts receivable 818,331 ---
Other current assets 250,182 761,904
------------ ------------
Total current assets 11,448,864 24,626,081
Deferred acquisition costs 1,125,827 ---
Property and equipment, net 5,187,977 5,942,273
Oil and gas properties, net, full cost method 583,906 1,478,974
(including unevaluated amounts of $324,500
and $324,500, respectively)
Investment in and advances to
oil and gas ventures, net 5,315,309 5,386,707
------------ ------------
TOTAL ASSETS $ 23,661,883 $ 37,434,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 324,709 $ 328,171
Accrued liabilities 567,014 10,326,608
------------ ------------
Total current liabilities 891,723 10,654,779
Stockholders' Equity:
Preferred stock --- ---
Common stock 2,244,749 2,244,749
Capital in excess of par value 82,040,156 82,040,156
Accumulated deficit since October 31, 1988 (61,514,745) (57,505,649)
------------ ------------
Total stockholders' equity 22,770,160 26,779,256
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,661,883 $ 37,434,035
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
-------------------------- --------------------------
Three Months Ended Six Months Ended
JUNE 30, June 30, JUNE 30, June 30,
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and gas production $ 51,902 $ 77,744 $ 132,516 $ 109,660
Other 12,000 --- 12,000 ---
----------- ----------- ----------- -----------
63,902 77,744 144,516 109,660
----------- ----------- ----------- -----------
Operating Expenses:
Lease operating expense 78,110 54,070 177,627 68,050
Cost of sales 10,891 --- 10,891 ---
Other direct project cost 245,078 221,556 784,484 393,853
General and administrative 746,512 763,752 2,203,863 2,147,379
Depreciation, depletion and
Amortization 42,647 50,427 160,471 77,628
Loss from investments
in unconsolidated subsidiaries 43,946 715,994 135,377 1,364,782
Writedown of oil and gas
properties 100,000 --- 900,000 ---
----------- ----------- ----------- -----------
1,267,184 1,805,799 4,372,713 4,051,692
----------- ----------- ----------- -----------
OPERATING LOSS 1,203,282 1,728,055 4,228,197 3,942,032
----------- ----------- ----------- -----------
Other Income (Expense):
Interest, net 39,227 389,129 242,799 700,280
Other income (expense) 775 (79,081) 4,000 (41,307)
Loss on disposition
of equipment (27,698) (84,849) (27,698) (221,793)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 12,304 225,199 219,101 437,180
----------- ----------- ----------- -----------
Minority interest in loss of
consolidated subsidiary --- 38,618 --- 79,444
----------- ----------- ----------- -----------
NET LOSS $ 1,190,978 $ 1,464,238 $ 4,009,096 $ 3,425,408
----------- ----------- ----------- -----------
Weighted average number of
common shares outstanding 11,223,744 11,214,250 11,223,744 11,189,073
----------- ----------- ----------- -----------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.11) $ (0.13) $ (0.36) $ (0.31)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
-----------------------------
Six Months Ended
JUNE 30, 1998 June 30, 1997
-----------------------------
<S> <C> <C>
Operating activities:
Net loss $ (4,009,096) $ (3,425,408)
Loss on disposition of equipment 27,698 221,793
Equity loss in unconsolidated subsidiaries 135,377 1,364,782
Minority interest in loss of consolidated subsidiary --- (79,444)
Depreciation, depletion and amortization 160,471 77,628
Writedown of oil and gas properties 900,000 ---
Changes in assets and liabilities:
Accounts receivable (818,331) (147,876)
Other current assets 511,722 (467,717)
Accounts payable (3,462) (279,301)
Accrued liabilities (9,759,594) (478,644)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (12,855,215) (3,214,187)
------------ ------------
Investing activities:
Restricted cash 9,700,000 (4,300,000)
Deferred acquisition costs (1,125,827) ---
Investments in oil and gas properties (110,599) (773,610)
Purchase of property and equipment (45,193) (862,780)
Proceeds from disposition of assets 716,987 171,150
Investments in and advances to oil and gas ventures (63,979) (2,613,328)
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 9,071,389 (8,378,568)
------------ ------------
Financing activities:
Proceeds from exercise of options --- 156,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES --- 156,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,783,826) (11,436,755)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,164,177 31,424,064
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,380,351 $ 19,987,309
============ ============
Non cash investing and financing activities:
Issuance of common stock in connection with
investments in oil and gas ventures $ --- $ 1,060,937
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 (UNAUDITED)
(1) General
-------
The consolidated condensed financial statements of the Company included
herein have been prepared by the Company, without audit. In the opinion of
management, the consolidated condensed financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the results for the interim period. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Report on Form 10-K/A for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.
On July 15, 1998, a business combination was completed pursuant to which
CanArgo Energy Inc. ("CEI") became a subsidiary of the Company and each
previously outstanding CEI Common Stock was converted into the right to
receive 0.8 shares (1.6 shares pre reverse split) of the Company's Common
Stock, giving the former shareholders of CEI the right to receive
approximately 47% of the Company's Common Stock. In addition, the former
management of CEI hold a majority of the Company's senior management
positions. On July 15, 1998 the Company filed with the Delaware Secretary
of State amendments to its Certificate of Incorporation to effect a one-
for-two reverse split of the shares of the Company's Common Stock and to
change the Company's name from Fountain Oil Incorporated to CanArgo Energy
Corporation. The reverse split has been retroactively recorded in the
accompanying financial statements.
The business combination will result in the issuance of 9,970,918 shares of
the Company's Common Stock. After issuance, the number of shares of the
Company's Common Stock outstanding will be 21,194,662.
Participation in ventures having corporate characteristics in which the
Company's equity interest is 50% or less is accounted for using the equity
method. This has applied to the Company's participation in four ventures
in Eastern Europe.
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
5
<PAGE>
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. During the six months ended June 30, 1998, the
Company recognized a writedown of $900,000 on its oil and gas properties in
the Sylvan Lake project as a result of a decline of heavy oil prices and
the application of the quarterly full cost ceiling test. The writedown
related to proved properties.
Recently Issued Pronouncements - In 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income and SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information and in
1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 130 became effective on January 1, 1998,
however the Company had no comprehensive income other than net income. SFAS
No. 131 and SFAS. No. 133 will be adopted in the annual financial
statements for 1998 and 1999, respectively, and based on present
circumstances would not have any material effect on the Company's financial
statements.
(2) Accounts Receivable
-------------------
In April 1998, the Company sold to CEI oilfield related equipment for a
total price of $672,000 and in May 1998, the Company sold to CEI office
equipment for a total price of $54,000.
(3) Restricted Cash
---------------
In April 1998, restricted cash totaling $8,567,000, which supported letters
of credit issued to assure repayment of borrowings under a bank line of
credit established by Kashtan Petroleum Ltd. ("Kashtan") which operates the
Lelyaki Field project, was applied to repay such bank borrowings and
related interest. The remaining portion of restricted cash, totaling
$783,000 was released to the Company free of restrictions in May 1998.
In January 1998, $350,000 of restricted cash, which had been used to
collateralize a bank letter of credit relating to the Gorisht-Kocul Field
project, was released.
(4) Deferred Acquisition Costs
--------------------------
Deferred acquisition costs of $1,126,000, which are principally fees to
financial advisers and legal counsel, relate to the costs of the
acquisition of CEI.
6
<PAGE>
5) Property and Equipment, Net
---------------------------
Property and equipment and the related accumulated depreciation and
impairment at June 30, 1998 included the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------------------
<S> <C> <C>
Electrically enhanced oil recovery ("EEOR")
equipment $ 562,953 $ 562,953
Oil and gas related equipment 7,647,648 8,348,309
Office furniture, fixtures, equipment and other 924,702 1,014,263
----------- -----------
TOTAL PROPERTY AND EQUIPMENT $ 9,135,303 $ 9,925,525
Accumulated depreciation (748,412) (739,255)
Impairment (3,198,914) (3,243,997)
----------- -----------
NET PROPERTY AND EQUIPMENT $ 5,187,977 $ 5,942,273
=========== ===========
</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 wrote off its investment in and advances to Intergas at December
31, 1997. See Note 7, Investment in and Advances to Oil and Gas Ventures,
of Notes to Consolidated Condensed 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.
(6) Oil and Gas Properties
----------------------
The Company has acquired interests in oil and gas properties through joint
ventures and joint operating arrangements. A summary of the Company's oil
and gas properties as of June 30, 1998 and December 31, 1997 are set out
below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Proved properties $ 2,760,926 $ 2,650,327
Unproved properties 324,500 324,500
Less: accumulated depreciation, depletion,
amortization and impairment (2,501,520) (1,495,853)
----------- -----------
TOTAL OIL AND GAS PROPERTIES, NET $ 583,906 $ 1,478,974
=========== ===========
</TABLE>
During the fiscal year ended December 31, 1997, the Company recognized an
impairment of $257,407, on its oil and gas properties as a result of
applying the full cost ceiling limitation. The impairment related to a
previously unproved property.
7
<PAGE>
During the first quarter of 1997, the Company purchased a 60% interest in a
heavy oil property in the Sylvan Lake area in Alberta, Canada for
approximately $1,009,000. One new well was successfully drilled during the
1997 third quarter, and was prepared for installation of the Company's EEOR
equipment. The Sylvan Lake project includes a total of four producing
wells. During the six months ended June 30, 1998, the Company recognized
writedowns aggregating $900,000 on its oil and gas properties in the Sylvan
Lake project as a result of a decline of heavy oil prices and the
application of the quarterly full cost ceiling test. The writedown relates
to proved properties.
Unproved properties and associated costs not currently being amortized and
included in oil and gas properties were $324,500 at both June 30, 1998 and
December 31, 1997, substantially all of which relates to the Sylvan Lake
Field. Such properties are expected to be evaluated over the next 18
months, and if no proved reserves are added, those properties could result
in additional impairment.
(7) Investments in and Advances to Oil and Gas Ventures
---------------------------------------------------
The Company has acquired interests in oil and gas ventures through less
than majority interests in corporate and corporate-like entities. A summary
of the Company's oil and gas ventures as of June 30, 1998 and December 31,
1997 is set out below:
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
Ukraine - Lelyaki Field, Pryluki Region
through an effective 40.5% ownership of
Kashtan Petroleum Ltd. $ 2,435,725 $ 2,435,725
Adygea, Russian Federation - Maykop Field
through 37% ownership in Intergas JSC 6,710,874 6,710,874
Albania - Gorisht-Kocul Field
through 50% ownership of joint venture 2,202,922 2,202,922
Ukraine - Stynawske Field, Boryslaw
through 45% ownership of Boryslaw Oil
Company 5,864,386 5,800,407
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $17,213,907 $17,149,928
----------- -----------
EQUITY IN LOSS OF OIL AND GAS VENTURES
Ukraine - Lelyaki Field, Pryluki Region $(2,435,725) $(2,435,725)
Adygea, Russian Federation - Maykop Field (1,452,510) (1,452,510)
Albania - Gorisht-Kocul Field (833,191) (833,191)
Ukraine - Stynawske Field, Boryslaw (549,077) (413,700)
----------- -----------
TOTAL EQUITY IN LOSS OF OIL AND GAS VENTURES $(5,270,503) $(5,135,126)
----------- -----------
Impairment - Maykop Field $(5,258,364) $(5,258,364)
Impairment - Gorisht-Kocul Field (1,369,731) (1,369,731)
----------- -----------
TOTAL IMPAIRMENT $(6,628,095) $(6,628,095)
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES, NET OF EQUITY LOSS
AND IMPAIRMENT $ 5,315,309 $ 5,386,707
=========== ===========
8
<PAGE>
The following supplemental information relates to the Company's investment in
and advances to its two most significant oil and gas ventures:
SIX MONTHS
ENDED YEAR ENDED
6/30/98 12/31/97
---------- ----------
Total funding from owners:
Kashtan $8,567,000(1) $ 304,508
Intergas 294,173 2,529,292
Total cash expenditures by
the venture:
Kashtan $121,046 $7,275,440
Intergas 294,173 2,529,292
Tangible assets and liabilities Tangible
at June 30, 1998: Assets Liabilities
---------- -----------
Kashtan $862,811 $ (1)
Intergas 15,749 ---
(1) In April 1998, the Company funded $8,567,000 for the repayment of Kashtan's
indebtedness to banks which had been supported indirectly by the Company's
restricted cash deposits.
Based on its analysis of initial Lelyaki Field development efforts completed in
the fourth quarter of 1997, the Company concluded that the Lelyaki Field would
not support a successful commercial development. As a result, the Company
recorded an impairment 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 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
with most of these costs having been paid during the first six months of 1998.
In addition, the Company recognized a loss in 1997 of $2,080,000 reflecting its
equity in the loss of Kashtan. The Company believes that it has no further
obligation to fund any operations of Kashtan.
Because it has experienced extended delays in resolving operating arrangements
and other matters associated with Intergas, the entity developing the Maykop
Field project, including completion of corporate formalities, the Company
concluded that under present circumstances it cannot pursue commercial
activities and develop the Maykop Field through Intergas. As a result, the
Company during the fourth quarter of 1997 recorded an impairment for the entire
amount of its investment in and advances to Intergas of $5,258,000. In addition,
the Company recognized a loss in 1997 of $851,000, reflecting its equity in the
loss of Intergas. The Company believes that it has no further obligation to fund
any operations of Intergas.
9
<PAGE>
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. At
June 30, 1998, the force majeure condition remained in effect.
As of June 30, 1998, the Company had remaining net investments in and
advances to oil and gas ventures totaling $5,315,000 which relate solely to
Boryslaw Oil Company ("BOC"), the entity holding the license to develop the
Stynawske Field, 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.
Included in net investments are advances to BOC totaling $1,572,000 at June
30, 1998 and $1,508,000 at December 31, 1997. Such advances may be
recoverable only from future revenue of or payments from future
participants in the venture.
The Company's investments in and advances to oil and gas ventures are
essentially unevaluated properties. At June 30, 1998 and December 31, 1997,
there were no material operations or assets (other than unevaluated
properties) of entities being accounted for using the equity method.
Accordingly, no other separate financial information has been presented.
As a result of the events associated with the impairment of the Company's
investment in and advances to and other assets related to Kashtan, Intergas
and the Gorisht-Kocul joint venture, the Company may be subject to
contingent liabilities in the form of claims from those ventures and other
participants therein. The Company has been advised that Intergas and
another shareholder of Intergas are considering asserting such claims.
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. Any such claims may be adjudicated in host
country forums under host country law.
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 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,
10
<PAGE>
that the Company or the entities that are developing the oil and gas
properties and ventures will be able to arrange the financing necessary to
develop the projects being undertaken or to support the corporate and other
activities of the Company or that such financing as is available will be on
terms that are attractive or acceptable to or are deemed to be in the best
interests of the Company, such entities or their respective stockholders or
participants.
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.
(8) Accrued Liabilities
-------------------
Accrued liabilities at June 30, 1998 and December 31, 1997 included the
following:
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
Compensation, including related taxes $166,512 $ 337,767
Professional fees 226,544 276,500
Termination costs --- 405,833
Effective guarantee of Kashtan
obligations --- 8,280,000
Close down costs - Kashtan project 154,086 690,622
Oilfield related equipment 10,000 268,000
Other 9,872 67,886
-------- -----------
$567,014 $10,326,608
======== ===========
(9) Shareholders' Equity
--------------------
<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, DECEMBER 31, 1997 22,447,489 $2,244,749 $82,040,156 $(57,505,649) $26,779,256
Net loss (4,009,096) (4,009,096)
----------- ---------- ----------- ------------ -----------
22,447,489 $2,244,749 $82,040,156 $(61,514,745) $22,770,160
One-for-two reverse split of the
shares of the Company's Common
Stock (July 15, 1998) (11,223,745) --- --- --- ---
----------- ---------- ----------- ------------ -----------
BALANCE, JUNE 30, 1998 11,223,744 $2,244,749 $82,040,156 $(61,514,745) $22,770,160
----------- ---------- ----------- ------------ -----------
</TABLE>
11
<PAGE>
The business combination will result in the issuance of 9,970,918 shares of
the Company's Common Stock determined as follows:
COMMON STOCK RESERVED FOR ISSUANCE TO
SHAREHOLDERS OF CEI COMMON SHARES # OF SHARES
- ------------------------------------- -----------
Exchangeable Shares issued by CEI 17,061,425
Special Warrants issued by CEI 2,880,411
----------
19,941,836
TOTAL CEI EXCHANGEABLE SHARES RESERVED
AS OF JULY 15, 1998 (POST 1:2 REVERSE SPLIT) 9,970,918
COMMON STOCK ISSUED OR ISSUABLE
AS OF JULY 15, 1998 (POST 1:2 REVERSE SPLIT) # OF SHARES
- -------------------------------------------- -----------
CEI Exchangeable Shares Reserved as of July 15, 1998 9,970,918
Common Stock Outstanding as of June 30, 1998 11,223,744
----------
TOTAL COMMON STOCK ISSUED OR ISSUABLE AS OF JULY 15, 1998 21,194,662
The Exchangeable Shares are securities issued by CEI that are exchangeable
generally at the option of the holders for the Company's Common Stock on a
share-for-share basis and entitle the holders to dividends and other rights
economically equivalent to those to which holders of the Company's Common
Stock are entitled. Through contractual arrangements, holders of
Exchangeable Shares will have the right to direct votes at meetings of
stockholders of the Company commensurate with the number of shares of the
Company's Common Stock such holders, respectively, have the right to
receive upon exchange of the Exchangeable Shares. As a result of such
contractual arrangements, the Exchangeable Shares will represent the same
rights to dividends and rights upon liquidation and will generally have the
same voting rights as shares of the Company's Company Stock.
OPTIONS
-------
On August 17, 1994, options to purchase 200,000 shares (400,000 shares pre
one-for-two reverse split) of the Company's Common Stock were issued to
various individuals who were serving or were expected in the future to
serve the Company as officers, directors, employees, consultants and
advisors (the "1994 Plan"). The options are exercisable at an exercise
price of $3.00 and are only exercisable at the time or within six months
after services are rendered by such individuals. 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, 750,000 shares (1,500,000 shares pre one-for-
two reverse split) 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
12
<PAGE>
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 June 30, 1998. The exercise price and vesting schedule
of stock appreciation rights are determined at the date of grant.
A summary of the status of stock options granted under the 1994 and 1995
Plans is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUABLE WEIGHTED
SHARES UNDER AVERAGE
AVAILABLE OUTSTANDING EXERCISE
FOR ISSUE OPTIONS PRICE
--------- ----------- --------
<S> <C> <C> <C>
BALANCE AT AUGUST 31, 1995 0 200,000
1995 Plan Authorization 750,000
Options:
Granted at market (15,000) 15,000 $ 7.68
Exercised -- (26,000) $ 3.00
-------- --------
BALANCE AT AUGUST 31, 1996 735,000 189,000 $ 3.38
Options:
Granted at market (190,750) 190,750 $14.50
Granted at a premium (222,500) 222,500 $17.98
Exercised -- (6,000) $ 3.00
-------- --------
BALANCE AT DECEMBER 31, 1996 321,750 596,250 $12.38
Options:
Granted at market (18,500) 18,500 $ 8.90
Granted at a premium (77,500) 77,500 $10.54
Exercised -- (52,000) $ 3.00
Canceled 63,084 (63,084) $14.54
-------- --------
BALANCE AT DECEMBER 31, 1997 288,834 577,166 $12.64
Options:
Canceled 157,500 (157,500) $14.57
Canceled -- (28,000) $ 3.00
-------- --------
BALANCE AT JUNE 30, 1998 446,334 391,666 $12.55
</TABLE>
Pursuant to the terms of an Amended and Restated Combination Agreement
between the Company and CEI (the "Combination Agreement") on July 17, 1998,
stock options granted under CEI's Stock Option Plan were converted into
options to purchase 0.8 shares of the Company's Common Stock. A total of
988,000 shares of the Company's Common Stock have been authorized for
issuance under CEI's Stock Option Plan. The options are exercisable at an
exercise price of Canadian $2.75 per share with 908,000 and 80,000 options
expiring on July 1, 2002, and May 2, 2003, respectively.
13
<PAGE>
WARRANTS
--------
Pursuant to the terms of the Combination Agreement, holders of CEI Stock
Purchase Warrants will have the right to purchase CEI Exchangeable Shares
which are exchangeable generally at the option of the holder for the
Company's Common Stock on a share-for-share basis. As of July 15, 1998, a
total of 1,097,511 CEI Stock Purchase Warrants were outstanding. A summary
of the CEI Stock Purchase Warrants is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
NUMBER IN
OF WARRANTS CANADIAN DOLLARS EXPIRATION DATE
----------- ---------------- ---------------
<S> <C> <C>
164,008 $ 2.75 April 30, 1999
32,000 $2.875 July 31, 1999
901,503 $ 3.25 November 1, 1999
</TABLE>
(10) Net Loss Per Common Share
-------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings Per
Share. Basic and diluted net loss per common share for the periods ended
June 30, 1998 and June 30, 1997 are based on the weighted average number
of common shares outstanding during those periods. The weighted average
numbers of shares is 11,223,744 and 11,189,073, respectively. The weighted
average number of common shares outstanding excludes 391,666 and 606,250 of
options, respectively, because they are anti-dilutive.
(11) 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 June 30, 1998 and December 31, 1997, the
Company had the contingent obligation to issue an aggregate of 187,500
shares (after giving effect to the one-for-two reverse split) of its Common
Stock, subject to the satisfaction of conditions related to the achievement
of specified performance standards by the Stynawske Field project. The
Company believes that it has no further obligation to fund any operations
of Kashtan or Intergas.
As a result of the events associated with the impairment of the Company's
investment in and advances to and other assets related to Kashtan, Intergas
and the Gorisht-Kocul joint venture, the Company may be subject to
contingent liabilities in the form of claims from those ventures and other
participants therein. The Company has been advised that Intergas and
another shareholder of Intergas are considering asserting such claims.
LEGAL PROCEEDINGS AND POTENTIAL CLAIMS - On February 20, 1998, Zhoda
Corporation ("Zhoda"), which sold to the Company most of the Company's
interest in UK-RAN Oil Corporation ("UK-RAN") through which the Company
holds its interest in Kashtan, filed suit against the Company and two of
its consolidated subsidiaries in the District Court of Harris County,
Texas. Zhoda alleged that Zhoda was, on several theories, wrongfully
deprived of the value of the UK-RAN shares it transferred to the Company or
the contingent consideration it might have received under its agreement
with the Company. Among the theories of Zhoda's complaint were breach of
contract, breach of fiduciary
14
<PAGE>
duty and duty of good faith and fair dealing, fraud and constructive fraud,
fraud in the inducement, negligent misrepresentation, civil conspiracy,
breach of trust, unjust enrichment and rescission. Zhoda sought damages in
excess of $7.5 million, redelivery of the UK-RAN shares transferred to the
Company, fees, expenses and costs and any further relief to which it may be
entitled. The Harris County District Court issued an order staying the
litigation initiated by Zhoda in its entirety and indicating that the Court
would dismiss the action if the parties did not commence arbitration in New
York, New York. On July 10, 1998, a request for arbitration was filed by
Zhoda with the International Chamber of Commerce. On July 17, 1998, the
Harris County District Court issued an order retaining the case and
directing that the arbitration be held and concluded by April 16, 1999.
On March 24, 1998, the Company and two consolidated subsidiaries filed an
action against Zhoda in the Court of Queen's Bench of Alberta, Judicial
Centre of Calgary, in which the Company seeks to recover $190,000, plus
interest thereon, which the Company asserts is owing by Zhoda pursuant to
promissory notes and loan agreements. On March 31, 1998, Zhoda filed an
answer and counterclaims against the Company and its two subsidiaries,
asserting essentially the same claims as were asserted in the Texas action
described in the previous paragraph, with the exception that claims
asserted in the Texas suit based on fraud and civil conspiracy were not
included in the Alberta counterclaims. On the basis of its counterclaims,
Zhoda seeks damages estimated to be at least Canadian $10,500,000,
redelivery of the UK-RAN shares transferred to the Company, interest, costs
and such further relief as the court may deem just.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to the
Company the outstanding capital of Gastron International Limited
("Gastron"), which in turn owned 31% of the capital of Intergas, filed suit
against the Company and one of its consolidated subsidiaries in the Third
Judicial District Court of Salt Lake County, Utah. In its complaint,
Ribalta alleges breach by the Company of the contract governing the sale of
the outstanding capital of Gastron and failure of a condition in that
contract that should have resulted in its termination. Ribalta seeks the
return of all benefits conferred on the Company pursuant to the contract,
including the shares of Gastron and any property transferred by Gastron,
or, alternatively, damages equal to the value of such benefits, as well as
fees, costs and such other relief as the court deems proper. As of August
7, 1998, the Company and its subsidiary had not been served with the
complaint in the action.
The entity that sold to the Company certain rights related to the Stynawske
Field project, Fielden Management Services Pty. Ltd., has indicated to the
Company that it is considering an action seeking the contingent
consideration payable with respect to that sale on the grounds that the
acquisition of CEI or other action by or inaction of the Company has
unreasonably delayed or will unreasonably delay the satisfaction of the
conditions precedent to the issuance of such contingent consideration.
Management is unable to estimate the range that such potential claims, if
any, might total. However, if any claims which have been or in the future
are asserted were determined to be valid, they could have a material
adverse effect on the financial position, results of operations and cash
flows of the Company. Any such claims may be adjudicated in host country
forums under host country law.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Qualifying Statement With Respect To Forward-Looking Information
----------------------------------------------------------------
The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward looking statements. Such forward
looking statements are based upon the current expectations of the Company and
speak only as of the date made. These forward looking statements involve risks,
uncertainties and other factors. The factors discussed below under "Forward
Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q are
among those factors that in some cases have affected the Company's historic
results and could cause actual results in the future to differ significantly
from the results anticipated in forward looking statements made in this
Quarterly Report on Form 10-Q, future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made by authorized officers of the Company. When used in this Quarterly Report
on Form 10-Q, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe," "hope," "may" and similar expressions, as well as "will," "shall" and
other indications of future tense, are intended to identify forward looking
statements.
Liquidity, Capital Resources, and Changes in Financial Condition
----------------------------------------------------------------
During the fourth quarter of 1997, the Company commenced a program to
preserve its financial resources by reducing general and administrative expenses
and limiting its investments in and advances to oil and gas ventures and
properties in which it holds interests, while it explored and pursued strategic
alternatives with the assistance of investment advisors. This program continued
through the second quarter of 1998. As a result of its consideration of
strategic alternatives, on February 2, 1998 the Company entered into an
agreement with CanArgo Energy Inc. ("CEI") contemplating a series of
transactions (collectively the "Transaction") to effect a business combination
involving CEI and the Company. The Transaction was consummated on July 15,
1998, and as a result CEI became a subsidiary of the Company, each previously
outstanding CEI Common Share was converted into the right to receive 0.8 share
of Company Common Stock which provided the former shareholders of CEI with the
right to receive approximately 47% of the Company's Common Stock, and the
management of CEI succeeded to a majority of the senior management positions in
the Company. In connection with the Transaction, the Company on July 15, 1998
filed amendments to its Certificate of Incorporation effecting a one-for-two
reverse stock split and changing the Company's name from Fountain Oil
Incorporated to CanArgo Energy Corporation.
As of June 30, 1998, the Company had working capital of $10,557,000,
reflecting current assets of $11,449,000, of which $10,380,000 was in the form
of cash and cash equivalents, and current liabilities of $892,000. This
compares to working capital of $13,971,000 as of December 31, 1997, the
principal components of which were current assets of $24,626,000, including cash
and cash equivalents of $14,164,000 and restricted cash of $9,700,000, and
current liabilities of $10,655,000. The $3,414,000 decrease in working capital
from December 31, 1997 to June 30, 1998 reflects principally the decrease in
cash and cash equivalents during that period attributable to expenditures on
1998 operating activities, including general and administrative expenses and
direct project costs, and deferred acquisition costs relating to the
Transaction. The decrease in cash and cash equivalents was partially offset by
an increase in accounts receivable.
16
<PAGE>
Cash and cash equivalents decreased $3,784,000 from $14,164,000 at
December 31, 1997 to $10,380,000 at June 30, 1998, primarily as a result of
expenditures on operating activities and activities relating to the Transaction.
The general and administrative expenses of $2,204,000, direct project costs of
$784,000 and deferred acquisition costs of $1,126,000 incurred during the first
six months of 1998 all involved principally cash items. The use of cash to fund
expenditures was partially offset by the release of restrictions that had
previously applied to a portion of the Company's restricted cash.
At December 31, 1997, the Company had placed a total of $9,700,000 in
restricted deposit accounts to collateralize letters of credit used for the
benefit of oil and gas ventures in which the Company held interests. During the
second quarter of 1998, $8,567,000 of restricted cash was applied on behalf of
Kashtan Petroleum Ltd. ("Kashtan"), the venture operating the Lelyaki Field
project, to satisfy Kashtan's obligations to repay principal and to pay
associated interest under a line of credit established by Kashtan with a bank in
Ukraine where Kashtan operated. The balance of restricted cash was released from
restrictions during the first six months of 1998 and augmented cash and cash
equivalents.
Accounts receivable increased from nil at December 31, 1997, when the
minimal amount of accounts receivable were classified within other current
assets, to $818,000 at June 30, 1998, principally as a result of the Company's
sale of certain oilfield related equipment and office equipment to CEI during
the second quarter of 1998 for an aggregate purchase price of $726,000. In
addition, $92,000 of receivables which had previously been included within other
current assets were reclassified as accounts receivable at June 30, 1998.
Other current assets decreased from $762,000 at December 31, 1997 to
$250,000 at June 30, 1998, primarily as a result of the collection of $234,000
on claims that had been included within other current assets, the amortization
of prepaid expenses amounting to $135,000, and the reclassification of remaining
receivables during that six month period.
The $9,763,000 decrease in current liabilities during the six months
ended June 30, 1998 is attributable to a $9,760,000 decrease in accrued
liabilities, which in turn is primarily attributable to payment of various
liabilities accrued at December 31, 1997 relating to the payment of bank debt
and related interest incurred by Kashtan, Lelyaki Field project closedown costs,
employee termination costs and payment for oilfield equipment.
The $1,126,000 in the deferred acquisition costs at June 30, 1998 is
due to expenditures associated with the Transaction, principally fees to
financial advisers and legal counsel; there were no comparable deferred costs at
December 31, 1997.
Property and equipment, net, decreased from $5,942,000 at December 31,
1997 to $5,188,000 at June 30, 1998, primarily as a result of the Company's sale
to CEI of oilfield related equipment and office equipment for a total of
$718,000 during the second quarter of 1998.
Oil and gas properties, net declined from $1,479,000 at December 31,
1997 to $584,000 at June 30, 1998 primarily as a result of writedowns of the
Company's oil and gas properties associated with the Sylvan Lake project
aggregating $900,000 as a result of a decline during the first six months of
heavy oil prices and the application of the quarterly full cost ceiling test.
17
<PAGE>
Investments in and advances to oil and gas ventures, net decreased
during the six month period ended June 30, 1998 from $5,387,000 at December 31,
1997 to $5,315,000 at June 30, 1998. The decrease reflects the Company's equity
in the loss of Boryslaw Oil Company ("BOC"), the entity developing the Stynawske
Field project, for the first six months of 1998, which was partly offset by the
Company's advances to BOC in the first six months of 1998.
The balance of $5,387,000 as of December 31, 1997 and $5,315,000 as of
June 30, 1998 in investments in and advances to oil and gas ventures, net,
relates solely to BOC. The Company has the responsibility for arranging
financing for this venture and, unless third-party financing can be arranged,
the Company might have to supply the capital to finance operations until the
venture generates positive cash flow, which would have the effect of increasing
investments in and advances to oil and gas ventures. The amount of such
advances may be greater than the amount of the operating losses recognized by
the Company, which would cause such net investment balances to increase. Such
investments are essentially unevaluated oil and gas properties, and such costs
may not be recovered if the venture is not successful. No assurance can be
given that the Company will either be able to arrange third-party financing for
such venture or have sufficient resources to fund the capital and operating
needs of the venture or that the venture will be successful.
Based on its analysis of the results of the initial development
efforts in the Lelyaki Field project, the Company concluded that the Lelyaki
Field would not support a successful commercial development. As a result, the
Company recorded in 1997 an impairment charge totaling $9,108,000. The
impairment charge consisted of $137,000 representing the carrying value of an
investment related to Kashtan, $8,280,000 of debt and accrued interest of
Kashtan on which Kashtan has defaulted 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 operation.
Because it has experienced extended delays in resolving operating
arrangements and other matters associated with Intergas JSC ("Intergas"), the
entity developing the Maykop Field project, including completion of corporate
formalities, the Company concluded that under present circumstances it cannot
effectively pursue commercial activities and develop the Maykop Field through
Intergas. As a result, the Company recorded during the fourth quarter of 1997
an impairment of $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, the Company wrote those rigs and equipment down to their
estimated fair value.
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
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, the Company
recognized at December 31, 1997 a $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.
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. The Company has been advised that
18
<PAGE>
Intergas and another shareholder of Intergas are considering asserting such
claims. The Company management is unable to estimate the range that such claims,
if any, might total. However, if any claims were determined to be valid, they
could have a material adverse effect on the Company's financial position, result
of operations and cash flows. Any such claims may be adjudicated in host country
forums under host country law.
The Company has contingent obligations and may incur additional
obligations, absolute or contingent, with respect to the acquisition and
development of oil and gas properties and ventures in which it has interests
that require or may require the Company to expend funds and to issue shares of
its Common Stock. The Company believes that it has no further obligation to fund
any operations of Kashtan or Intergas. At June 30, 1998, the Company had
contingent obligations, subject to the satisfaction of conditions relating to
the achievement of specified Stynawske Field project performance standards,
involving 187,500 shares (after giving effect to the one-for-two reverse split).
As the Company develops current projects and undertakes other projects,
significant additional obligations may be incurred.
Development of the oil and gas properties and ventures in which the
Company has interests involves multi-year efforts and substantial cash
expenditures. The Company had working capital of $10,557,000 and $13,971,000 at
June 30, 1998 and December 31, 1997, respectively, which the company considered
inadequate to proceed with the full implementation of its program of developing
its principal oil and gas properties and ventures. Full development of the
Company's oil and gas properties and ventures will require the availability of
substantial additional financing from external sources. The Company believes
that the consummation of the Transaction has improved its potential for
attracting external financing, although no assurances can be given that such
financing will be secured. The Company also intends to pursue the farm-out of a
portion of its interest in BOC and other properties and ventures to entities
that can provide such financing. The Company generally has the principal
responsibility for arranging financing for the oil and gas properties and
ventures in which it has an interest. There can be no assurance, however, that
the Company or the entities that are developing the oil and gas properties and
ventures will be able to arrange the financing necessary to develop the projects
being undertaken or to support the corporate and other activities of the Company
or that such financing as is available will be on terms that are attractive or
acceptable to or are deemed to be in the best interest of the Company, such
entities and their respective stockholders or participants.
Ultimate realization of the carrying value of the Company's oil and
gas properties and ventures will require production of oil and gas in sufficient
quantities and marketing such oil and gas at sufficient prices to provide
positive cash flow to the Company, which is dependent upon, among other factors,
achieving significant production at costs that provide acceptable margins,
reasonable levels of taxation from local authorities, and the ability to market
the oil and gas produced at or near world prices. In addition, the Company must
mobilize drilling equipment and personnel to initiate drilling, completion and
production activities. The Company has plans to mobilize resources and achieve
levels of production and profits sufficient to recover its carrying value.
However, if one or more of the above factors, or other factors, are different
than anticipated, these plans may not be realized, and the Company may not
recover its carrying value. The Company will be entitled to distributions from
the various properties and ventures in which it participates in accordance with
the arrangements governing the respective properties and ventures.
19
<PAGE>
As a result of the consummation of the Transaction, the Company is
currently implementing new computer information systems, which the Company
believes are Year 2000 compliant. Although the Company does not expect to incur
significant additional expenditures to address Year 2000 issues, there can be no
assurance that this will be the case. Additionally, the ability of third
parties with whom the Company transacts business to adequately address their
Year 2000 issues is outside of the Company's control. There can be no assurance
that the failure of the Company or such third parties to adequately address
their respective Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
Results of Operations
---------------------
The Company has typically acquired its interests in oil and gas
properties through interests in joint ventures, partially owned corporate and
other entities and joint operating arrangements. The Company's interest in the
assets and liabilities of unconsolidated entities is reflected on the Company's
consolidated balance sheet on a net basis as investment in and advances to oil
and gas ventures; the Company's share of revenue, other income and expenses of
unconsolidated entities is reported in the Company's consolidated statement of
operations as income or loss from equity investment in oil and gas ventures; and
the Company's interest in the cash flow of unconsolidated entities is reported
in the Company's consolidated statement of cash flows as distributions from or
investment in or advances to oil and gas ventures. Interests acquired in certain
joint ventures, partnerships and production sharing, working interest and other
arrangements are proportionately consolidated. The Company will report the same
stockholders' equity and net income or loss whether it accounts for various oil
and gas ventures using the equity method or on a consolidated basis.
Six month periods ended June 30, 1998 and 1997:
The Company recorded operating revenue of $145,000 during the six
month period ended June 30, 1998 compared with $110,000 for the six month period
ended June 30, 1997. Revenue in both quarters primarily related to oil
production from the Sylvan Lake property in Alberta, Canada in which the Company
has an interest. The Company also recorded revenue during six month period ended
June 30, 1998 from the sale of electrically enhanced oil recovery ("EEOR")
equipment; there was no revenue from the sale of EEOR equipment for the six
month period ended June 30, 1997.
The operating loss for the six month period ended June 30, 1998
amounted to $4,228,000, compared with $3,942,000 for the six month period ended
June 30, 1997. Lease operating expenses which in the first six months of 1998
related primarily to the Sylvan Lake property increased to $178,000 during the
six month period ended June 30, 1998, as compared to $68,000 for the six month
period ended June 30, 1997, primarily as a result of a greater level of
operating activity in the first six months of 1998. Direct project costs
increased to $784,000 from $394,000 for the six month period ended June 30,
1997, reflecting increased activity related to BOC and winding down activities
related to other oil and gas ventures. The increase in depreciation, depletion
and amortization expense from $78,000 for the six month period ended June 30,
1997 to $160,000 during the six month period ended June 30, 1998 is attributable
principally to increased depletion due to the increased production of oil. The
loss from investments in unconsolidated subsidiaries decreased to $135,000
during the six month period ended June 30, 1998, from $1,365,000 for the six
month period ended June 30, 1997, as a result of a lower level of activity in
the unconsolidated subsidiaries in the first six months of 1998. During the six
20
<PAGE>
month period ended June 30, 1998, the Company wrotedown its oil and gas
properties in the Sylvan Lake project by an aggregate $900,000 as a result of a
substantial decline of heavy oil prices and the application of the quarterly
full cost ceiling test. There was no comparable writedown during the first six
months of 1997. If oil prices decline further the Company may experience
additional writedowns.
Although lease operating expenses exceeded revenue for the first six
months of 1998, the Company does not believe that such expenses will continue to
exceed revenue because expenses during the six month period ended June 30, 1998,
included non-recurring costs. In addition, prices for heavy oil were depressed
during the first six months of 1998 resulting in decreased revenue per unit
produced. No assurance can be given, however, that prices for heavy oil will
improve or that operating revenue will exceed lease operating expenses from the
Sylvan Lake property or other properties in future periods.
The Company recorded net other income of $219,000 for the six month
period ended June 30, 1998, as compared to $437,000 during the six month period
ended June 30, 1997. The principal reason for the decrease is the Company's 1998
payment of interest expense on behalf of Kashtan. This was partially offset by a
loss that the Company recorded on the disposition of miscellaneous equipment and
property amounting to $222,000 in the first six months of 1997; the comparable
loss incurred in the first six months of 1998 was $28,000.
The net loss of $4,009,000, or $.36 per share, during the six month
period ended June 30, 1998 compares to a net loss of $3,425,000, or $.31 per
share, for the six month period ended June 30, 1997.
Three month periods ended June 30, 1998 and 1997:
The Company recorded operating revenue of $64,000 during the three
month period ended June 30, 1998, compared with $78,000 for the three month
period ended June 30, 1997. Revenue in both quarters primarily related to oil
production from the Sylvan Lake property in Alberta, Canada in which the Company
has an interest. The Company also recorded revenue during the three month period
ended June 30, 1998 from the sale of EEOR equipment; there was no revenue from
the sale of EEOR equipment for the three month period ended June 30, 1997.
The operating loss for the three month period ended June 30, 1998
amounted to $1,203,000, compared with $1,728,000 for the three month period
ended June 30, 1997. Lease operating expenses, which in the three month period
ended June 30, 1998 and 1997 related primarily to the Sylvan Lake property,
increased to $78,000 during the three month period ended June 30, 1998, as
compared to $54,000 for the three month period ended June 30, 1997, primarily as
a result of a greater level of operating activity in the second quarter of 1998.
Direct project costs increased to $245,000 from $222,000 for the three month
period ended June 30, 1997, reflecting activity related to BOC and winding down
activities related to other oil and gas ventures. The decrease in depreciation,
depletion and amortization expense from $50,000 for the three month period ended
June 30, 1997 to $43,000 during the three month period ended June 30, 1998 is
attributable principally to a reduced charge for depreciation due to disposal of
office equipment, which is partially offset by increased depletion due to the
increased production of oil. The loss from investments in unconsolidated
subsidiaries decreased to $44,000 during the three month period ended June 30,
1998, as compared to $716,000 for the three month period ended
21
<PAGE>
June 30, 1997, as a result of a lower level of activity in the unconsolidated
subsidiaries in the second quarter of 1998.
Although lease operating expenses exceeded revenue for the second
quarter of 1998, the Company does not believe that such expenses will continue
to exceed revenue because expenses during the three month period ended June 30,
1998, included non-recurring costs. In addition, prices for heavy oil were
depressed during the second three months of 1998 resulting in decreased revenue
per unit produced due to the decline in heavy oil prices and the application of
the quarterly full cost ceiling limitation. No assurance can be given, however,
that prices for heavy oil will improve or that operating revenue will exceed
lease operating expenses from the Sylvan Lake property or other properties in
future periods.
The Company recorded net other income of $12,000 for the three month
period ended June 30, 1998, as compared to $225,000 during the three month
period ended June 30, 1997. The principal reason for the decrease is the reduced
amount of interest earned due to the Company's lower total of cash and cash
equivalents and restricted cash in the second quarter of 1998, which is
partially offset by a loss that the Company recorded in 1997 from the
disposition of miscellaneous equipment and property amounting to $85,000 in the
second quarter of 1997; the comparable loss incurred in the second quarter of
1998 was $28,000.
The net loss of $1,191,000, or $.11 per share, during the three month
period ended June 30, 1998 compares to a net loss of $1,464,000, or $.13 per
share, for the three month period ended June 30, 1997.
Forward Looking Statements
--------------------------
The forward looking statements contained in this Item 2 and elsewhere
in this Quarterly Report on Form 10-Q are subject to various risks,
uncertainties and other factors that could cause actual results to differ
materially from the results anticipated in such forward looking statements.
Included among the important risks, uncertainties and other factors are those
hereinafter discussed.
Few of such forward looking statements deal with matters that are
within the unilateral control of the Company. Joint venture, acquisition,
financing and other agreements and arrangements must be negotiated with
independent third parties and, in some cases, must be approved by governmental
agencies. Such third parties generally have interests that do not coincide with
those of the Company and may conflict with the Company's interests. Unless the
Company and such third parties are able to compromise their respective
objectives in a mutually acceptable manner, agreements and arrangements will not
be consummated. Operating entities in various foreign jurisdictions must be
registered by governmental agencies, and production licenses for development of
oil and gas fields in various foreign jurisdictions must be granted by
governmental agencies. These governmental agencies generally have broad
discretion in determining whether to take or approve various actions and
matters. In addition, the policies and practices of governmental agencies may be
affected or altered by political, economic and other events occurring either
within their own countries or in a broader international context. The Company
does not have a majority of the equity in BOC, the entity that is the licensed
developer of the Stynawske Field project, even though the Company may be the
designated operator of the oil or gas field. Thus, the concurrence of co-
venturers may be required for various actions. Other parties influencing the
timing of events may have priorities that differ from those of the Company, even
if they generally share the Company's objectives. As a result of all of the
22
<PAGE>
foregoing, among other matters, the forward looking statements regarding the
occurrence and timing of future events may well anticipate results that will not
be realized.
The availability of equity financing to the Company or debt financing to
the Company and the joint venture or other entities that are developing the
projects is affected by, among other things, world economic conditions,
international relations, the stability and policies of various governments,
fluctuations in the price of oil and gas and the outlook for the oil and gas
industry, the competition for funds and an evaluation of specific Company
projects. Rising interest rates might affect the feasibility of debt financing
that is offered. Potential investors and lenders will be influenced by their
evaluations of the Company and its projects and comparisons with alternative
investment opportunities. The Company's ability to finance all of its present
oil and gas projects according to present plans is dependent upon obtaining
additional funding.
The development of oil and gas properties is subject to substantial
risks. Expectations regarding production, even if estimated by independent
petroleum engineers, may prove to be unrealized. There are many uncertainties
inherent in estimating production quantities and in projecting future production
rates and the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to the Company's properties are subject to change as
additional information becomes available. Most of the Company's interests in oil
and gas ventures are located in Eastern European countries. Operations in those
countries are subject to certain additional risks relating to, among other
things, enforceability of contracts, currency convertibility and
transferability, unexpected changes in tax rates, availability of trained
personnel, availability of equipment and services and other factors that could
significantly change the economics of production. Production estimates are
subject to revision as prices and costs change. Production, even if present, may
not be recoverable in the amount and at the rate anticipated and may not be
recoverable in commercial quantities or on an economically feasible basis. World
and local prices for oil and gas can fluctuate significantly, and a reduction in
the revenue realizable from the sale of production can affect the economic
feasibility of an oil and gas project. World and local political, economic and
other conditions could affect the Company's ability to proceed with or to
effectively operate projects in various foreign countries.
Demands by or expectations of governments, co-venturers, customers and
others may affect the Company's strategy regarding the various projects. Failure
to meet such demands or expectations could adversely affect the Company's
participation in such projects or its ability to obtain or maintain necessary
licenses and other approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet effective.
23
<PAGE>
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
On February 20, 1998, Zhoda Corporation ("Zhoda"), which sold to the
Company most of the Company's interest in UK-RAN, filed suit against the Company
and two of its consolidated subsidiaries in the District Court of Harris County,
Texas. Zhoda alleged under several theories that Zhoda was wrongfully deprived
of the value of the UK-RAN shares it transferred to the Company or the
contingent consideration it might have received under its agreement with the
Company. Among the theories of Zhoda's complaint were breach of contract, breach
of fiduciary duty and duty of good faith and fair dealing, fraud and
constructive fraud, fraud in the inducement, negligent misrepresentation, civil
conspiracy, breach of trust, unjust enrichment and rescission. Zhoda sought
damages in excess of $7,500,000, redelivery of the UK-RAN shares transferred to
the Company, fees, expenses and costs and any further relief to which it may be
entitled. An outcome of this proceeding that is unfavorable to the Company could
have a material adverse impact on the Company's financial condition and results
of operations. The Harris County District Court issued an order staying the
litigation initiated by Zhoda in its entirety and indicating that the Court
would dismiss the action if the parties did not commence arbitration in New
York, New York. On July 10, 1998, a request for arbitration was filed by Zhoda
with the International Chamber of Commerce. On July 17, 1998, the Harris County
District Court issued an order retaining the case and directing that the
arbitration be held and concluded by April 16, 1999. Orest Senkiw, who was a
Vice President of the Company from February 4, 1997 to December 1, 1997, and his
wife and adult children indirectly beneficially own in the aggregate 10.3% of
the outstanding stock of Zhoda.
On March 24, 1998, the Company and two consolidated subsidiaries filed
an action against Zhoda in the Court of Queen's Bench of Alberta, Judicial
Centre of Calgary, in which the Company seeks to recover $190,000, plus interest
thereon, which the Company asserts is owing by Zhoda pursuant to promissory
notes and loan agreements. On March 31, 1998, Zhoda filed an answer and
counterclaims against the Company and its two subsidiaries, asserting
essentially the same claims as were asserted in the Texas action described in
the previous paragraph, with the exception that claims asserted in the Texas
suit based on fraud and civil conspiracy were not included in the Alberta
counterclaims. On the basis of its counterclaims, Zhoda seeks damages estimated
to be at least Canadian $10,500,000, redelivery of the UK-RAN shares transferred
to the Company, interest, costs and such further relief as the court may deem
just. An outcome of this proceeding that is unfavorable to the Company could
have a material adverse impact on the Company's financial condition and results
of operations.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to
the Company the outstanding capital of Gastron International Limited
("Gastron"), which in turn owned 31% of the capital of Intergas, filed suit
against the Company and one of its consolidated subsidiaries in the Third
Judicial District Court of Salt Lake County, Utah. In its complaint, Ribalta
alleges breach by the Company of the contract governing the sale of the
outstanding capital of Gastron and failure of a condition in that contract that
should have resulted in its termination. Ribalta seeks the return of all
benefits conferred on the Company pursuant to the contract, including the shares
of Gastron and any property transferred by Gastron, or, alternatively, damages
equal to the value of such benefits, as well as fees, costs and such other
relief as the court deems proper. Under that contract, as amended, the maximum
consideration to which Ribalta might have been entitled was $800,000 and 700,000
shares of the Company Common Stock, and the Company
24
<PAGE>
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 August
7, 1998, the Company and its subsidiary had not been served with the complaint
in the action. An outcome of this proceeding unfavorable to the Company could
have a material adverse impact on the Company's financial condition and results
of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
2(1) Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
August 10, 1995 by and among Ribalta Holdings, Inc. as Vendor
and Fountain Oil Incorporated as Purchaser, and John Richard
Tate as Warrantor (Incorporated herein by reference from October
19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase
of All the Issued Share Capital of Gastron International Limited
dated November 3, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference from
October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International Limited
dated May 29, 1996 by and among Ribalta Holdings, Inc. as Vendor
and Fountain Oil Incorporated as Purchaser, and John Richard
Tate as Warrantor (Incorporated herein by reference from June
30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management
Services Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil
Incorporated dated May 16, 1995 (Incorporated herein by
reference from December 31, 1997 Form 10-K).
2(5) Amended and Restated Combination Agreement between
Fountain Oil Incorporated and CanArgo Energy Inc. dated as of
February 2, 1998 (Incorporated herein by reference from Form S-3
Registration Statement, File No. 333-48287 filed on June 9,
1998).
2(6) Voting, Support and Exchange Trust Agreement
(Incorporated herein by reference as Annex G from Form S-3
Registration Statement, File No. 333-48287 filed on June 9,
1998).
25
<PAGE>
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15, 1998
Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference
from December 31, 1996, Form 10-K).
4 Form of 8% Convertible Subordinated Debenture
(Incorporated herein by reference from February 29, 1996 Form
10-QSB).
10(1) License Agreement among IIT Research Institute, ORS
Corporation and Uentech Corporation dated October 27, 1986
(Incorporated herein by reference from October 31, 1986 Form 10-
K, filed by Electromagnetic Oil Recovery, Inc., Fountain's
predecessor).
10(2) Amendment to Revised Single Well Technology License
Agreement Dated October 27, 1986 (Incorporated herein by
reference from August 31, 1995 Form 10-KSB).
*10(3) Securities Compensation Plan (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., Fountain's predecessor).
*10(4) Form of Certificate for Common Stock Purchase Warrants
issued pursuant to the Securities Compensation Plan
(Incorporated herein by reference from Form S-8 Registration
Statement, File No. 33-82944 filed on August 17, 1994, filed by
Electromagnetic Oil Recovery, Inc., Fountain's predecessor).
*10(5) Form of Option Agreement for options granted to certain
persons, including Directors (Incorporated herein by reference
from August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil
Recovery, Inc., Fountain's predecessor).
*10(6) Form of Certificate for Common Stock Purchase Warrants
issued to certain investors in August 1994, including Directors
(Incorporated herein by reference from August 31, 1994 Form 10-
KSB, filed by Electromagnetic Oil Recovery, Inc., Fountain's
predecessor).
*10(7) Management Services Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated herein by
reference from June 30, 1997 Form 10-Q).
*10(8) Restated Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated herein by
reference from December 31, 1997 Form 10-K).
26
<PAGE>
*10(9) Employment Agreement between Fountain Oil Incorporated
and Einar H. Bandlien (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(10) Employment Agreement between Fountain Oil Incorporated
and Arnfin Haavik (Incorporated herein by reference from August
31, 1995 Form 10-KSB).
*10(11) Employment Agreement between Fountain Oil Incorporated
and Svein E. Johansen (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(12) Employment Agreement between Fountain Oil Incorporated
and Arild Boe (Incorporated herein by reference from August 31,
1995 Form 10-KSB).
*10(15) Employment Agreement between Fountain Oil Incorporated
and Ravinder S. Sierra (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(16) Employment Agreement between Fountain Oil Incorporated
and Susan E. Palmer (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(17) Amended 1995 Long-Term Incentive Plan (Incorporated
herein by reference from June 30, 1997 Form 10-Q).
*10(19) Fee Agreement dated November 15, 1995 between Fountain
Oil Incorporated and Robert A. Halpin (Incorporated herein by
reference from August 31, 1996 Form 10-KSB).
*10(20) Fee Agreement between Fountain Oil Incorporated and
Eugene J. Meyers (Incorporated herein by reference from August
31, 1996 Form 10-KSB).
*10(21) Amended Fee Agreement dated December 10, 1996 between
Fountain Oil Incorporated and Robert A. Halpin (Incorporated
herein by reference from December 31, 1996 Form 10-K).
*10(22) Employment Agreement between Fountain Oil Incorporated
and Whitfield Fitzpatrick (Incorporated herein by reference from
March 31, 1997 Form 10-Q).
*10(23) Management Services Agreement between Fountain Oil
Services Incorporated and Orest Senkiw (Incorporated herein by
reference from March 31, 1997 Form 10-Q).
27
<PAGE>
*10(24) Employment Agreement between Fountain Oil Incorporated
and Alfred Kjemperud (Incorporated herein by reference from
March 31, 1997 Form 10-Q).
*10(25) Employment Agreement between Fountain Oil Norway AS and
Rune Falstad (Incorporated herein by reference from December 31,
1997 Form 10-K).
*10(26) Management Services Agreement between Trident Petroleum
Inc. and Fountain Oil Boryslaw Limited (Incorporated herein by
reference from December 31, 1997 Form 10-K).
*10(27) CanArgo Energy Inc. Stock Option Plan (Incorporated
herein by reference from Form S-8 Registration Statement, File
No. 333-59367 filed on July 17, 1998).
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
Date: August 11, 1998 By: /s/ MICHAEL BINNION
-------------------
Michael Binnion
President and Chief
Financial Officer
28
<PAGE>
next pages for electronic filing only - not a part of 10Q
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
- ------ ------- -----------
<S> <C> <C>
2(1) Agreement Relating to the Sale and Purchase of All
the Issued Share Capital of Gastron International
Limited dated August 10, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated
as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19,
1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and
Purchase of All the Issued Share Capital of Gastron
International Limited dated November 3, 1995
by and among Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein
by reference from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase
of All the Issued Share Capital of Gastron
International Limited dated May 29, 1996 by and
among Ribalta Holdings, Inc. as Vendor and Fountain
Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference
from June 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management
Services Pty, Ltd., A.C.N. 005 506 123 and Fountain
Oil Incorporated dated May 16, 1995 (Incorporated
herein by reference from December 31, 1997 Form 10-K).
2(5) Amended and Restated Combination Agreement between
Fountain Oil Incorporated and CanArgo Energy Inc.
dated as of February 2, 1998 (Incorporated herein by
reference from Form S-3 Registration Statement, File
No. 333-48287 filed on June 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement
(Incorporated herein by reference as Annex G from
Form S-3 Registration Statement, File No. 333-48287
filed on June 9, 1998).
3(1) Registrant's Certificate of Incorporation and
amendments thereto (Incorporated herein by reference
from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference
from December 31, 1996, Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4 Form of 8% Convertible Subordinated Debenture
(Incorporated herein by reference from February 29,
1996 Form 10-QSB).
10(1) License Agreement among IIT Research Institute, ORS
Corporation and Uentech Corporation dated October 27,
1986 (Incorporated herein by reference from October 31,
1986 Form 10-K, filed by Electromagnetic Oil Recovery,
Inc., Fountain's predecessor).
10(2) Amendment to Revised Single Well Technology License
Agreement Dated October 27, 1986 (Incorporated herein
by reference from August 31, 1995 Form 10-KSB).
*10(3) Securities Compensation Plan (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., Fountain's
predecessor).
*10(4) Form of Certificate for Common Stock Purchase Warrants
issued pursuant to the Securities Compensation Plan
(Incorporated herein by reference from Form S-8
Registration Statement, File No. 33-82944 filed on
August 17, 1994, filed by Electromagnetic Oil Recovery,
Inc., Fountain's predecessor).
*10(5) Form of Option Agreement for options granted to certain
persons, including Directors (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., Fountain's
predecessor).
*10(6) Form of Certificate for Common Stock Purchase
Warrants issued to certain investors in August 1994,
including Directors (Incorporated herein by reference
from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., Fountain's
predecessor).
*10(7) Management Services Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated herein
by reference from June 30, 1997 Form 10-Q).
*10(8) Restated Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated herein
by reference from December 31, 1997 Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10(9) Employment Agreement between Fountain Oil Incorporated
and Einar H. Bandlien (Incorporated herein by reference
from August 31, 1995 Form 10-KSB).
*10(10) Employment Agreement between Fountain Oil Incorporated
and Arnfin Haavik (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(11) Employment Agreement between Fountain Oil Incorporated
and Svein E. Johansen (Incorporated herein by reference
from August 31, 1995 Form 10-KSB).
*10(12) Employment Agreement between Fountain Oil Incorporated
and Arild Boe (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(15) Employment Agreement between Fountain Oil Incorporated
and Ravinder S. Sierra (Incorporated herein by reference
from August 31, 1995 Form 10-KSB).
*10(16) Employment Agreement between Fountain Oil Incorporated
and Susan E. Palmer (Incorporated herein by reference
from August 31, 1995 Form 10-KSB).
*10(17) Amended 1995 Long-Term Incentive Plan (Incorporated
herein by reference from June 30, 1997 Form 10-Q).
*10(19) Fee Agreement dated November 15, 1995 between Fountain
Oil Incorporated and Robert A. Halpin (Incorporated
herein by reference from August 31, 1996 Form 10-KSB).
*10(20) Fee Agreement between Fountain Oil Incorporated and
Eugene J. Meyers (Incorporated herein by reference
from August 31, 1996 Form 10-KSB).
*10(21) Amended Fee Agreement dated December 10, 1996 between
Fountain Oil Incorporated and Robert A. Halpin
(Incorporated herein by reference from December 31,
1996 Form 10-K).
*10(22) Employment Agreement between Fountain Oil Incorporated
and Whitfield Fitzpatrick (Incorporated herein by
reference from March 31, 1997 Form 10-Q).
*10(23) Management Services Agreement between Fountain Oil
Services Incorporated and Orest Senkiw (Incorporated
herein by reference from March 31, 1997 Form 10-Q).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10(24) Employment Agreement between Fountain Oil
Incorporated and Alfred Kjemperud (Incorporated
herein by reference from March 31, 1997 Form 10-Q).
*10(25) Employment Agreement between Fountain Oil Norway AS
and Rune Falstad (Incorporated herein by reference
from December 31, 1997 Form 10-K).
*10(26) Management Services Agreement between Trident
Petroleum Inc. and Fountain Oil Boryslaw Limited
(Incorporated herein by reference from December
31, 1997 Form 10-K).
*10(27) CanArgo Energy Inc. Stock Option Plan (Incorporated
herein by reference from Form S-8 Registration Statement,
File No. 333-59367 filed on July 17, 1998).
27 Financial Data Schedule (EDGAR filing only) X
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,380,351
<SECURITIES> 0
<RECEIVABLES> 818,331
<ALLOWANCES> 0
<INVENTORY> 36,369
<CURRENT-ASSETS> 11,448,864
<PP&E> 9,135,303
<DEPRECIATION> 748,412
<TOTAL-ASSETS> 23,661,883
<CURRENT-LIABILITIES> 891,723
<BONDS> 0
0
0
<COMMON> 2,244,749
<OTHER-SE> 20,525,411
<TOTAL-LIABILITY-AND-EQUITY> 23,661,883
<SALES> 12,000
<TOTAL-REVENUES> 144,516
<CGS> 10,891
<TOTAL-COSTS> 177,627
<OTHER-EXPENSES> 1,980,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323,272
<INCOME-PRETAX> (4,009,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,009,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,009,096)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
