<PAGE> 1
As filed with the Securities and Exchange Commission on February 12, 1999
File No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
CANARGO ENERGY CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
1311
(Primary Standard Industrial Classification Code Number)
91-0881481
(IRS Employer Identification No.)
1580, 727 - 7th Avenue S.W.,
Calgary, Alberta T2P 0Z5
Telephone (403) 777-1185
(Address and telephone number of principal executive offices)
Susan E. Palmer
CANARGO ENERGY CORPORATION
1400 Broadfield Boulevard, Suite 100
Houston, Texas 77084
Telephone (281) 492-6992
(Name, address and telephone number of agent for service)
Please forward a copy of all correspondence to:
Alan D. Jacobson, Esq.
Kelly Lytton Mintz & Vann LLP
1900 Avenue of the Stars, Suite 1450
Los Angeles, California 90067
Telephone (310) 277-5333
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
<PAGE> 2
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, 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, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Offering Price Per Aggregate Offering Amount of
Securities To Be Registered Amount To Be Registered Unit Price Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $.10 par value 21,264,643 shares $0.2813(1) $5,981,744(1) $1,663.00
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with Rule 457(c) under the Securities Act of
1933, as amended, on the basis of the last sale price of the Common
Stock on the Nasdaq National Market System on February 8, 1999.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
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.
(ii)
<PAGE> 3
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1999
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
21,264,643 Shares
[ Shares Minimum]
CANARGO ENERGY CORPORATION
COMMON STOCK
CanArgo Energy Corporation is offering 21,264,643 shares of its Common Stock
on a best efforts basis directly to the public at a price of $ per share.
The closing price of the Company's Common Stock on the Nasdaq National Market
System (symbol: GUSH) on February 11, 1999 was $0.375 per share. The Company's
Common Stock is also traded on the Oslo Stock Exchange (symbol: CNR).
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION REGARDING RISKS ASSOCIATED
WITH A PURCHASE OF THE COMPANY'S COMMON STOCK THAT ARE DESCRIBED UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 5.
The Company is offering 21,264,643 shares (the "Maximum Offering") subject
to selling at least shares (the "Minimum Offering"). All subscription
payments will be deposited into an escrow account until the Minimum Offering is
sold. When the Minimum Offering has been sold, the escrow will be terminated and
the subscription proceeds will be delivered to the Company. Any proceeds from
subsequent sales of shares up to the Maximum Offering will be delivered directly
to the Company. If the Minimum Offering is not sold, all proceeds deposited in
the escrow account will be promptly refunded in full, without interest and
without any deduction of any kind.
Record holders as of , 1999 of the Company's Common Stock and of the
Exchangeable Shares issued by the Company's subsidiary, CanArgo Oil & Gas Inc.,
will be given priority to purchase a number of shares being offered up to the
number of shares they held on that date, provided that the Company receives
their subscriptions in proper form prior to , 1999. Subject to such
priority, subscriptions in proper form will be accepted in the order received.
The Company reserves the right to reject any subscription in full or in part.
The offering will terminate on the earliest of (a) the date on which the
Maximum Offering been sold; (b) , 1999, unless such date is extended by the
Company to not later than , 1999; or (c) the date on which the Company
terminates the offering.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Public Commissions Company
--------------- ----------- -------
<S> <C> <C> <C>
Per Share $ None $
-------------------- ------------
Minimum Offering: shares $ None
-------------- -------------------- ------------
Maximum Offering: 21,264,643 shares $ None $
-------------------- ------------
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1999
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[Inside Front Cover Page]
The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward-looking statements. When used in
this 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. 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 that
in some cases have affected the Company'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 Prospectus. Important
factors that could cause such a difference are discussed in this Prospectus,
particularly in the "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections. You are cautioned not
to place undue reliance on the forward-looking statements.
You should rely only on the information contained in this Prospectus.
We have not authorized anyone to provide you with information that is different.
The information in this Prospectus is current only as of the date of this
Prospectus, regardless of the time this Prospectus is delivered to you or the
time you purchase Common Stock. Such information could change and be different
as of a later date.
This Prospectus is not an offer to sell, nor is it seeking an offer to
buy, the Company's Common Stock in any jurisdiction where the offer or sale
would be unauthorized or unlawful.
TABLE OF CONTENTS
Page
SUMMARY ................................................................... 3
RISK FACTORS............................................................... 5
THE OFFERING...............................................................14
USE OF PROCEEDS............................................................17
MARKET FOR COMMON STOCK AND DIVIDEND POLICY................................18
CAPITALIZATION.............................................................20
SELECTED CONSOLIDATED FINANCIAL DATA.......................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................22
BUSINESS...................................................................32
MANAGEMENT.................................................................48
CERTAIN TRANSACTIONS.......................................................55
OWNERSHIP OF VOTING SECURITIES.............................................57
DESCRIPTION OF CAPITAL STOCK...............................................60
SHARES ELIGIBLE FOR FUTURE RESALE..........................................64
LEGAL MATTERS..............................................................64
EXPERTS....................................................................65
AVAILABLE INFORMATION......................................................65
INDEX TO FINANCIAL STATEMENTS.............................................F-1
2
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SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in the Common Stock. You
should read the entire Prospectus carefully.
All share and per share amounts in this Prospectus have been adjusted
to reflect a 1-for-2 reverse stock split of the Company's Common Stock effected
in July 1998. All references to the "Company" are to CanArgo Energy Corporation
and its consolidated subsidiaries.
THE COMPANY
CanArgo Energy Corporation is a Delaware corporation with interests in
oil and gas properties in Eastern Europe, principally the Republic of Georgia.
The Company completed in July 1998 a business combination with CanArgo Energy
Inc., which is now known as CanArgo Oil & Gas Inc. and is a wholly owned
subsidiary of the Company. The Company's principal asset is a 68.5% interest in
Ninotsminda Oil Company Limited ("NOC"), a Cyprus corporation that is engaged in
the development of the Ninotsminda oil field and other fields in the Republic of
Georgia. The Company is directing substantially all of its efforts and available
funds to the development of the Ninotsminda field and requires the proceeds of
this offering to continue such activities. The Company has other interests in
oil and gas properties in the Republic of Georgia, Ukraine and elsewhere,
including North America.
The Company's principal executive offices are located at Suite 1580,
Guinness House, 727 - 7th Avenue, S.W., Calgary, Alberta, Canada T2P 0Z5, and
its telephone number is (403) 777-1185. See "BUSINESS."
THE OFFERING
<TABLE>
<S> <C>
Priority to Record Stockholders......... Record holders of the Company's Common Stock and of the Exchangeable
Shares issued by CanArgo Oil & Gas Inc. as of , 1999
will be given priority to purchase in the offering a number of shares
up to the number of shares they hold, provided their subscription
documents are received in proper form by ,
1999.
Best Efforts Offering................... Subject to the priority of Record Stockholders, subscriptions will be
accepted in the order received.
Minimum Offering........................ shares ($3,000,000).
Maximum Offering........................ 21,264,643 shares ($ ).
Escrow Account.......................... All subscription payments will be deposited into an escrow account
until the Minimum Offering is sold.
</TABLE>
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<TABLE>
<S> <C>
Offering Period......................... The offering will terminate on the earliest of
- sale of all the shares offered;
- , 1999 or, if extended, not later than
, 1999; or
- the date the Company terminates the offering.
Use of Proceeds......................... The Company will use the net proceeds of the Minimum Offering to make
a $2,000,000 loan to NOC to be used to develop the Ninotsminda
field. Additional net proceeds will be used as working capital and
to invest in a refinery. See "USE OF PROCEEDS."
Nasdaq Symbol........................... GUSH
Oslo Stock Exchange Symbol.............. CNR
Risks................................... An investment in the Common Stock is very risky. The Company has
experienced significant losses and requires the proceeds of this
offering to finance its oil and gas projects. You should carefully
read "RISK FACTORS."
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The Company's operations have generated minimal revenues over the last
five years, and during that time the Company has had substantial operating
losses. The following consolidated financial data, which is unaudited,
summarizes the Company's financial results for the nine month period ended
September 30, 1998 and its financial position as of September 30, 1998.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
(unaudited)
<S> <C>
Total revenue $ 520,000
Operating loss (5,015,000)
Net loss (4,790,000)
Net loss per common share (0.34)
Working capital 6,717,000
Total assets 48,077,000
Notes payable and long-term debt 896,000
Minority interest 3,385,000
Stockholders' equity 41,689,000
</TABLE>
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RISK FACTORS
An investment in the Company's Common Stock involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, as well as all other information in this Prospectus, before investing
in the Common Stock. This Prospectus contains certain forward-looking statements
that involve risks and uncertainties. Future events and the Company's actual
results could differ materially from the results anticipated in these forward
looking statements. Some of the important factors that might cause such a
difference are discussed in the following risk factors.
THE COMPANY HAS INCURRED SUBSTANTIAL LOSSES AND HAS MINIMAL REVENUES.
The Company's oil and gas properties have produced minimal revenues. As
a result, the Company has experienced recurring operating losses, and its
current operations are not generating positive cash flows. For the quarter ended
September 30, 1998, the Company reported revenues of $375,000 and a net loss of
$781,000. On that date, the Company had an accumulated deficit since October 31,
1988, when it went through a quasi-reorganization, of $62,296,000. The Company's
ability to continue its operations is dependent upon generating funds from
external sources and, eventually, generating positive cash flows from its
operating activities. Without sufficient cash, the Company will not be able to
finance its ongoing operations. The Company's financial statements are prepared
on the basis that it will be able to continue to operate despite its need for
cash. Thus, the financial statements do not reflect the reduction in the value
of the Company's assets that would be expected if the Company ceased operations.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
THE COMPANY HAS SIGNIFICANT SHORT-TERM CASH REQUIREMENTS.
Under the terms of the operative agreements governing its principal oil
and gas projects, including its projects in the Republic of Georgia, the Company
is required to provide or arrange for all capital and operating costs. The
Company's working capital at December 31, 1998 was $ , which would be
insufficient to fund the Company's planned operations past June 30, 1999.
NOC has entered into a $6,000,000 Loan Agreement with the International
Finance Corporation, with the proceeds to be used principally to fund the
development of the Ninotsminda oil field, the Company's principal operation at
the present time. The terms of the loan agreement require that the Company make
or arrange a $2,000,000 subordinated loan to NOC before the International
Finance Corporation will disburse the loan, and the first disbursement must
occur by June 30, 1999. The Company is conducting this offering in order to
raise the funds to make the $2,000,000 subordinated loan and to generate other
funding, including additional working capital. See "USE OF PROCEEDS". If the
Company is unable to arrange the $2,000,000 loan, it may be unable to continue
with the development of the Ninotsminda oil field. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THE COMPANY'S FUTURE IS DEPENDENT ON THE SUCCESS OF THE NINOTSMINDA OIL FIELD.
The Company's management has been directing substantially all of its
efforts and available funds to the development of the Ninotsminda oil field in
the Republic of Georgia and some ancillary activities closely related to the
Ninotsminda field project. This decision is based on management's assessment of
the promise of the Ninotsminda field. In order to mitigate its investment risk,
the Company has
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structured its development plans for the Ninotsminda field so that management
can assess the commercial feasibility of the project at various stages. There is
no assurance, however, that the Company's development plans for the Ninotsminda
field, or any of the Company's oil and gas properties, will prove successful,
that the Ninotsminda field will ever produce sufficient quantities of oil and
gas to establish a viable operation, or that the Company will be able to market
the oil and gas produced at a sufficiently high price to produce a profit and
positive cash flow. The Company has not yet successfully developed and operated
an oil field.
The Company has a number of other projects that are not being actively
developed at this time. These projects involve unevaluated oil and gas
properties which had a carrying value of $11,451,000 at September 30, 1998. The
risks associated with successfully developing unevaluated oil and gas properties
are even greater than those associated with producing oil and gas properties.
During 1997, the Company concluded that one venture it was developing could not
be a successful commercial development and recorded an impairment charge for all
of its assets related to that venture. In addition, the Company concluded that
it would be unable to develop two other ventures successfully and recorded
impairment charges for all of its assets related to these ventures.
THE COMPANY NEEDS LONG-TERM FUNDING.
It will take many years and substantial cash expenditures to develop
the Company's oil and gas properties. The Company generally has the principal
responsibility to provide financing for its oil and gas properties and ventures.
The net proceeds of this offering, together with existing debt financing and
funds expected to be generated by operations, are not expected to be sufficient
to fund the Company's operations and development plans beyond June 2000.
Accordingly, the Company will need to raise additional funds from public or
private sources or enter into joint venture or similar arrangements with third
parties in order to pay for project development costs. The issuance of
additional equity securities would likely dilute the ownership interests of
existing stockholders, and arrangements like joint ventures will reduce the
Company's percentage interest in the relevant projects. Additional borrowing
would increase interest expense and debt service requirements. The amount of
additional financing the Company will require will depend upon a number of
factors, including the success of this offering and the Company's development
plans. The Company may not be able to obtain additional financing from any
source if needed. If adequate funds are not available, the Company would be
required to scale back or even suspend its operations.
THE COMPANY'S OIL AND GAS ACTIVITIES INVOLVE MANY RISKS.
The Company's exploration, development and production activities are
subject to a number of factors and risks, many of which may be beyond the
Company's control. First, the Company must successfully identify commercial
quantities of recoverable oil and gas. The development of an oil and gas deposit
can be affected by a number of factors, such as the size of the deposit,
proximity to infrastructure, oil prices and government regulations, which are
beyond the Company's control. The Company's activities can also be affected by a
number of hazards, such as -
- - labor disputes;
- - unexpected or unusual geological conditions;
- - natural phenomena, such as bad weather and earthquakes;
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- - operating hazards, such as fires, explosions, blow-outs, pipe failures and
casing collapses; and
- - environmental hazards, such as oil spills, gas leaks, ruptures and discharges
of toxic gases.
Any of the hazards could result in damage, losses or liability for the Company.
Company operations involving the rehabilitation of fields where less than
optimal practices and technology were employed, as was often the case in Eastern
Europe, carry increased risk for encountering some of these hazards.
The Company maintains insurance customary in the oil and gas industry
relative to the scope of its operations. That insurance, however, does not cover
all of the possible risks that are involved in oil and gas exploration,
development and production.
THE COMPANY'S FOREIGN OPERATIONS ARE SUBJECT TO SPECIAL RISKS.
The Company's principal oil and gas properties, including the
Ninotsminda field, are located in Eastern Europe. Development of these fields is
subject to special risks and uncertainties such as:
- Political Instability - The governments of the
Eastern European countries in which the Company
operates were established relatively recently. The
Company's operations typically involve partnerships
or joint ventures with the local government or
state-owned companies. As a result, the Company's
operations could be adversely affected by political
instability, changes in government institutions,
personnel or policies, or shifts in political power.
There is also the risk that new governments could
seek to nationalize or otherwise take over the
Company's oil and gas properties.
- Social and Economic Instability - Countries in
Eastern Europe have experienced social and economic
instability due to low standards of living, lack of
infrastructure and technology, undeveloped legal and
social institutions, conflicts with neighboring
countries, and other factors. Such instability can
make continued operations difficult or impossible.
- Deteriorating Infrastructure - Countries in Eastern
Europe often either have underdeveloped
infrastructures or, as a result of shortages of
resources, have permitted infrastructure improvements
to deteriorate. The lack of necessary infrastructure
improvements can adversely affect operations. For
example, the lack of a reliable power supply caused
the drilling of a well in the Ninotsminda field to be
suspended and the testing of a second well to be
delayed.
- Currency Risks - Payment to the Company for oil and
gas products sold in Eastern European countries may
be in local currencies. Although the Company
currently sells its oil for U.S. dollars, it may not
be able to continue to demand payment in hard
currencies. Although most Eastern European currencies
are presently convertible into U.S. dollars, there is
no assurance that convertibility will continue. Even
if currencies are convertible, the rate at which they
convert
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into U.S. dollars is subject to fluctuation. The
Company's ability to transfer currencies into or out of
Eastern European countries may be restricted or limited.
OIL AND GAS PRICES ARE VOLATILE.
The Company's operations are 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 changes in the supply and demand for oil and natural
gas, 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. The Company is unable to
predict future oil and natural gas price movements with any certainty. The
significant declines in oil prices during the past year have adversely affected
the economics of the Company's projects. At current prices, the Company's
revenue from its share of Ninotsminda field production is insufficient to cover
production and depletion expenses associated with that production.
The price received for oil by NOC has generally been negotiated on the
basis of the European spot price for Brent grade crude oil, less certain
discounts for transportation and related charges. The price received by NOC has
ranged from the full Brent price to Brent minus $5.83 per barrel. The average
discount from the spot price for Brent grade crude oil is approximately $1.50 at
this time because the particular buyers are transporting the oil shorter
distances. If the Company is unable to attract buyers who need to transport the
oil a relatively short distance, the Company will probably realize a lower net
price from the sale of its oil. At today's European spot prices it would be
uneconomic for the Company to sell its oil at a price incorporating a $5.83 per
barrel discount for transportation and related charges.
RESERVE INFORMATION IS UNCERTAIN.
Estimates of oil and natural gas reserves and their values by petroleum
engineers are inherently uncertain. The estimates incorporate professional
judgments not only about the quantities of crude oil and natural gas that exist
in identified reservoirs but also about the portion that can be produced on an
economically sound basis, the costs of production and the rate of extraction.
This estimating process involves an evaluation of all available geological,
engineering, production and economic data relating to each relevant oil and gas
reservoir. The data relating to a particular reservoir may change substantially
over time as a result of additional development activity, evolving production
history, changing economic conditions, market price fluctuations, variations in
production costs and other factors. In addition, the estimating process requires
significant subjective judgments. As a result, different petroleum engineers
evaluating the same data may reach substantially different results, and the same
petroleum engineers evaluating data relating to a particular reservoir at
various times may come to substantially different conclusions at different
times. Actual production, revenue and costs for the Company's oil and gas
reserves in the future will probably vary from those anticipated in the current
estimates of the Company's oil and gas reserves, and the magnitude of those
variations may be material.
OIL AND GAS OPERATIONS ARE SUBJECT TO EXTENSIVE REGULATION.
Governments at all levels -- national, regional and local -- regulate
oil and gas activities extensively. Laws and regulations govern many aspects of
the oil and gas business, including exploration, development, production,
occupational health and safety, labor standards and environmental matters. The
Company must comply with these laws and regulations. In recent years,
governments have strengthened
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many of these laws and regulations, thereby increasing the burdens imposed on
oil and gas companies in a number of ways, including the following:
- increasing the amount of potential liability associated with
a particular event;
- expanding the categories of participants who may be
responsible for the liabilities associated
with that event;
- increasing reporting requirements; and
- subjecting operations to greater substantive regulation and
greater requirements for advance regulatory clearance.
The trend is towards more burdensome regulation. This trend is particularly
applicable in developing economies, such as those in Eastern Europe where the
Company has its principal operations. In these countries, the evolution towards
a more developed economy is often accompanied by the more burdensome regulations
that typically exist in the more developed economies.
THE COMPANY IS INVOLVED IN LITIGATION.
The Company has acquired interests in various oil and gas properties
from third parties who agreed to condition receipt of all or a portion of their
payment for those interests upon the property achieving certain operating
objectives, such as specified levels of production within specified periods. In
certain cases, the properties have not achieved these objectives, with the
consequence that the sellers did not receive the contingent payments. Two
sellers who were denied some or all of their potential payments have instituted
suits against the Company. In addition, some of the Company's co-venturers in
oil and gas projects or the ventures themselves may assert claims against the
Company with respect to the Company's decision not to proceed with the
development of these projects. See "BUSINESS - Legal Proceedings".
THE COMPANY ENCOUNTERS INTENSE COMPETITION.
The oil and gas industry is highly competitive. The Company encounters
competition from other oil and gas companies in many areas, including:
- acquisition of producing properties and undeveloped acreage;
- obtaining scarce resources, such as experienced personnel,
drilling rigs or the services of oil field service companies,
when in short supply; and
- sale of production.
The Company's competitors include integrated oil and gas companies,
independent oil and gas companies, drilling and income programs, and
individuals. Many of its competitors are large, well-established, well-financed
companies. These competitors may possess advantages in relation to the Company,
including -
- larger and more experienced staffs;
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- greater capital resources;
- the ability to develop better information and to provide
better analysis of available information;
- the ability to pay more for productive properties and
exploratory prospects; and
- the human and financial resources to pursue a greater number
of attractive opportunities.
The Company may not possess the capabilities required to compete successfully
with its competitors in acquiring additional properties or in maximizing the
development of its properties.
THE COMPANY IS DEPENDENT ON MANAGEMENT AND SERVICE CONTRACTORS.
The Company depends to a significant degree on key personnel and on its
ability to attract and retain highly-skilled personnel. The loss of key
personnel might adversely affect the Company's future results if the Company
cannot attract suitable replacements.
David Robson, the Company's Chairman and Chief Executive Officer, does
not have an employment agreement with the Company and could leave at will. He is
the Company executive who has the most experience in the oil and gas industry
and who has the most highly developed relationships in Eastern Europe. Should
Mr. Robson leave the employ of the Company, his loss could have a material
adverse effect upon the Company and its operations unless the Company were able
to replace him with an executive of similar experience and skill.
The Company seeks to operate efficiently in Eastern European countries
by engaging local service companies to operate and manage the Company's
properties, including the Ninotsminda field. Although the Company has overall
responsibility for the Ninotsminda project, the day-to-day operations, including
personnel selection and supervision, are administered by the local service
company. The lack of control over daily operations subjects the Company to
increased risk of unauthorized actions.
EXISTING STOCKHOLDERS MAY EXPERIENCE DILUTION.
The number of shares being offered is equal to the number of outstanding
shares of Common Stock and Exchangeable Shares. The public offering price is
significantly less than the net tangible book value per share of the Common
Stock of $ at December 31, 1998. Holders of the Company's Common Stock and
the Exchangeable Shares as of , 1999 are being given priority to purchase
in this offering up to the number of shares they own. Those stockholders who do
not purchase shares in this offering, or who purchase less than the number of
shares they own, will experience dilution in their percentage ownership in the
Company and in the net tangible book value per share of the shares they hold.
THE COMMON STOCK COULD BE DELISTED FROM THE NASDAQ STOCK MARKET.
The Company's Common Stock currently trades on the Nasdaq National
Market System, as well as on the Oslo Stock Exchange. On September 30, 1998,
Nasdaq advised the Company that its Common Stock would be delisted if the Common
Stock did not attain a bid price of at least $1.00 for ten consecutive days by
the end of December 1998. The Common Stock failed to satisfy the minimum bid
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requirement by the end of December. The Company, however, requested a hearing
regarding the proposed delisting by Nasdaq, which had the effect of delaying the
proposed delisting until a hearing is held and a determination is made regarding
delisting. The hearing will be held on February 26, 1999.
In an effort to satisfy Nasdaq's minimum price requirement, the Company
will seek at the next annual meeting stockholder approval of a one-for-ten
reverse stock split of the Common Stock. The reverse stock split would combine
each ten issued and outstanding shares into one share. The Board of Directors
believes that the reverse split should have the effect of increasing the bid
price for the Common Stock to a level well in excess of the $1.00 minimum
required by Nasdaq. However, there is no assurance that the price of one share
after the reverse split will be as high as the aggregate price of ten shares
before the reverse split or that the stock price after the reverse split will
meet the Nasdaq requirement.
The Company will seek a further delay of action by Nasdaq to delist the
Common Stock until a stockholder meeting is held to vote on the proposed reverse
stock split. The failure of the Company's stockholders to approve the reverse
stock split could result in the delisting of the Common Stock.
If Nasdaq delists the Company's Common Stock from the National Market
System, the Common Stock might thereafter trade in the United States either on
the OTC Bulletin Board or through what is commonly referred to as the "pink
sheets". In that event, Company stockholders would likely experience more
difficulty in obtaining accurate and timely quotations of the price of the
Common Stock, greater percentage spreads between bid and asked prices, and more
difficulty and higher transactions costs when buying or selling the Common
Stock.
If Nasdaq delists the Common Stock, then the Oslo Stock Exchange might
also consider delisting the Common Stock from that exchange.
In addition, if Nasdaq delists the Common Stock from the National
Market System, the penny stock rules of the Securities and Exchange Commission
could apply to the Company's Common Stock. A "penny stock" is an equity security
that is not listed on a national securities exchange or quoted on Nasdaq that
has a market price of less than $5.00 per share. The penny stock rules generally
require, among other things:
- a suitability determination regarding a prospective purchaser
of penny stock;
- the written consent of a prospective purchaser of penny stock
prior to the transaction;
- delivery prior to a penny stock transaction of a disclosure
document relating to the penny stock market;
- disclosure by the broker-dealer of the commissions payable to
the broker-dealer and registered representative, current
quotations for the penny stock security and, if true, that the
broker-dealer is the sole market maker in the security and the
control over that market that the broker-dealer would
presumably possess; and
- monthly statements containing recent price information for
penny stock held in a brokerage account and information on the
limited market in penny stocks.
11
<PAGE> 14
As a result of the requirements imposed by the penny stock rules, broker-dealers
may have limited interest in or capability for handling penny stock
transactions. Consequently, if the Company's Common Stock becomes subject to the
penny stock rules, stockholders may find it substantially more difficult to
dispose of the Common Stock and may experience substantially increased
transaction costs.
DURING THIS OFFERING, YOUR ABILITY TO SELL COMMON STOCK WILL BE IMPAIRED.
This offering may continue until , 1999. Although the Company's Common
Stock is currently publicly traded on the Nasdaq National Market, until the
offering is terminated investors who wish to sell their shares will have to
compete for buyers with the Company's offering of shares pursuant to this
Prospectus. It is unlikely that investors will be able to sell their shares on
the open market during the offering for more than a price which together with
the "spread" required by a market maker equals the price at which shares are
being sold in this offering. The Company can give no assurance that the market
price of the Common Stock will be at or above the public offering price during
or after the offering.
THE OFFERING PROCEEDS WILL BE HELD IN AN ESCROW ACCOUNT.
All subscription payments will be deposited into an escrow account until the
Minimum Offering is sold. If the Minimum Offering is not fully subscribed by
, 1999, all monies deposited in the escrow account will be refunded to the
subscribers, without interest and without any deduction for expenses. During the
escrow period, subscribers will have no right to a return of their payments, and
they will have no rights as stockholders until certificates are issued and
delivered. See "THE OFFERING--Escrow of Minimum Proceeds."
FUTURE SALES OF COMMON STOCK COULD AFFECT ITS MARKET PRICE.
Open market sales of Common Stock that is outstanding at the start of this
offering may adversely affect the market price of the shares during or after
this offering. There are no material restrictions on the transferability of the
approximately shares of Common Stock held by non-affiliates of the
Company. Affiliates of the Company may sell shares subject to the volume
limitations set forth in Rule 144. See "SHARES ELIGIBLE FOR FUTURE RESALE."
FUTURE STOCK ISSUANCES COULD HAVE ANTI-TAKEOVER EFFECTS.
The Company's Board of Directors may issue additional shares of
Preferred Stock and Common Stock without any prior approval by the stockholders.
Holders of outstanding shares have no right to purchase a pro rata portion of
additional shares of Common or Preferred Stock issued by the Company. The
issuance of additional shares could have an anti-takeover effect under certain
circumstances.
In the case of Preferred Stock, the Board of Directors can establish
the voting power, preferences, rights and limitations of each class or series it
creates in the future. For example, the Board of Directors can create a series
of Preferred Stock with disproportionate voting power or with the right to vote
separately as a class on important corporate matters, like mergers or the
election of directors. A series of Preferred Stock can also be convertible into
a large number of shares of Common Stock under specified circumstances or have
other terms that could make the acquisition of a controlling interest in the
Company more difficult or more expensive.
12
<PAGE> 15
Additional shares of either Preferred Stock or Common Stock could be
sold privately to purchasers who could be expected to support incumbent
management in opposing an unsolicited attempt to obtain control of the Company.
The issuance of additional shares of Preferred or Common Stock could deprive
stockholders of the opportunity to benefit from offers to take control of the
Company that stockholders might view as favorable. If the one-for-ten reverse
stock split is approved by the stockholders and implemented, there would be
after completion of this offering (and assuming no other significant
transactions) at least 45,000,000 authorized but unissued shares of Common Stock
available for issuance at the discretion of the Board of Directors.
13
<PAGE> 16
THE OFFERING
GENERAL
The Company is offering up to 21,264,643 shares of its Common Stock on
a "best efforts" basis directly to the public at a subscription price of $.
per share. Subject to a priority being afforded to holders of Company Common
Stock and of Exchangeable Shares issued by the Company's subsidiary, CanArgo Oil
& Gas Inc., the shares will be sold to purchasers in the order in which their
subscriptions are received and accepted.
The offering will terminate on the earliest of:
- the date on which all 21,264,643 shares have been sold;
- , 1999, unless such date is extended by the
Company to not later than , 1999; or
- the date on which the Company terminates this offering.
ESCROW OF MINIMUM PROCEEDS
This offering is being made directly by the Company on a "minimum/maximum"
basis. The Minimum Offering is shares ($3,000,000) and the Maximum
Offering is 21,264,643 shares ($ ). Until at least the Minimum Offering can
be closed, all subscription payments will be deposited into an escrow account
established at by Signature Stock Transfer, Inc., which is
acting as the Company's Subscription Agent and as Escrow Agent. When
subscriptions for shares representing at least the Minimum Offering have been
received and accepted, but not earlier than , 1999 when the priority
rights being afforded holders of Company Common Stock and of Exchangeable Shares
will expire, the escrow will terminate. At that time, share certificates will be
issued and delivered to the subscribers, and the proceeds from the sale of those
shares will be disbursed to the Company. Proceeds from additional sales of
shares up to the Maximum Offering will be disbursed to the Company upon issuance
and delivery of share certificates to the subscribers. If the Minimum Offering
is not sold by the date this offering is terminated, all proceeds deposited in
the escrow account will be promptly refunded in full, without interest and
without any deduction of any kind.
RECORD STOCKHOLDER PRIORITY
Holders of record of the Company's Common Stock and of the Exchangeable
Shares issued by CanArgo Oil & Gas Inc., a subsidiary of the Company, as of
, 1999 ("Record Stockholders") have the first right to subscribe for the
shares of Common Stock being offered in this offering. Each Record Stockholder
will have the right to subscribe for and purchase a number of shares of Common
Stock up to the number of shares of Common Stock and Exchangeable Shares held by
the Record Stockholder on the record date, so long as the Subscription Agent
receives properly completed subscription documents and payment for such shares
from the Record Stockholder no later than 5:00 p.m. Central Time on
, 1999.
The Company will concurrently solicit subscriptions for shares from the
general public. Subject to the priority being accorded to the Record
Stockholders to subscribe prior to , 1999,
14
<PAGE> 17
subscriptions will be processed in the order received and accepted until all
21,264,643 shares are sold or until the Company terminates the offering.
If you are a beneficial owner of shares held in the name of someone
else who is acting as your nominee (for example, shares held by a bank or
brokerage firm for your account), and you want your subscription to receive
priority treatment, you must instruct the nominee in whose name your shares are
registered to subscribe for shares on your behalf within the time period
described above. If you are a broker, depository or nominee that holds shares of
the Common Stock for the account of others, you should provide copies of this
Prospectus to the beneficial owners. You should carry out their intentions
should they desire to purchase shares in this offering.
SUBSCRIPTION PROCEDURE
To subscribe for shares in the offering, you must complete, sign and
return a Subscription Agreement and include full payment for the shares
subscribed. You must pay for the shares subscribed in U.S. dollars by check or
bank draft drawn on a United States bank, or postal, telegraphic or express
money order payable to "Signature Stock Transfer, Inc. , as Subscription Agent."
The subscription price will be considered to have been received when:
- - The Subscription Agent receives a certified check, bank cashier's check or
bank draft drawn on a United States bank;
- - The Subscription Agent receives a postal, telegraphic or express money
order; or
- - An uncertified check has "cleared".
Subscribers are urged to consider paying the subscription price by means of
certified or bank cashier's checks or money orders. Payments made by personal or
company checks that have not been certified will be considered received only
upon clearance. Even domestic checks that have not been certified may take more
than five business days to clear, so subscribers intending to pay with
uncertified personal or company checks are urged to make payment sufficiently in
advance of the termination date or the date on which the priority being accorded
the Record Stockholders terminates to ensure that payment is deemed received
prior to such date. The Escrow Agent must receive the completed Subscription
Agreements and payments by 5:00 p.m., Central _______ Time, on , 1999,
unless extended by the Company.
We suggest, for your protection, that you deliver your subscription
documents to the Escrow Agent by overnight or express mail courier. If you mail
the documents, we suggest you use registered mail. You should deliver the
Subscription Agreement and payment to:
-----------------
-----------------
-----------------
Once delivered, you may not revoke or change your subscription, even if
the market price for the Common Stock falls below the subscription price of $
per share during the offering.
15
<PAGE> 18
The Company may reject any subscription in full or in part. The
subscription price paid with subscriptions that are not accepted for any reason
will be promptly returned without interest or any deduction of any kind.
Subscriptions accompanied by an overpayment which are otherwise in order will be
accepted and a check will be mailed to the subscriber for the amount of the
overpayment.
The Subscription Agent will deliver certificates for shares subscribed
promptly after the Minimum Offering has been sold and promptly after later
subscriptions have been accepted. Subscribers will not be deemed to be holders
of the shares of Common Stock they are purchasing until the stock certificates
representing those shares are issued and delivered.
The Company will decide all questions as to the validity, form and
eligibility of subscriptions, and the Company's interpretation of the terms and
conditions of the offering will be final and binding. The Company may waive any
irregularities in any subscription. The Company is not required to notify you of
any defect or irregularity in your subscription.
Prospective subscribers with questions or needing assistance concerning
the procedures for subscribing for shares should call Susan E. Palmer, who is
the Company Secretary, at (281) 492-6992.
DETERMINATION OF OFFERING PRICE
The Company has determined the public offering price of the shares
based upon the recent trading history of the Common Stock on the Nasdaq National
Market and the Oslo Stock Exchange. On , 1999, the last sale price for
Common on the Nasdaq National Market System was $ .
The public trading price of the Common Stock may differ from the
subscription price of $ during the offering. If that is the case, persons
interested in acquiring Common Stock are unlikely to purchase shares on Nasdaq
or the Oslo Exchange for more than $ if they can purchase shares at that
price directly from the Company in this offering. For that reason, stockholders
who wish to sell their shares during the offering will probably be required to
ask a price that, when coupled with the "spread" required by a market maker, is
no more than $ per share.
The Company's net tangible book value per share as of September 30,
1998 was $1.97 per share. Since this amount exceeds the public offering price of
$ per share by a substantial amount, purchasers in this offering will not
experience dilution of the subscription price they pay in this offering in
relation to net tangible book value per share. Record Stockholders who do not
subscribe in this offering for the same number of shares as they own will,
however, experience dilution in the net tangible book value of the shares they
hold.
SALES REPRESENTATIVE
The Company will only effect offers and sales of shares through its
designated sales representative, Mr. , who also serves as the Company's
and is a member of the Board of Directors. Mr. will not
receive, directly or indirectly, any commissions, remuneration, or any other
compensation based on transactions in securities. Mr. is
registered as a sales representative for this offering in those jurisdictions in
which such registration is required.
16
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from this offering, after deducting the
estimated expenses of the offering of approximately $ , are expected to be $
upon completion of the Minimum Offering and $ upon completion of the Maximum
Offering. The Company intends to use the net proceeds for the following
purposes, which are listed in their order of importance:
<TABLE>
<CAPTION>
Minimum Maximum
Offering Offering
-------- --------
<S> <C> <C>
Subordinated loan to Ninotsminda Oil Company (1) $2,000,000 $2,000,000
Working capital (2)
---------- ----------
Investment in refinery (3) 0 860,000
</TABLE>
(1) Under the terms of a $6,000,000 loan agreement between Ninotsminda Oil
Company and the International Finance Corporation, the Company must make or
arrange a $2,000,000 subordinated loan to Ninotsminda Oil Company as a
condition to disbursement of the $6,000,000 loan. See "BUSINESS -
Ninotsminda Oil Field - International Finance Corporation Loan".
(2) To be used for general corporate overhead and the development of fields and
prospects.
(3) To exercise the Company's option to purchase an additional 11.1% interest in
an oil refinery in Georgia. See "BUSINESS - Ninotsminda Oil Field -
Ancillary Projects - Refinery".
Pending such uses, the net proceeds of this offering will be invested
in short-term, investment-grade, interest-bearing securities.
The Company currently anticipates that the net proceeds from the
Minimum Offering, together with amounts available under its loan from the
International Finance Corporation and cash generated from operations and the
sale of excess equipment will be sufficient to satisfy its operating needs for
approximately the twelve months following the completion of the Minimum
Offering.
17
<PAGE> 20
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
MARKET FOR COMMON STOCK
The Company's Common Stock is traded under the symbol "GUSH" on the
Nasdaq National Market System and under the symbol "CNR" on the Oslo Stock
Exchange. The following table sets forth the high and low sales prices and the
average daily trading volume of the Common Stock on Nasdaq and the OSE. Nasdaq
data is from The Nasdaq Stock Market and OSE data is from published financial
sources.
<TABLE>
<CAPTION>
NASDAQ OSE(1)
------------------------ ----------------------------
AVERAGE AVERAGE
DAILY DAILY
HIGH LOW VOLUME HIGH LOW VOLUME
------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL QUARTER ENDED
March 31, 1997 $ 14.25 $ 8.75 49,338 $ 14.22 $ 8.96 210,918
June 30, 1997 10.13 7.81 21,109 9.52 7.92 103,931
September 30, 1997 9.13 4.84 23,603 8.86 4.96 157,173
December 31, 1997 7.00 1.19 62,684 6.46 1.66 284,036
March 31, 1998 2.63 1.44 27,015 2.38 1.60 153,177
June 30, 1998 2.25 1.00 15,520 2.13 1.20 65,617
September 30, 1998 1.81 0.47 10,266 1.60 0.53 24,924
December 31, 1998 0.81 0.22 34,570 0.67 0.20 27,493
</TABLE>
(1) 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 March , 1999 the closing price of the Common Stock on Nasdaq
was $ per share. Nasdaq has notified the Company that its Common Stock may
be delisted because the stock has not achieved the minimum bid price required by
Nasdaq. See "RISK FACTORS -- The Common Stock could be delisted from the Nasdaq
Stock Market."
On February 3, 1999, 19,381,120 shares of Common Stock were outstanding
and held of record by 3,856 stockholders. In addition, 1,073,763 Exchangeable
Shares issued by CanArgo Oil & Gas Inc., a subsidiary of the Company, were
outstanding on that date. Each Exchangeable Share may be exchanged for one share
of Common Stock. See "DESCRIPTION OF CAPITAL STOCK."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock. The
Company currently intends to retain future earnings, if any, for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. The payment of future dividends, if any, will depend, among
other things, on the Company's results of operations and financial condition and
on such other factors as the Company's Board of Directors may, in its
discretion, consider relevant. Under its loan agreement with International
Finance Corporation, Ninotsminda Oil Company's ability to transfer funds to
CanArgo Energy Corporation and its affiliates is severely restricted. See
"MANAGEMENT'S
18
<PAGE> 21
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
Note ____ of the Company's Consolidated Financial Statements. In addition, the
Company may not pay dividends on its Common Stock unless its subsidiary, CanArgo
Oil & Gas Inc., is able to pay and simultaneously pays an equivalent dividend on
the Exchangeable Shares issued by that subsidiary. See "DESCRIPTION OF CAPITAL
STOCK."
19
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of September 30, 1998. The table also presents such capitalization as adjusted
to reflect the Minimum Offering and the Maximum Offering and, in each case, the
application of the estimated net proceeds thereof. You should read this
information together with the Company's financial statements.
AS OF SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
As adjusted for
---------------
Minimum Maximum
Actual Offering Offering
-------------- -------- --------
<S> <C> <C> <C>
Long-term debt (1) $ 895,500
Stockholders' equity
Preferred stock --
Common stock:
issued and outstanding:
11,223,744 shares actual;
shares as adjusted
for Minimum Offering;
32,488,387 shares as
adjusted for Maximum
Offering (2)
9,970,900 additional
shares issuable without
receipt of further
consideration (3) 2,119,464
Capital in excess of par value 101,865,441
Accumulated deficit since October 31, 1988 (62,296,130)
-------------
Total stockholders' equity 41,688,775
=============
Total capitalization $ 42,584,275
</TABLE>
- ----------
(1) The "as adjusted" long-term debt reflects the amount committed under
the Company's loan agreement with the International Finance
Corporation.
(2) Excludes 2,765,511 shares reserved for issuance upon the exercise of
outstanding options and warrants and upon achievement of certain
performance objectives by an oil and gas project.
(3) The 9,970,900 additional shares issuable without receipt of further
consideration represent shares issuable upon exchange of Exchangeable
Shares issued or issuable by CanArgo Oil & Gas Inc., the Company's
subsidiary. See "DESCRIPTION OF CAPITAL STOCK."
20
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial data
taken from the Company's financial statements which appear in this Prospectus
beginning at page F-1. CanArgo Oil & Gas Inc. and its subsidiary, Ninotsminda
Oil Company Limited, were purchased by the Company in July 1998. Their financial
results are included in the Company's consolidated financial results from July
16, 1998. CanArgo Oil & Gas Inc. is a wholly owned subsidiary and NOC is a 68.5%
owned subsidiary of the Company.
You should read the complete financial statements and related notes
of these companies which begin on page F-1 of this Prospectus. You should also
read the section "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" for an explanation of the Company's financial
results.
CANARGO ENERGY CORPORATION
<TABLE>
<CAPTION>
TWELVE TEN TWELVE TWELVE FOUR TWELVE NINE NINE
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
10/31/93 8/31/94 8/31/95 8/31/96 12/31/96 12/31/97 9/30/97 9/30/98
-------- ------- ------- ------- -------- -------- ------- -------
(unaudited)
(in $1,000 except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue 190 3 625 35 17 313 173 520
Operating loss (1,547) (1,466) (7,882) (5,640) (2,983) (29,090) (6,645) (5,015)
Other income (expense) 252 (366) 312 (854) 361 1,202 783 171
Net loss (1,295) (1,832) (7,600) (6,494) (2,604) (27,683) (5,675) (4,790)
Net loss per common share - (0.44) (0.90) (1.82) (1.04) (0.28) (2.47) (0.51) (0.34)
basic and diluted
Working capital (deficit) (446) 1,145 4,188 16,925 30,382 13,971 17,753 6,717
Total assets 4,528 4,944 10,710 32,089 55,375 37,434 49,933 48,077
Notes payable and long-term 158 163 -- 300 -- -- -- 896
debt
Minority interest -- -- -- -- -- -- 19 3,385
Stockholders' equity 3,707 4,181 9,608 30,505 53,245 26,779 48,787 41,689
Cash dividends per common -- -- -- -- -- -- -- --
share
</TABLE>
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Forward looking statements can be identified by
such words as "may", "will", "should", "expect", "intend", "plan", "estimate"
and similar words. Future events and the Company's actual results could differ
materially from the results anticipated by the forward-looking statements.
Important factors that could cause such a difference are discussed in this
Prospectus, in particular in the "Risk Factors" section. You are cautioned not
to place undue reliance on the forward-looking statements.
The following discussion should be read together with the Company's
consolidated financial statements which appear in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued its program to reduce expenses and limit
investment in oil and gas ventures which began in the fourth quarter of 1997.
The Company continues to incur general and administrative costs and project
costs which were committed to prior to the combination with CanArgo Oil & Gas in
July 1998 (the "Transaction"). The Company expects that the ongoing costs from
the restructuring of the Company will finally be eliminated by July 1999.
Capital expenditures by Ninotsminda Oil Company ("NOC") in 1998 are
currently projected to be approximately $7,350,000 of which $3,990,000 has been
spent at September 30, 1998. Current development plans for the Ninotsminda Field
in 1999 include the drilling of a minimum of three development wells plus five
major workovers of existing wells for a total budgeted cost of $8,415,000. As a
considerable amount of infrastructure has been put in place for the Ninotsminda
Field by Georgian Oil, subsequent increases in oil production are not expected
to increase infrastructure costs substantially. No assurance can be given,
however, that NOC's development plan will increase production or that operating
revenues will exceed operating expenses.
As of September 30, 1998, the Company had working capital of
$6,717,000, compared to working capital of $13,971,000 as of December 31, 1997.
The $7,254,000 decrease in working capital from December 31, 1997 to September
30, 1998 reflects principally expenditures on 1998 acquisition costs relating to
the Transaction, restructuring costs associated with the program to reduce
overall costs, operating activities, including general and administrative
expenses and direct project costs, and capital expenditures relating to the
Ninotsminda Field. The decrease in cash and cash equivalents was partially
offset by an increase in accounts receivable.
Cash and cash equivalents decreased $8,073,000 from $14,164,000 at
December 31, 1997 to $6,091,000 at September 30, 1998, primarily as a result of
expenditures on operating activities and activities relating to the Transaction.
Cash and cash equivalents include cash held by NOC of $1,495,000 which the
Company has the limited ability to withdraw. The general and administrative
expenses of $2,721,000, direct project costs of $1,012,000, acquisition costs of
$1,215,000, and investment in property, plant and equipment of $1,896,000 and
oil and gas property of $1,224,000 incurred during the first nine months of 1998
all involved principally cash items. The use of cash to fund expenditures was
partially offset by the release of restrictions that had applied to $1,133,000
of the Company's previously restricted cash.
22
<PAGE> 25
These cash balances are not sufficient to cover the Company's
working capital requirements and capital expenditure plans during the remainder
of 1998 and through 1999. To avoid cutbacks to the Company's capital expenditure
plans, the Company is seeking the funds necessary to cover its working capital
and capital expenditure plans. Potential sources of funds include project
financing, additional equity and joint ventures with other companies. Based on
continuing discussions with major stockholders, investment bankers, potential
partners and other oil companies, the Company believes that such required funds
will be available. However, there is no assurance that such funds will be
available, and if available, will be offered on attractive or acceptable terms.
In October 1998, the International Finance Corporation ("IFC") approved, subject
to the execution of definitive legal documentation, a $6,000,000 convertible
loan to NOC. The Company is not obligated to provide additional capital to any
of its projects with the exception of its share of a $2,000,000 shareholders
supporting loan to NOC upon completion of IFC financing. However there is no
assurance that the non-controlling shareholder in NOC will contribute its share
of the shareholder supporting loan, in which case the Company maybe required to
source additional capital to meet the IFC's funding requirements.
Accounts receivable increased from nil at December 31, 1997, when
the minimal amount of accounts receivable were classified within other current
assets, to $454,000 at September 30, 1998, primarily as a result of $120,000
relating to oil revenue. In addition, $92,000 of receivables which had
previously been included within other current assets were reclassified as
accounts receivable at September 30, 1998.
Advances to operator increased from nil at December 31, 1997 to
$1,764,000 at September 30, 1998 as a result of advances to the operator for the
Ninotsminda Field.
Inventory increased from nil at December 31, 1997 to $170,000 at
September 30, 1998 as result of placing oil produced at the Ninotsminda Field in
storage.
Other current assets decreased from $762,000 at December 31, 1997 to
$345,000 at September 30, 1998, primarily as a result of the collection of
$234,000 on claims that had been included within other current assets, the
amortization of prepaid expenses amounting to $264,000, and the reclassification
of remaining receivables during that nine month period, partly offset by the
prepayment of insurance premiums amounting to $155,000 in the third quarter of
1998.
The $8,547,000 decrease in current liabilities during the nine
months ended September 30, 1998 is primarily attributable to a $9,018,000
decrease in accrued liabilities, which in turn is primarily attributable to
payment of various liabilities accrued at December 31, 1997 relating to the
payment of bank debt and related interest incurred by Kashtan Petroleum Ltd.
("Kashtan"), the entity operating the Lelyaki Field project, Lelyaki Field
project closedown costs, employee termination costs and payment for oilfield
equipment; partly offset by increased accounts payable due to the Transaction.
Property and equipment, net, increased from $5,942,000 at December
31, 1997 to $7,161,000 at September 30, 1998, primarily as a result of the
Transaction.
Oil and gas properties, net increased from $1,479,000 at December
31, 1997 to $26,729,000 at September 30, 1998 primarily as a result of the
Transaction. The effect of the Transaction was partly offset by writedowns of
the Company's oil and gas properties associated with the Sylvan Lake project
aggregating $900,000 as a result of a decline of heavy oil prices during the
first nine months of 1998 and the application of the quarterly full cost ceiling
test.
23
<PAGE> 26
Investments in and advances to oil and gas ventures, net decreased
during the nine month period ended September 30, 1998 from $5,387,000 at
December 31, 1997 to $5,362,000 at September 30, 1998. The decrease reflects the
Company's equity in the loss of Boryslaw Oil Company ("BOC"), the entity
developing the Stynawske Field project, for the first nine months of 1998, which
was partly offset by the Company's advances to BOC in the first nine months of
1998.
The balance of $5,387,000 as of December 31, 1997 and $5,362,000 as
of September 30, 1998 in investments in and advances to oil and gas ventures,
net, relates solely to BOC and the Stynawske Field project. The Company has the
responsibility for arranging financing for this venture and, unless third-party
financing can be arranged, the Company might have to supply the capital to
finance operations until the venture generates positive cash flow, which would
have the effect of increasing investments in and advances to oil and gas
ventures. The amount of such advances may be greater than the amount of the
operating losses recognized by the Company, which would cause such net
investment balances to increase. Such investments at the initial stages of
development are essentially unevaluated oil and gas properties, and such costs
may not be recovered if the venture is not successful. No assurance can be given
that the Company will either be able to arrange third-party financing for such
venture or have sufficient resources to fund the capital and operating needs of
the venture or that the venture will be successful.
The Company is aware that its recent stock price does not meet the
minimum bid price requirements of the Nasdaq National Market. The Company
believes, based on its net book value of $1.97 per share at September 30, 1998,
recent business progress and improving market conditions, that the current
situation should be temporary. Nevertheless, the Company is corresponding with
the Nasdaq National Market and is prepared to be proactive in protecting
shareholder liquidity.
As a result of the Company's suspension of activities relating to
Kashtan, Intergas JSC ("Intergas"), the entity developing the Maykop Field
project, and the Gorisht-Kocul joint venture, the Company may be subject to
contingent liabilities in the form of claims from those ventures and other
participants therein. The Company has been advised that Intergas and another
shareholder of Intergas are considering asserting such claims. The Company's
management is unable to estimate the range that such claims, if any, might
total. However, if any claims were determined to be valid, they could have a
material adverse effect on the Company's financial position, result of
operations and cash flows. Any such claims may be adjudicated in host country
forums under host country law.
The Company has contingent obligations and may incur additional
obligations, absolute or contingent, with respect to the acquisition and
development of oil and gas properties and ventures in which it has interests
that require or may require the Company to expend funds and to issue shares of
its Common Stock. The Company believes that it has no further obligation to fund
any operations of Kashtan or Intergas. At September 30, 1998, the Company had
contingent obligations, subject to the satisfaction of conditions relating to
the achievement of specified Stynawske Field project performance standards,
involving 187,500 shares. As the Company develops current projects and
undertakes other projects, significant additional obligations may be incurred.
Development of the oil and gas properties and ventures in which the
Company has interests involves multi-year efforts and substantial cash
expenditures. Full development of the Company's oil and gas properties and
ventures will require the availability of substantial additional financing from
external sources. The Company also intends where opportunities exist to farm-out
portions of its interests in oil and gas properties and ventures to entities
that can provide such financing. The Company generally has
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<PAGE> 27
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.
The $339,000 due to affiliated entity at September 30, 1998 relates
to a loan from Terrenex Acquisition Corporation. Long term debt at September 30,
1998 of $896,000 relates to a loan and an advance to NOC from NOC's
non-controlling shareholder. Minority interest in subsidiaries at September 30,
1998 of $3,385,000 relates to the 44.1% interest of the non-controlling
shareholder in NOC.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs being
written using two digits to define the applicable year. If not corrected, any
programs or equipment that have time sensitive components could fail or create
erroneous results. The Company has completed a preliminary review of its
existing systems and has upgraded its accounting information systems to software
that purports to be Year 2000 compliant. The majority of other software and
hardware currently used by the Company is believed to be Year 2000 compliant and
the cost of converting any non-compliant systems is not expected to be material
to the Company's financial condition. Although the Company does not expect to
incur significant additional expenditures to address Year 2000 issues, there can
be no assurance that this will be the case.
The Company currently has limited information concerning the Year
2000 compliance status of its suppliers of goods and services including the
status of its contract operator in the Republic of Georgia. The Company intends
to initiate formal communications with all of its significant suppliers with
respect to such persons' Year 2000 compliance and status. Should remedial
efforts be required, the inability of the Company or its principal suppliers to
become Year 2000 compliant in a timely manner could have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows. Should it become apparent that significant remedial action is
required by the Company's suppliers, a contingency plan will be developed by
January 31, 1999.
New Accounting Standards
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<PAGE> 28
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.
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. The
Company's interest in the cash flow of unconsolidated entities is reported in
the Company's consolidated statement of cash flows as distributions from or
investment in or advances to oil and gas ventures. Interests acquired in certain
joint ventures, partnerships and production sharing, working interest and other
arrangements are proportionately consolidated. The Company will report the same
stockholders' equity and net income or loss whether it accounts for various oil
and gas ventures using the equity method or on a consolidated basis.
Nine month periods ended September 30, 1998 and 1997
The Company recorded operating revenue of $520,000 during the nine
month period ended September 30, 1998 compared with $173,000 for the nine month
period ended September 30, 1997. Revenue of $331,000 in the nine month period
ended September 30, 1998 related to oil production of 151,000 barrels ("bbls")
gross (54,600 bbls net to NOC) from the Ninotsminda Field subsequent to the
Transaction less net production placed in storage of 34,500 bbls. and revenue of
$177,000 related to oil production from the Sylvan Lake property in Alberta,
Canada. Revenue for the nine month period ended September 30, 1997 primarily
related to oil production from the Sylvan Lake property. Net sales from the
Ninotsminda Field before prior months' oil price adjustments averaged $11.50 per
barrel. The Company also recorded a nominal amount of revenue during nine month
period ended September 30, 1998 from the sale of electrically enhanced oil
recovery ("EEOR") equipment. There was no revenue from the sale of EEOR
equipment for the nine month period ended September 30, 1997.
The operating loss for the nine month period ended September 30,
1998 amounted to $5,015,000, compared with $6,645,000 for the nine month period
ended September 30, 1997. Lease operating expenses increased to $477,000 during
the nine month period ended September 30, 1998, as compared to $117,000 for the
nine month period ended September 30, 1997, primarily as a result of the
inclusion of expenses related to the Company's interest in the Ninotsminda Field
subsequent to the Transaction. Direct project costs increased to $1,012,000 from
$815,000 for the nine month period ended September 30, 1997, reflecting activity
related to the Ninotsminda Field subsequent to the Transaction and to BOC and
the winding down of certain oil and gas ventures. The increase in depreciation,
depletion and amortization expense from $158,000 for the nine month period ended
September 30, 1997 to $261,000 during the nine month period ended September 30,
1998 is attributable principally to depletion
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<PAGE> 29
subsequent to the Transaction related to the Company's acquisition of the
Ninotsminda Field and increased production of oil from the Sylvan Lake property.
The loss from investments in unconsolidated subsidiaries decreased to $152,000
during the nine month period ended September 30, 1998, from $3,011,000 for the
nine month period ended September 30, 1997, as a result of the substantially
lower level of activity in the unconsolidated subsidiaries in the first nine
months of 1998, reflecting the impairment of most venture assets during 1997.
During the nine month period ended September 30, 1998, the Company wrotedown its
oil and gas properties in the Sylvan Lake project by an aggregate $900,000 as a
result of a substantial decline of heavy oil prices and the application of the
quarterly full cost ceiling test. There was no comparable writedown during the
first nine months of 1997. If oil prices decline further, the Company may
experience additional writedowns.
Although lease operating expenses exceeded revenue for the Sylvan
Lake property for the first nine months of 1998, the Company does not believe
that such expenses will continue to exceed revenue because expenses during the
nine month period ended September 30, 1998 included non-recurring costs. In
addition, prices for heavy oil were depressed during the first nine months of
1998, resulting in decreased revenue per unit produced. No assurance can be
given, however, that prices for heavy oil will improve or that operating revenue
will exceed lease operating expenses from the Sylvan Lake property or other
properties in future periods.
The Company recorded net other income of $171,000 for the nine month
period ended September 30, 1998, as compared to $783,000 during the nine month
period ended September 30, 1997. The principal reason for the decrease is the
Company's 1998 payment of interest expense on behalf of Kashtan. This was
partially offset by a loss that the Company recorded on the disposition of
miscellaneous equipment and property amounting to $266,000 in the first nine
months of 1997; the comparable loss incurred in the first nine months of 1998
was $28,000.
The net loss of $4,790,000, or $0.34 per share, during the nine
month period ended September 30, 1998 compares to a net loss of $5,675,000, or
$.51 per share, for the nine month period ended September 30, 1997.
Three month periods ended September 30, 1998 and 1997
The Company recorded operating revenue of $375,000 during the three
month period ended September 30, 1998, compared with $63,000 for the three month
period ended September 30, 1997. Revenue of $331,000 in the three month period
ended September 30, 1998 related to oil production of 151,000 bbls. gross
(54,600 bbls. net to NOC) from the Ninotsminda Field subsequent to the
Transaction less net production placed in storage of 34,500 bbls. and revenue of
$44,000 related to oil production from the Sylvan Lake property in Alberta,
Canada. Revenue for the quarter ended September 30, 1997 primarily related to
oil production from the Sylvan Lake property. Net sales from the Ninotsminda
Field before prior months oil price adjustments averaged $11.50 per barrel.
The operating loss for the three month period ended September 30,
1998 amounted to $787,000, compared with $2,703,000 for the three month period
ended September 30, 1997. Lease operating expenses increased to $300,000 during
the three month period ended September 30, 1998, as compared to $49,000 for the
three month period ended September 30, 1997, primarily as a result of the
Company's acquisition of the Ninotsminda Field and as a result of greater unit
production from the Sylvan Lake property in the third quarter of 1998. Direct
project costs decreased to $228,000 from $421,000 for the three month period
ended September 30, 1997, primarily reflecting reduced activity with respect to
the
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<PAGE> 30
Company's projects that predated the Transaction, partially offset by activity
related to the Ninotsminda Field. The increase in depreciation, depletion and
amortization expense from $80,000 for the three month period ended September 30,
1997 to $101,000 during the three month period ended September 30, 1998 is
attributable principally to depletion associated with production of oil from
Ninotsminda Field subsequent to the Transaction, partially offset by a reduced
charge for depreciation due to disposal of office equipment. The loss from
investments in unconsolidated subsidiaries decreased to $17,000 during the three
month period ended September 30, 1998, as compared to $1,647,000 for the three
month period ended September 30, 1997, as a result of the substantially lower
level of activity in the unconsolidated subsidiaries in the third quarter of
1998, reflecting the impairment of most venture assets during 1997.
Although lease operating expenses for the Sylvan Lake property
exceeded revenue for the third quarter of 1998, the Company does not believe
that such expenses will continue to exceed revenue because expenses during the
three month period ended September 30, 1998, included non-recurring costs. In
addition, prices for heavy oil were depressed during the third quarter of 1998
resulting in decreased revenue per unit produced due to the decline in heavy oil
prices. No assurance can be given, however, that prices for heavy oil will
improve or that operating revenue will exceed lease operating expenses from the
Sylvan Lake property or other properties in future periods.
The Company recorded net other expense of $48,000 for the three
month period ended September 30, 1998, as compared to net other income of
$346,000 during the three month period ended September 30, 1997. The principal
reason for the decrease is the reduced amount of interest earned due to the
Company's lower total of cash and cash equivalents and restricted cash in the
third quarter of 1998, partially offset by a loss that the Company recorded in
1997 from the disposition of miscellaneous equipment and property amounting to
$44,000 in the third quarter of 1997; there was no comparable loss in the third
quarter of 1998.
The net loss of $781,000, or $0.04 per share, during the three month
period ended September 30, 1998 compares to a net loss of $2,250,000, or $.20
per share, for the three month period ended September 30, 1997.
Year Ended December 31, 1997 Compared to Year Ended August 31, 1996
The Company recorded operating revenue of $313,000 during the year
ended December 31, 1997 compared with $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 the Company has interests.
The 1997 production was generated primarily at the Sylvan Lake property in which
the Company acquired an interest in 1997.
The operating loss for the year ended December 31, 1997 amounted to
$29,090,000, compared with $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 $19,424,000 in 1997, as well as a $3,778,000 loss
representing the Company's equity in the loss of oil and gas ventures. There
were no comparable impairment charges in fiscal 1996, and in that year, the
Company's equity in the loss of oil and gas ventures was $13,000.
Lease operating expenses increased to $200,000 in 1997, as compared
to $11,000 in fiscal 1996, primarily as a result of the Company's acquisition of
an interest in the Sylvan Lake property in early 1997. 1997 direct project costs
increased $485,000 from the $1,268,000 experienced during the fiscal year ended
August 31, 1996, reflecting principally the higher level of project activity and
the inability of
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<PAGE> 31
the Company to recoup from Kashtan certain expenses related to the Lelyaki 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 $77,000 in the year ended August 31, 1996 to $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, the Company recognized an
aggregate of $19,237,000 in losses as a result of the impairment of long-lived
assets, as compared to an impairment loss of $420,000 for the year ended August
31, 1996. Impairment of the ventures operating the Lelyaki, Maykop and
Gorisht-Kocul Field projects resulted in a combined loss of $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 $3,244,000. The remaining investment in the
Rocksprings property, which was carried in the Company's December 31, 1996
balance sheet as a $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 the Company its principal interest in
Kashtan, as to which there were doubts regarding collectability.
In 1997, the Company recorded total other income of $1,202,000, as
compared to total other expense of $854,000 in the year ended August 31, 1996.
Interest income increased to $1,615,000 for the year ended December 31, 1997
from $332,000 for the year ended August 31, 1996 due to higher average cash and
cash equivalent investments. Interest expense decreased from $1,016,000 for the
year ended August 31, 1996, when the Company recorded amortization of financing
costs, discount and interest related to the Company's 8% Convertible
Subordinated Debentures, to $69,000 for calendar 1997. In both 1997 and fiscal
1996, the Company recorded losses from the sale of miscellaneous equipment and
property amounting to $271,000 and $182,000, respectively.
The net loss of $27,683,000, or $2.47 per share, in 1997 compares to
a net loss of $6,494,000, or $1.04 per share, in the fiscal year ended August
31, 1996. The disproportionate losses per share are attributable to the
Company'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
The Company recorded an operating loss of $2,983,000 during the four
month period ended December 31, 1996 compared with $1,470,000 for the same 1995
period. The increased loss resulted from an increase of approximately $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 the Company has interests.
General and administrative expenses for the four month period ended
December 31, 1996 amounted to $1,282,000 reflecting a modest decrease from the
$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
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<PAGE> 32
$1,220,000 and $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 $424,000 for the four month period
ended December 31, 1996 from $55,000 in the comparable period for the prior year
due to higher average cash investments. Interest expense increased to $13,000
for the four month period ended December 31, 1996 from $3,000 in the comparable
period for the prior year due to the amortization of financing costs and
interest related to the Company's Debentures and financing of insurance
premiums.
Twelve Months Ended August 31, 1996 Compared With Twelve Months
Ended August 31, 1995
The Company recorded operating revenue of $35,000 during the year
ended August 31, 1996 compared with $625,000 for the year ended August 31, 1995.
The decrease in revenue resulted from a decline in sale of EEOR equipment. The
Company 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 $625,000 of 1995 revenue
related to EEOR technology, only $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 the Company relating to
property in Alberta, Canada.
The operating loss for the year ended August 31, 1996 amounted to
$5,640,000 compared with $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 expenses paid primarily
by the issuance of the Company Common Stock, partially offset by higher 1996
direct project costs of $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 the Company's oil and gas
activities.
General and administrative expenses for the year ended August 31,
1996 amounted to $3,854,000 compared to $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
$1,157,000 in fiscal 1995, to $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 $223,000 per quarter during fiscal 1995.
During fiscal 1996, the Company recognized an impairment of $420,000
on its oil and gas properties as a result of applying the full cost ceiling
limitation. Of this amount, $269,000 related to the Company'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 the Company participated. During fiscal year 1995, the Company recognized
$608,000 of impairment expense on the same project. As of August 31, 1996, the
Company had a $257,000 unevaluated oil and
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<PAGE> 33
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 the Company'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, the Company recorded a loss of $182,000 from the sale
of certain drilling equipment. Interest income increased to $332,000 for the
year ended August 31, 1996 from $251,000 in the prior year due to higher average
cash investments. Interest expense increased to $1,016,000 for the year ended
August 31, 1996 from $28,000 in the prior year due to the amortization of
financing costs, discount and interest related to the Company's Debentures.
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BUSINESS
GENERAL DEVELOPMENT OF CANARGO'S BUSINESS
CanArgo Energy Corporation ("CanArgo") was formed in 1994 to
continue, through reincorporation in Delaware, the business of a predecessor
Oklahoma corporation which was formed in 1980. CanArgo changed its name from
Fountain Oil Incorporated to CanArgo Energy Corporation in connection with a
business combination with CanArgo Oil & Gas Inc. completed on July 15, 1998. The
Company conducts its principal operations through subsidiaries, and unless
otherwise indicated, the term the "Company" refers to CanArgo Energy Corporation
and its consolidated subsidiaries.
The Company initially operated as an oil and gas exploration and
production company. It altered its principal focus to the application of
electrically enhanced heavy oil recovery technology in 1988, and that focus
continued through 1994. In early 1995, the Company shifted its principal
activities to acquiring and developing interests in Eastern European oil and gas
properties. From 1995 to 1997, the Company established significant ownership
interests in four Eastern European oil and gas development projects. As a result
of disappointing results and other negative indications, the Company during the
fourth quarter of 1997 wrote-off its entire investments in three of those four
projects and began actively to seek a business combination or similar
transaction with another oil and gas company.
As a result of this effort, the Company entered into a business
combination with CanArgo Oil & Gas Inc. Upon completion of the business
combination in July 1998, CanArgo Oil & Gas Inc. became a subsidiary of the
Company, the management of CanArgo Oil & Gas Inc. assumed the senior management
positions in the Company, and the Company changed its name to CanArgo Energy
Corporation.
At the time of the business combination, the principal operations
and assets of CanArgo Oil & Gas Inc. were associated with the producing
Ninotsminda oil field in the Republic of Georgia. Since the combination,
development of the Ninotsminda field and related activities have become the
Company's main focus. The Company has additional exploratory and developmental
oil and gas properties and prospects in Georgia and Ukraine, owns interests in
other Eastern European oil and gas projects which the Company is not actively
pursuing, and holds interests in small oil and gas properties in North America,
some of which are producing modest amounts of oil and gas. The Company's
principal product is crude oil, and the sale of that oil is its principal source
of revenue.
NINOTSMINDA OIL FIELD
Since completion of the business combination with CanArgo Oil & Gas
Inc., the Company's resources have been focused on the development of the
Ninotsminda oil field and some associated activities. The Ninotsminda oil field
covers some 2,500 acres and is located forty kilometers east of the Georgian
capital, Tbilisi. It is adjacent to and west of the Samgori oil field, which is
Georgia's most productive oil field. Ninotsminda was discovered later than
Samgori and has experienced substantially less development activity. The state
oil company, Georgian Oil, and others including the Company have drilled sixteen
wells in the Ninotsminda field, of which seven are currently classified as
producing. Three of the seven "producing" wells are presently shut-in awaiting
completion of work-over operations, and the remaining four wells are currently
producing approximately 1,200 barrels of oil per day.
Business Structure
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The Company's activities at the Ninotsminda oil field are conducted
through Ninotsminda Oil Company ("NOC"), a 68.5% owned subsidiary. In November
1998, the Company increased its percentage ownership of NOC from 55.9% to 68.5%
when the other shareholder of NOC chose not to subscribe for its pro rata
portion of shares being offered to increase the capital of NOC. During 1998, the
Company invested $6,394,000 of cash in NOC and, in addition, capitalized an
aggregate of $1,164,000 in loans and accrued interest. If the other shareholder
of NOC continues to decline to provide its pro rata share of NOC's required
capital, the Company may be required to provide a disproportionate share of the
capital NOC requires, which would result in an increase in the Company's
percentage ownership of NOC.
NOC obtained its rights to the Ninotsminda field and two other
fields under a 1996 production sharing contract with Georgian Oil and an
associated license. NOC's rights under the agreement and license expire in
December 2019, subject to possible loss of undeveloped areas prior to that date
and possible extension with regard to developed areas.
Under the production sharing contract, Georgian Oil has a priority
right to receive approximately 542 barrels of oil per day during 1999, 280
barrels of oil per day during 2000 and 93 barrels of oil per day during 2001,
representing a projection of what the Ninotsminda field would have yielded
during those years based upon the wells and equipment in use at the time the
contract was entered into. Of the remaining production, up to 50% will be
allocated to NOC for the recovery of the cumulative capital and operating costs
associated with the Ninotsminda field, which NOC initially pays. The balance of
production is allocated on a 70/30 basis between Georgian Oil and NOC. Thus
while NOC continues to have unrecovered costs, it will receive 65% (50% plus 30%
of the other 50%) of production in excess of the oil allocated to Georgian Oil
on a priority basis with respect to projected base production. The allocation of
a share of production to Georgian Oil relieves NOC of all obligations it would
otherwise have to pay taxes and similar levies to the Republic of Georgia.
Both Georgian Oil and NOC take their shares of production in kind,
and they market their oil separately.
Pursuant to the terms of the production sharing contract, a local,
Georgian company must be appointed as field operator. The field operator
provides the operating personnel and is responsible for day-to-day operations.
NOC pays the operating company's expenses associated with the development of the
Ninotsminda field, and the operating company performs on a non-profit basis. The
governing body for Ninotsminda field operations consists of members designated
by Georgian Oil and NOC, with the deciding vote allocated to NOC. The company
serving as Ninotsminda field operator has eighty-eight full time employees, and
substantially all of its activities relate to the development of the Ninotsminda
field.
Field Development
When NOC assumed developmental responsibility for the Ninotsminda
field in 1996, production was minimal. The Company believes that the development
and productivity of the Ninotsminda field had in the past been hampered by,
among other factors, a lack of funding, civil strife and utilization of
non-optimal technology.
NOC's initial approach to Ninotsminda field development involved
reworking and adding additional perforations to existing wells, and this program
is continuing. In 1997, NOC commenced a drilling program, which has involved
three wells thus far. The first was completed in October 1997.
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Under normal production conditions, this well has been producing at the rate of
400 to 600 barrels per day. The second well was completed in October 1998. While
testing and stimulation of this well are continuing prior to NOC placing the
well on production, the Company believes that the second well will be less
productive than the first. The drilling of the third well was suspended in
December 1998 at a depth of 700 meters as a result of undependable electrical
supply and is expected to resume in the spring of 1999 when the electrical
supply is expected to improve. The lack of a reliable power supply has also
caused delays in the testing of the second well and in the continuing field
workover program. NOC expects that the electrical supply problem will be
resolved or mitigated if and when a planned gas fired, electric generating power
plant near Ninotsminda commences operations. See "-- Ancillary Projects
- -- Electrical Power Generation."
During 1997 and 1998, NOC acquired additional seismic data about the
Ninotsminda field, which the Company believes will be useful in selecting
additional drilling sites. To date, exploration and production at the
Ninotsminda field have focused on one zone. There is, however, a second zone,
from which oil has been produced in one well, that NOC intends to examine. In
addition, the Ninotsminda field has a gas cap above the principal producing
zone. The Company has not yet considered the reserves and economics of
production relating to the gas cap, since significant production at this time
could be prejudicial to oil recovery, but may consider them in the future.
NOC's current development program contemplates the commencement of
at least three additional wells, the workover of various existing wells, and the
installation of additional facilities designed to increase production to at
least 4,500 barrels of oil per day.
International Finance Corporation Loan
In December 1998, NOC entered into a convertible loan agreement with
International Finance Corporation ("IFC"), an affiliate of the World Bank.
Disbursement of the loan is subject to a number of conditions, including the
Company providing or arranging for a $2,000,000 subordinated loan to NOC. The
IFC loan is to be used to implement NOC's current Ninotsminda field development
program. The loan will bear interest at LIBOR (currently approximately 5%) plus
3% and will be repayable in five semi-annual payments of $1,200,000 each
commencing December 2001. NOC paid to IFC a facility fee of $60,000 and will pay
a commitment fee equal to 1/2 of 1% per annum on the portion of the $6,000,000
that has not been disbursed. The first disbursement under the loan agreement
must be made before July 1, 1999, and IFC has no obligation to disburse funds
after June 29, 2000.
The Company does not presently have the resources to provide the
$2,000,000 subordinated loan to NOC, and a high priority use of the proceeds of
this offering is funding that subordinated loan.
The IFC has the right under the loan agreement to convert all or
part of the loan into common shares of NOC. If the entire $6,000,000 loan were
converted, IFC would receive shares representing 20% of the equity of NOC. This
would reduce the Company's percentage ownership of NOC from 68.5% to 54.8% but
would leave NOC as a consolidated subsidiary of the Company. The conversion
right remains in effect until three months after the successful completion of
NOC's current development program or the achievement of sustained production of
at least 4,500 barrels of oil per day and, in either case, the completion of
various procedural requirements.
Both the Company and the other shareholder of NOC have guaranteed
the IFC loan in proportion to their holdings of NOC stock and have pledged that
stock to IFC to secure their guaranty obligations.
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<PAGE> 37
NOC has pledged substantially all of its assets to IFC to secure the loan. In
the event IFC converts the loan into NOC stock, it may require the Company to
repurchase those shares at prices based upon the greater of (i) the cost of the
shares to IFC plus interest and (ii) the NOC net asset value attributable to the
shares. The repurchase obligation will terminate no later than December 31,
2007.
Processing, Sale and Customers
Georgian Oil built a considerable amount of infrastructure in and
adjacent to the Ninotsminda field prior to entering into the production sharing
contract with NOC, and those infrastructure improvements are now used by NOC.
The mixed oil and water fluid produced from the Ninotsminda field
wells flows into a two-phase separator located at the Ninotsminda field, where
gas associated with the oil is separated. The oil and water mixture is then
transported eleven kilometers in a pipeline to Georgian Oil's 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
currently flared.
At Sartichala, the water is separated from the oil. NOC then sells
oil in this state to buyers at Sartichala, and the buyers at that point assume
responsibility for the oil. The buyers generally transport the oil at their risk
and cost by pipeline 20 kilometers to a railhead at Ghaciani. At the railhead,
the oil is loaded into railcars for transport directly to the buyers' customers
or to the Black Sea port of Batumi, Georgia, where oil can be loaded onto
tankers for international shipment.
NOC sells its oil directly to local and international buyers. NOC
sold all of its 1997 production to one buyer, Glencore International AG. In
1998, NOC sold its production to three customers as follows:
<TABLE>
<CAPTION>
Customer Percent of Production
-------- ---------------------
<S> <C>
Sis Plus 7 Ltd. 35.9%
Glencore International AG 34.4
Navtobi Ltd. 29.7
</TABLE>
The price received for oil by NOC has generally been negotiated on
the basis of the European spot price for Brent grade crude oil, less certain
discounts for transportation and related charges. The price received by NOC has
ranged from the full Brent price to Brent minus $5.83 per barrel. The average
discount from Brent prices was less in 1998 than 1997, as buyers have begun to
purchase oil from NOC for use in Georgia and neighboring countries and have
accordingly faced smaller transportation costs. NOC now maintains an inventory
of oil available for local buyers principally on cash payment terms. The average
discount from the spot price for Brent grade crude oil is approximately $1.50 at
the present time.
CanArgo believes that the loss of a current customer would not
result in any significant delay in sale of its production, but could result in
lower selling prices. At current spot prices for Brent grade crude oil, a
discount for transportation and related charges that is substantially greater
than $1.50 per barrel could render the production and sale of Ninotsminda field
oil uneconomic.
At current world oil prices, NOC's revenues from the sale of its
share of oil production under the production sharing contract are insufficient
to cover production and depletion expenses. In order to cover
35
<PAGE> 38
production and depletion expenses under the production sharing contract at the
current production level of approximately 1,200 barrels per day, the price for
Brent crude oil would need to be approximately $11.50 per barrel. The European
spot price for Brent crude oil on February 5, 1999 was $10.18 per barrel. See
"RISK FACTORS --Oil and gas prices are volatile."
Production History
The Ninotsminda field was discovered and initial development began
in 1979. Ninotsminda field is currently producing approximately 1,200 barrels
per day of oil plus associated gas primarily from four wells. Gross production
from the Ninotsminda field for the past three years was as follows:
<TABLE>
<CAPTION>
Year ended December 31, Oil (Gross Barrels)
----------------------- -------------------
<S> <C>
1998 600,000
1997 639,910
1996 515,000
</TABLE>
Productive Wells and Acreage
The following table summarizes the number of productive oil wells
and the total developed acreage for the Ninotsminda field. Such information has
been presented on a gross basis, representing the interest of NOC, and on a net
basis, representing the interest of the Company based on its 68.5% interest in
NOC. The information is presented as at December 31, 1998.
<TABLE>
<CAPTION>
Gross Net
------------------------------ -------------------------
Number of Wells Acreage Number of Wells Acreage
--------------- ------- --------------- -------
<S> <C> <C> <C> <C>
Ninotsminda field (1) 6 2,500 4.1 1,713
</TABLE>
- ----------
(1) On December 31, 1998, there were no productive wells or developed
acreage on any of the Company's other Georgian properties, except
for one well on the West Rustavi field which was shut-in at that
date.
Reserves
The following table summarizes net hydrocarbon reserves for the
Ninotsminda oil field, which are the only significant reserves for the Company.
This information is derived from a report as of December 31, 1998 prepared by
AMH Group Ltd. ("AMH"), independent petroleum consultants. This report is
available for inspection at the Company's executive offices during regular
business hours.
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 given that the projections included in the report by AMH
will be
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<PAGE> 39
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 their report. See "RISK FACTORS --
Reserve information is uncertain."
37
<PAGE> 40
<TABLE>
<CAPTION>
OIL RESERVES PSC Entitlement Volumes (1)
--------------------- ----------------------------
Company Share
NOC of NOC
Gross Net (2) Entitlement Entitlement
----- ------- ----------- -----------
(In Millions of Barrels)
<S> <C> <C> <C> <C>
Proved Developed Producing 2,404 1,647 1,340 918
Proved Developed Non- 1,379 945 890 610
Producing
Proved Undeveloped 15,200 10,412 8,783 6,016
====== ====== =====
TOTAL PROVEN 18,983 13,004 11,013 7,544
</TABLE>
- ----------
(1) PSC (production sharing contract) Entitlement Volumes are those
produced volumes which, through the production sharing contract,
accrue to the benefit of NOC and, as a result of the Company's
interest in NOC, accrue to the benefit of the Company for the
recovery of capital, repayment of operating costs and share of
profit.
(2) Net Oil Reserves represent the Company's 68.5% share of NOC's
interest under the production sharing contract in the gross
reserves, before taking into account the interest of Georgian Oil.
"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", "proved non-producing reserves"
and "proved undeveloped reserves".
"Proved Producing Reserves" are those proved reserves that are actually on
production or, if not producing, that could be recovered from existing wells or
facilities and where the reasons for the current non-producing status is the
choice of the owner rather than the lack of markets or some other reason. An
illustration of such a situation is where a well or zone is capable but is
shut-in because its deliverability is not required to meet commitments. 1998
production was 554,663 barrels.
"Proved non-producing reserves" have been calculated based on the following
parameters. Due to the general workover program delays, several wells were
shut-in or remained shut-in during 1998. These non-producing reserves are
expected to be recovered from producing zones in existing well bores open at the
time of the reserve estimate, but production is not occurring for mechanical
reasons or the lack of maintenance type workovers. Although these reserves are
currently not producing, they are expected to be producing in the short term.
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<PAGE> 41
"Proved undeveloped reserves" are proven reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where
relatively major expenditures are required for the completion of these wells or
for installation of processing and gathering facilities prior to the production
of these reserves. Reserves on undrilled acreage are limited to those drilling
units offsetting productive wells that are reasonably certain of production when
drilled.
Other Fields and Prospects Under 1996 Production Sharing Contract
NOC has rights to one other field, West Rustavi, and one prospect,
Manavi, in addition to the Ninotsminda field, under the 1996 production sharing
contract.
The West Rustavi field is located some 40 km southeast of Ninotsminda.
Ten wells were drilled by Georgian Oil in the West Rustavi field, two of which
produced oil. NOC has initiated an appraisal program and commenced test
production from one of the wells. The appraisal program, which includes
acquiring further seismic data and performing workovers on some of the wells, is
aimed at assessing Georgian Oil's original reserve estimates and ultimately
initiating an appropriate development program.
The Manavi prospect is located east of Ninotsminda. NOC has seismic data
regarding the Manavi prospect from both work NOC commissioned and earlier
efforts by Georgian Oil. Georgian Oil's attempt to drill in the Manavi prospect
was thwarted by logistical problems and did not reach the reservoir. The
Company's management ranks it highly as an exploration prospect.
Ancillary Projects
Electrical Power Generation
The Company has an effective 42.5% interest in a Georgian stock company
that intends to produce electricity. This company is planning to install and
operate a pilot 3.0 megawatt gas fired power plant to be located adjacent to the
Ninotsminda field. The plant would utilize gas from the Ninotsminda field as
fuel and would sell the electricity generated to NOC for the Ninotsminda field
project and to other local purchasers. The basic equipment, a refurbished Rolls
Royce Proteus single cycle gas turbine with attached Siemens electrical
generating equipment, is expected to be in Georgia and operational during the
second quarter of 1999.
Once operational, this project would be one of the first private sector
power producers in Georgia. Privatization of the Georgian power sector is well
underway. The 1997 Electricity Law restructured the power sector to facilitate
competition, mandated unbundling of the generation, transmission and
distribution functions, increased tariffs substantially and established an
independent regulatory commission to grant licenses and regulate tariffs.
NOC expects that the private power company will supply electricity for
Ninotsminda field operations on a priority basis. If this happens, NOC should be
able to avoid or mitigate the electrical supply problems it has encountered,
which forced a suspension of drilling activity on the third well and interfered
with other operations.
The Company is actively seeking to expand its involvement in the
Georgian power sector and is seeking to attract financial partners to join it in
pursuing opportunities for private sector power production in Georgia.
39
<PAGE> 42
Refinery
In September 1998, the Company signed an agreement to purchase up to 24%
of the equity in a company which owns a small refinery located at Sartichala,
Georgia. Thus far, the Company has purchased a 12.9% interest for $1,000,000,
with the proceeds being used to upgrade and expand the refinery. The Company
retains the right to purchase the remaining 11.1% interest at the same rate.
The refinery, which utilizes primarily refurbished American equipment,
began operations in July 1998 and has a current capacity of approximately 2,000
barrels per day. It is the only refinery in Georgia employing western
technology. It is able to produce naphtha, diesel fuel, fuel oil, kerosene and
jet fuel. Refinery expansion plans envision capacity of over 4,000 barrels per
day, with further capacity expansion and product extension possible in the
future.
Sartichala is the primary processing center for east Georgian oil
production, including production from Ninotsminda. Refined products are sold on
both the local and export markets. Although the refinery receives some revenue
from the sale of its products in the Georgian currency, the Lari, most pricing
is related to dollar based world market prices. To mitigate the currency
exchange risk, the refinery has established some export sales contracts
denominated in United States dollars. The Company believes that its involvement
in Georgian refining activity strengthens its position in the Georgian energy
sector and provides specific support for NOC's activities in Ninotsminda.
OTHER EASTERN EUROPEAN PROJECTS
Nazvrevi / Block XIII
In February 1998, the Company entered into a second production sharing
contract with Georgian Oil. This contract covers the Nazvrevi and Block XIII
areas of East Georgia, a 2,100 square kilometer exploration area adjacent to the
Ninotsminda and West Rustavi fields and containing existing infrastructure. The
agreement extends for twenty-five years, but portions of the area not being
actively pursued are relinquished at five year intervals. The Company
commissioned seismic studies of the exploration area, and the results of those
studies are currently being interpreted, with a view towards defining possible
oil and gas prospects and exploration drilling locations.
Under the production sharing contract, the Company pays all operating
and capital costs. The Company first recovers its cumulative operating costs
from production. After deducting production attributable to operating costs, 50%
of the remaining production, considered on an annual basis, is applied to
reimburse the Company for its cumulative capital costs. While cumulative capital
costs remain unrecovered, the other 50% of remaining production is allocated on
a 50/50 basis between Georgian Oil and the Company. After all cumulative capital
costs have been recovered by the Company, remaining production after deduction
of operating costs is allocated on a 70/30 basis between Georgian Oil and the
Company. The allocation of a share of production to Georgian Oil relieves the
Company of all obligations it would otherwise have to pay the Republic of
Georgia for taxes and similar levies related to activities covered by the
production sharing contract. Both Georgian Oil and the Company will take their
respective shares of production under this production sharing contract in kind.
In October 1998, XCL Ltd., a Louisiana based oil exploration company,
agreed to purchase shares representing 11.5% of the outstanding equity of the
Company's subsidiary holding the Nazvrevi-Block XIII production sharing
contract, for $650,000. The proceeds will be applied by the subsidiary to
40
<PAGE> 43
fund a portion of the seismic acquisition, processing and interpretation program
relating to the Nazvrevi and Block XIII areas. The total seismic program is
expected to cost approximately $1,150,000, a portion of which the Company
expects to fund from working capital, including that supplied by the proceeds of
this offering. After completion of the seismic program, the Company will not
face another milestone under the work requirements of the production sharing
contract until February 2001.
Stynawske Field, Western Region, Ukraine
In November 1996, the Company entered into a joint venture arrangement
with the Ukrainian state oil company, Ukranafta, for the development of the
6,000 acre Stynawske field, located in Western Ukraine near the town of Stryv.
The Company has a 45% interest in the joint venture, with Ukranafta holding the
remaining 55% interest. Ukranafta retains rights to base production,
representing a projection 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 2001. The joint venture will be
entitled to all incremental production above that declining base.
The Stynawske field is a relatively tight sandstone reservoir containing
light sweet oil. The production from the field commenced in 1967 but was
substantially terminated after a few years of production due to environmental
considerations. The field is located underneath the main water supply for
Western Ukraine, and leakage from producing wells some 20 years ago threatened
to pollute this aquifer. Four wells that are located away from the water supply
have been allowed to continue production.
In preparation for the commencement of development activities, the joint
venture has carried out an environmental audit of the Stynawske field, the
technical and economic evaluation of the project and the selection of drilling
sites. The Company expects that the initial phase will consist of the workover
of a number of existing wells, with a view towards increasing production and
gathering data for the preparation of a full field development program. The
feasibility of the initial phase is currently being considered, including
financing and ultimate recovery of funds invested.
The Company has concluded on a preliminary basis that the full field
development plan for the rehabilitation of the Stynawske field will probably be
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. Reservoir pressure support through gas or water injection may be
necessary to optimize recovery. The full field development plan for the
Stynawske field will, however, depend upon data developed during an initial
workover phase.
The Company is actively seeking to establish arrangements under which
oil and gas production companies or other investors would acquire a portion of
the Company's interest in the joint venture in return for supplying financing or
services to implement the initial phase of the project. If the Company does not
proceed with a development program, it may be in breach of obligations it has
with regard to the joint venture. This could place the Company's rights to the
Stynawske field at risk and could subject the Company to possible liability.
See "-- Legal Proceedings."
Potential Caspian Exploration Project
41
<PAGE> 44
In May 1998, the Company led a consortium which submitted a bid in a
tender for two large exploration blocks in the Caspian Sea, located off the
shore of the autonomous Russian republic of Dagestan. The consortium was the
successful bidder in the tender and was awarded the right to negotiate licenses
for the blocks. Following negotiations, licenses were issued in February 1999 to
a majority-owned subsidiary of CanArgo. The licenses impose substantial
commitments on the licensee and the Company is assessing its options for meeting
such commitments in light of the Company's limited resources and existing
commitments. If the Company determines that it cannot assume the commitments,
the Company will relinquish its rights under the licenses.
Previously Impaired Projects
Gorisht-Kocul Field, Albania
The Company and the Albanian state oil company, Albpetrol, formed a
50/50 joint venture to rehabilitate and develop the Gorisht-Kocul field. The
Albanian government granted the joint venture a 25 year production license
covering approximately 16.5 square kilometers constituting the Gorisht-Kocul
field. Production at the Gorisht-Kocul field commenced in 1966. The field, which
contains relatively heavy oil, has reportedly produced approximately 69 million
barrels to date. The Company was named operator of the Gorisht-Kocul field with
responsibility for implementing the development plan and arranging financing for
the project.
In March 1997, the Company declared the political unrest in Albania to
be a force majeure, and the joint venture suspended activities. The suspension
continues. In light of the extended period that the force majeure condition
continued and the absence of any indication of an imminent termination of the
condition, the Company recorded during the fourth quarter of 1997 an impairment
for the entire amount of its investment in and advances to the Albanian joint
venture. Albpetrol has requested that the joint venture recommence activities at
the Gorisht-Kocul field, and the Company is evaluating that request and seeking
others who may want to participate in this project. If it is unsuccessful in
attracting others to participate in this project, the Company may relinquish
this project.
Lelyaki Field, Pryluki Region. Ukraine
The Company holds an effective 45% interest in a joint venture company
formed to develop the Lelyaki Field in eastern Ukraine. The Company's partner in
this joint venture is Ukranafta, which holds a 55% interest. The joint venture
received a 20 year oil and gas production license for a 67 square kilometer
portion of the Lelyaki Field, as well as a five year exploration license for 327
square kilometer area surrounding the production area.
Based on its analysis of initial development efforts including
consulting with independent petroleum engineers, the Company concluded that the
Lelyaki Field would not support a successful commercial development. On the
basis of that conclusion, the Company recorded during the fourth quarter of 1997
an impairment for the entire amount of its remaining investment in and advances
to the Lelyaki joint venture and advised the joint venture that the Company
would not provide it with any further financial support. The joint venture
continues to produce a modest amount of oil from wells recompleted by the joint
venture, which is sold in the Ukrainian market.
Maykop Field, Adygea
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<PAGE> 45
The Company holds a 37% interest in Intergas, a Russian joint stock
company with a license for the Maykop gas field. 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 the southern Russian
autonomous republic of Adygea, located approximately 185 kilometers from the
Black Sea. In 1996 through 1997, the Company experienced delays and difficulty
in resolving operating arrangements and other matters relating to Intergas. This
caused the Company to conclude that it could not effectively pursue commercial
activities and develop the Maykop field as planned. As a result, the Company
recorded during the fourth quarter of 1997 an impairment for the entire amount
of its investment in and advances to Intergas. The Company is currently in
discussions with the other shareholders regarding the future of Intergas. The
Company believes that it has no further obligation to fund any operations of
Intergas, but Intergas may assert claims against the Company. See "-- Legal
Proceedings".
RISKS ASSOCIATED WITH THE COMPANY'S OIL AND GAS ACTIVITIES
All oil and gas development and production activities are subject to
risks and uncertainties inherent in the oil and gas industry. These industry
related risks and uncertainties are discussed under "RISK FACTORS --The
Company's oil and gas activities involve many risks." Projects in Eastern Europe
are subject to certain additional specific risks. These additional specific
risks are discussed under "RISK FACTORS -- The Company's foreign operations are
subject to special risks. "
The consolidated financial statements of the Company do not give effect
to any further impairment in the value of the Company'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.
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 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 the Company and
ultimately in its ability to continue as a going concern. See "RISK FACTORS --
The Company has incurred substantial losses and has minimal revenues."
The Company has made advances and may make additional advances to its
Eastern European oil and gas ventures for capital and operating expenditures.
Advances are generally recoverable only from future production or revenue of the
ventures. No assurance can be given that future production or revenue will be
adequate to recover any such advances.
NORTH AMERICAN OIL AND GAS PROPERTIES AND VENTURES
The Company has interests in several small oil and gas properties
located in Alberta, Canada and Texas. These properties either are non-producing
or are producing insignificant amounts of oil and gas.
COMPETITION
The oil and gas industry is highly competitive. The Company encounters
competition from other oil and gas companies in all of its of operations,
including the acquisition of producing properties, obtaining scarce resources
and services including oil field services, and the sale of crude oil. The
Company'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,
43
<PAGE> 46
well-established companies with substantially larger operating staffs and
greater capital resources than the Company and which, in many instances, have
been engaged in the energy business for a much longer time than the Company.
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 the Company's
financial or human resources permit.
In the competition to acquire oil and gas properties, the Company has
relied substantially on the relationships its officers and directors have
developed in the international oil and gas industry and in its areas of
operation and interest. As a result of the termination of employment of various
former officers, the Company's ability to benefit from such relationships in
certain areas has been significantly reduced. The Company's management believes
that the Company'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 -- The Company encounters intense competition."
TECHNOLOGY FOR ENHANCED RECOVERY OF HEAVY OIL
The Company has rights to a technology based upon heating heavy oil in
the reservoir with electric current. Heavy oil is very viscous at reservoir
temperatures and normally needs to be heated in order to flow easily. Several
pilot projects involving the technology have been implemented during the past
ten years, and while results have varied, the Company believes that they suggest
the validity of the technology. The Company, however, has not successfully
commercialized this technology, and during the past several years the Company
has not devoted any significant resources to the development or
commercialization of this technology. The Company has no plans to devote
significant resources to this technology in the foreseeable future.
GOVERNMENTAL AUTHORIZATIONS
The Company's business in Eastern Europe operates pursuant to licenses,
concession agreements or other authorizations granted by the local governmental
authorities. These authorizations impose various requirements upon the Company,
either directly or indirectly. The failure to satisfy the requirements of any
authorization could result in its termination or cancellation. In addition, as
sovereign agencies, the governmental authorities that have granted
authorizations may have greater power than private parties to terminate such
authorizations arbitrarily. Loss of such authorizations could have a material
adverse effect upon the financial condition, results of operations, cash flows
and prospects of the Company.
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 the Company 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, which has been the case in the Eastern European oil
fields in which the Company has commenced operations. See "RISK FACTORS -- The
Company's oil and gas activities involve many risks. "
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<PAGE> 47
The Company'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. Many of these laws and regulations have become
more stringent in recent years, imposing greater liability on a larger number of
potentially responsible parties. The Company believes it has complied in all
material respects with these laws and regulations. Because the requirements
imposed by such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations. See "RISK FACTORS -- Oil and gas operations are
subject to extensive regulation."
EMPLOYEES
As of February 1, 1999, the Company had 12 full time employees. The
company acting as operator of the Ninotsminda oil field for NOC has 88 full time
employees, and substantially all of that company's activities relate to the
development of the Ninotsminda field.
PROPERTIES
The Company does not have outright ownership of any real property. Its
real property interests are limited to leasehold and mineral interests.
The following table summarizes the gross and net undeveloped acreage
held under the Ninotsminda and Nazvrevi/Block XIII production sharing contracts
on December 31, 1998. The information regarding gross acreage represents the
interest of NOC under the Ninotsminda contract and the interest of a
majority-owned subsidiary of the Company under the Nazvrevi/Block XIII contract.
The information regarding net acreage represents the interest of the Company
based on its 68.5% interest in NOC and its anticipated 88.5% interest in the
subsidiary holding the Nazvrevi/Block XIII contract.
<TABLE>
<CAPTION>
Gross Acreage Net Acreage
------------- -----------
<S> <C> <C>
Ninotsminda field 24,000 16,440
Nazvrevi/Block XIII 518,500 458,873
------- -------
Total 542,500 475,313
</TABLE>
The Company leases office space in Calgary (Alberta), Houston (Texas),
Tbilisi (Republic of Georgia), and Maidenhead (England) under leases having
remaining terms varying from one to __ months. The Company has subleased its
Maidenhead offices.
LEGAL PROCEEDINGS
Zhoda Litigation
On February 20, 1998, Zhoda Corporation ("Zhoda") filed suit against the
Company in the District Court of Harris County, Texas. Zhoda had sold to the
Company shares in a subsidiary through which the Company acquired most of its
interest in the Lelyaki field project. Substantially all of the consideration
payable to Zhoda was contingent upon achievement of specified Lelyaki field
operating objectives, and because these objectives were not achieved, the
Company did not pay the consideration. In the litigation, Zhoda asserts that it
was wrongfully deprived of the value of the shares it transferred to
45
<PAGE> 48
the Company and of the contingent consideration it might have received, based
upon claims of 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 is seeking more than $7,500,000 in damages,
return of the shares transferred to the Company, and other relief. The Company
believes it has meritorious defenses to Zhoda's claims which it intends to
assert vigorously.
The Harris County District Court has stayed the litigation pending
completion of arbitration proceedings, which are being held in Calgary, Alberta.
On March 24, 1998, the Company 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, which the Company asserts
Zhoda owes the Company pursuant to promissory notes and loan agreements. On
March 31, 1998, Zhoda filed a statement of defense and a counterclaim in which
it asserted essentially the same claims as were asserted in the Texas action
described above. On the basis of its counterclaim, Zhoda seeks relief similar to
that sought in the Texas action. The Company's claim against Zhoda in the
Alberta action is not within the scope of the arbitration proceeding being
conducted in Calgary.
A judgment in favor of Zhoda on its claims could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows.
Ribalta Litigation
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to the
Company shares in a subsidiary through which the Company acquired most of its
interest in the Maykop field project, filed suit against the Company in the
Third Judicial District Court of Salt Lake County, Utah. Ribalta, however, has
not yet served the complaint on the Company.
In its complaint, Ribalta alleges breach by the Company of the contract
governing the sale of the shares it transferred to the Company and failure of a
condition in that contract that should have resulted in the termination of the
contract. Ribalta seeks the return of all benefits conferred on the Company
pursuant to the contract or damages equal to the value of such benefits, as well
as other relief. Under that contract, as amended, the maximum consideration to
which Ribalta might have been entitled was $800,000 and 350,000 shares of
Company Common Stock. The Company believes that no consideration is payable
under that contract because conditions to payment specified in the contract were
not satisfied. An outcome of this proceeding unfavorable to the Company could
have a material adverse impact on the Company's financial condition, results of
operations and cash flows. The Company believes it has meritorious defenses to
Ribalta's claims which it intends to assert vigorously.
Potential Claims Relating to Previously Impaired Projects
As a result of the Company's decision to cease active development of the
Lelyaki, Maykop and Gorisht-Kocul projects, the Company may be subject to
contingent liabilities in the form of claims from the joint ventures developing
such projects or from others participating in those projects. The Company was
advised during the first quarter of 1998 that Intergas and another shareholder
of Intergas were considering asserting such claims in relation to the Maykop
project, but no such claims have yet been asserted. The Company is unable to
estimate the range that such claims, if made, might total. However,
46
<PAGE> 49
if one or more such claims were asserted and determined to be valid, they could
have a material adverse effect on the Company's financial position, results of
operations and cash flows. Such claims may be adjudicated in the host country
forum under host country laws.
47
<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David Robson 40 Chairman of the Board and Chief Executive Officer
Michael R. Binnion 38 Director, President and Chief Financial Officer
Robert A. Halpin (1) 63 Director
J.F. Russell Hammond (2) 57 Director
Peder Paus (1) 53 Director
Nils N. Trulsvik (2) 50 Director
Ron Gerlitz 44 Vice President, Technology
Anthony J. Potter 34 Vice President, Finance
Ravinder Sierra 46 Vice President (Significant Employee)
Niko Tevzadze 33 Vice President (Significant Employee)
</TABLE>
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
DAVID ROBSON was elected a Director, Chairman of the Board and Chief
Executive Officer on July 15, 1998. He has also served as a Director, Chairman
of the Board and Chief Executive Officer of the Company's subsidiary, CanArgo
Oil & Gas Inc., since July 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 Geochemistry
from the University of Newcastle upon Tyne, and an MBA from the University of
Strathclyde. He is the energy sector representative on the United Kingdom
government's East European Trade Council.
MICHAEL R. BINNION was elected a Director, President and Chief Financial
Officer on July 15, 1998. He has also served as a Director, Chief Financial
Officer and Secretary of the Company's subsidiary, CanArgo Oil & Gas Inc., since
March 1997. Mr. Binnion is also President and a director of Terrenex Acquisition
Corporation, an Alberta Stock Exchange listed investment company. He is also a
director of NRI Online Inc., Fintech Services Ltd. and Smartor Products Inc.
Prior to April 1997, he was Chief Financial Officer and a director of
Trans-Dominion Energy Company, a Toronto Stock Exchange listed international
exploration and production company, for years.
ROBERT A. HALPIN was elected a Director on March 4, 1995. He served as
Chairman of the Board from November 14, 1995 to February 4, 1997 and as Vice
Chairman of the Board from February 4, 1997 to July 15, 1998. Mr. Halpin has
long experience in the oil and gas industry. Mr. Halpin has been a director of
TransGlobe Energy Corporation, Synerseis Technologies Inc. and Pacific Tiger
Energy Ltd., all Canadian companies, since 1997. From 1989 to his retirement in
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.
48
<PAGE> 51
J.F. RUSSELL HAMMOND was elected a Director on July 15, 1998. He has
also served as a Director of the Company's subsidiary, CanArgo Oil & Gas Inc.,
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 Corporation since 1992.
PEDER PAUS was elected a Director on July 15, 1998 and is an independent
businessman based in Oslo, Norway. Since 1995, he has been 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.
NILS N. TRULSVIK was elected a Director of the Company on August 17,
1994. He has served the Company as President and Chief Executive Officer from
February 4, 1997 to July 15, 1998 and from November 21, 1994 to March 9, 1995;
and as Executive Vice President from March 9, 1995 to February 4, 1987 and from
September 8, 1994 until November 21, 1994. In August 1998, Mr. Trulsvik became a
partner in a consulting company, The Bridge Group, located in Norway. Mr.
Trulsvik is a petroleum explorationist with extensive experience in petroleum
exploration and development throughout the world. Prior to joining the Company,
he held various positions with Nopec a.s., a Norwegian petroleum consultant
group of companies of which he was a founder, including Managing Director from
1987 to 1993 and Special Advisor from 1993 to August 1994.
RON GERLITZ was elected Vice President, Technology on November 1, 1998.
From 1997 to September 1998, he was Manager of Engineering with First Calgary
Petroleums. From 1992 until 1997 he was an independent petroleum consultant in
Calgary, Alberta, Canada. From 1983 to 1992, Mr. Gerlitz worked as an engineer
in various capacities and positions with a number of corporations, including
Mobil Oil. In 1983, he graduated from the University of Calgary with a Bachelor
of Science in Engineering.
ANTHONY J. POTTER was elected Vice President, Finance on July 15, 1998.
He also serves the Company as Group Controller. He has served as Vice President
Finance and Group Controller of the Company's subsidiary, CanArgo Oil & Gas
Inc., since May 1998. From September 1986 to April 1998, Mr. Potter was employed
with Coopers & Lybrand Chartered Accountants. In 1986, he graduated from the
University of Calgary with a Bachelor of Commerce degree in Accounting.
RAVINDER S. SIERRA was elected Vice President on July 15, 1998 and has
served as Vice President of the Company's subsidiary, EOR International Inc.,
since December 15, 1994. Mr. Sierra first joined EOR International Inc. in
November 1990 as Senior Project Engineer. Mr. Sierra has over 16 years
experience in the international oil and gas industry.
NIKO TEVZADZE was elected Vice President on July 15, 1998. He has been
the General Director of Georgian British Oil Company, which operates the
Ninotsminda field on behalf of the Company, since October 1993. From 1991 to
1993, Mr. Tevzadze 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.
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Officers serve at the
pleasure of the Board of Directors.
49
<PAGE> 52
INDEMNIFICATION AND INSURANCE
The Company's Bylaws require the Company to indemnify its officers and
directors to the full extent permitted by Delaware law. The Bylaws also require
the Company to advance payment of expenses to an indemnified party so long as he
agrees to repay the amount advanced if it is later determined that he is not
entitled to indemnification. The Company carries directors' and officers'
liability insurance covering losses arising from claims based on breaches of
duty, negligence, error and other wrongful acts.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all compensation paid or accrued by the
Company during the fiscal year ended August 31, 1996, the four month period
ended December 31, 1996 and the fiscal years ended December 31, 1997 and
December 31, 1998 with respect to certain current and former executive officers
of the Company (the "Named Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Year Underlying All Other
Principal Position Ended Salary ($) Options/SARs (#) Compensation (5) ($)
------------------ ----- ---------- ---------------- --------------------
<S> <C> <C> <C> <C>
David Robson 12/98 82,500 390,000 0
(1)
Nils N. Trulsvik 12/98 87,376 0 3,681
(2) 12/97 140,333 0 6,653
12/96* 51,834 50,000 5,679
8/96 161,241 0 8,635
Rune Falstad 12/98 112,852 25,000 3,786
(3) 12/97 82,952 15,000 3,825
Alfred Kjemperud 12/98 133,338 50,000 3,124
(4) 12/97 101,296 5,000 5,014
12/96* 38,875 10,000 2,342
</TABLE>
* Four month period ended December 31, 1996.
(1) Mr. Robson has served as Chief Executive Officer since July 15, 1998 and
is employed by the Company through Vazon Energy Limited.
(2) Mr. Trulsvik served as President and Chief Executive Officer from
February 4, 1997 to July 15, 1998 and as Executive Vice President from
March 9, 1995 to February 4, 1997. Included in 1998 salary is $1,671
paid as non-employee director's fees subsequent to July 31, 1998. See
"Employment Contracts" and "Directors' Compensation".
50
<PAGE> 53
(3) Mr. Falstad has served as Vice President since June 3, 1997, but has not
been deemed an executive officer of the Company since October 1998.
Included in 1998 salary are payments made for consulting services
rendered to the Company subsequent to July 31, 1998 pursuant to a
contract with FinCom AS, of which Mr. Falstad is a partner. See
"Employment Contracts".
(4) Mr. Kjemperud resigned as Vice President on September 3, 1998. Included
in 1998 salary are payments made for consulting services rendered to the
Company subsequent to September 3, 1998 pursuant to a contract with The
Bridge Group. See "Employment Contracts".
(5) Represents the Company's contributions to or accruals with respect to
individual retirement and pension plans.
OPTION GRANTS DURING FISCAL YEAR 1998
The following table sets forth information concerning options granted to
the Named Officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Grant Date
Underlying Granted to Present Value(2)
Options Employees Exercise Expiration --------------------
Name Granted (1) in FY 12/98 Price Date Per Share Total
---- ----------- ----------- ----- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C>
David Robson 120,000 16.58% $0.69 10/6/08 $ $
270,000 37.30 1.25 7/16/08
Nils N. Trulsvik 0 -- -- -- -- --
Rune Falstad 25,000 3.45 0.70 12/16/00
Alfred Kjemperud 50,000 6.91 0.70 12/16/00
</TABLE>
(1) The options granted to Mr. Robson vest in three equal annual
installments commencing on the first anniversary of the grant date and
were granted at an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant. The options granted to
Messrs. Falstad and Kjemperud are exercisable only from November 16,
2000 through the expiration date of December 16, 2000, 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 Company's various stock option plans, the Compensation Committee
may, subject to each plan's limits, modify the terms of outstanding
options, including the exercise price and vesting schedule thereof.
51
<PAGE> 54
(2) These values were derived using the Black-Scholes option pricing model
applying the following assumptions:
<TABLE>
<CAPTION>
Risk Free
Exercise Price Dividend Yield Volatility Interest Rate Expected Term
- -------------- -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
$0.69 0%
1.25 0
0.70 0
</TABLE>
These values are not intended to forecast future appreciation of the Company's
stock price. The actual value, if any, that an executive officer may realize
from his options (assuming that they are exercised) will depend solely on the
increase in the market price of the shares acquired through option exercises
over the exercise price, measured when the shares are sold.
OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth information concerning the number and
hypothetical value of stock options held by the Named Officers at December 31,
1998.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Options
Held at Fiscal Value of Unexercised In-the-Money
Year End Options at Fiscal Year End (1)
------------------------------ ------------------------------------
Name Exercisable Unexercisable Exercisable ($) Unexercisable ($)
---- ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
David Robson 75,000 495,000 $0 $0
Nils Trulsvik 30,000 0 0 0
Rune Falstad 0 25,000 0 0
Alfred Kjemperud 0 50,000 0 0
</TABLE>
(1) The exercise price of all options exceeded the market value of the
Common Stock on December 31, 1998.
DIRECTORS' COMPENSATION
The Company does not currently pay directors' fees, but it does
reimburse ordinary out-of-pocket expenses for attending Board and Committee
meetings. From July 15, 1998 until October 1, 1998, the Company paid
non-employee directors fees at the rate of $10,000 per year. Prior thereto, the
Company paid non-employee directors (other than Mr. Halpin) fees at the rate of
$14,000 per year plus a fee of $3,000 per year for each committee on which such
non-employee director served. The Company also previously paid a fee of $1,000
per day, other than a day on which the Board met, for each day spent by a
non-employee director on the business of Board committees which exceeded 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.
From January 1998 through July 15, 1998, Robert A. Halpin was
compensated for his services as Vice Chairman of the Board and member of Board
committees pursuant to an agreement which provided
52
<PAGE> 55
for an annual fee of $45,000 plus $1,000 per day for each day of service in
excess of 66 days per year. During that period, the Company also provided Mr.
Halpin with an office at the Company's offices located in Calgary, Alberta,
Canada, and reimbursed Mr. Halpin for his out-of-pocket expenses in connection
with services on behalf of the Company. The Company also from time to time used
the consulting services of Halpin Energy Resources, Ltd., which is controlled by
Mr. Halpin, in the area of petroleum projects, for which such company was
compensated at its customary rates.
The Company from time to time uses the consulting services of The Bridge
Group, of which Mr. Trulsvik is a partner, for which such company is compensated
at its customary rates.
From January 1, 1996 to July 15, 1998, Eugene Meyers, a non-employee
director until July 15, 1998, provided financial relations consulting services
to the Company at the rate of $15,000 per year for 22 days of service, and
thereafter at the rate of $100 per hour ($1,000 maximum per day). The Company
also reimbursed him for his out-of-pocket expenses associated with such
services.
The Company 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 3,750 shares of 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 date 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 3,750 shares of Common Stock on each date on
which such non-employee director is elected or re-elected by the Board of
Directors as Chairman of the Board of Directors, or, if the Chairman of the
Board is then an employee of the Company, 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 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.
The following table shows the compensation paid to all persons who were
non-employee directors, including their respective affiliates, during the year
ended December 31, 1998:
<TABLE>
<CAPTION>
Directors Fees
and Other Consulting Options
Name Compensation Payments Granted
- ---- ------------ -------- -------
<S> <C> <C> <C>
Robert A. Halpin $26,293 $ 0 3,750 (3)
Russell Hammond 2,137 0 3,750 (4)
Stanley D. Heckman (1) 10,685 0 --
Eugene J. Meyers (1) 7,537 43,100 (2) --
Peder Paus 2,137 0 3,750 (4)
Nils N. Trulsvik 1,671 0 --
</TABLE>
(1) Messrs. Heckman and Meyers served as a non-employee directors until July
15, 1998.
(2) Includes $35,600 for services rendered during 1997.
53
<PAGE> 56
(3) The options were granted on December 31, 1998 at an exercise price of
$0.313 per share, expire on December 30, 2001 and will be 100% vested at
June 30, 1999.
(4) The options were granted on July 15, 1998 at an exercise price of $1.00
per share, expire on July 14, 2001 and were 100% vested at January 15,
1999.
EMPLOYMENT CONTRACTS
The Company had employment contracts with Nils Trulsvik, Rune Falstad
and Alfred Kjemperud which were terminated effective July 31, 1998. The
contracts provided for annual salaries of approximately $150,000 in the case of
Mr. Trulsvik, approximately $125,000 in the case of Mr. Falstad and
approximately $100,000 in the case of Mr. Kjemperud. In addition, each person
received an allowance equal to 12.5% of his base salary, a portion of which was
used to provide minimum life and disability insurance coverage for each such
person. The remainder of such allowance was used by each person for additional
life, medical or accident insurance and to fund individual pension and
retirement plans.
The Company has entered into consulting arrangements with each of
Messrs. Robson, Trulsvik, Falstad and Kjemperud. Mr. Robson's services are
provided through Vazon Energy Limited (of which he is Managing Director) at the
rate of $12,000 per month plus expenses. Mr. Trulsvik's consulting services are
provided through The Bridge Group (of which Mr. Trulsvik is a partner) pursuant
to a work order dated August 1, 1998 between the Company and Mr. Trulsvik at the
rate of $1,200 per day plus expenses. No consulting services have been provided
by Mr. Trulsvik as of December 1998. Mr. Falstad's consulting services are
provided through FinCom AS (of which Mr. Falstad is a principal) under an
agreement that commenced August 1, 1998 at the rate of $7,000 per month plus
expenses. This agreement may be terminated by either party upon 90-day notice.
Mr. Kjemperud's consulting services are provided through The Bridge Group
pursuant to a one-year work order commencing August 1, 1998 between the Company
and Mr. Kjemperud at the rate of $13,000 per month plus expenses.
54
<PAGE> 57
CERTAIN TRANSACTIONS
Nicholas G. Dobrotwir served as Vice President of the Company from
September 1997 until January 26, 1998. He continues to provide consulting
services to the Company. Pursuant to a Memorandum of Agreement dated May 16,
1995 between Fielden Management Services Pty, Ltd. ("Fielden") and the Company,
under which the Company acquired its interest in the Stynawske field, in the
first quarter of 1997 the Company paid $500,000 and issued 87,500 shares of
Common Stock having a value of $1,060,938 in connection with an agreement to
develop and operate the Stynawske field project. Mr. Dobrotwir has indirect
beneficial ownership of the 87,500 shares of Common Stock owned by Fielden.
Under the agreement, Fielden has the contingent right to receive up to an
additional 187,500 shares of the Company's Common Stock subject to the
satisfaction of conditions related to the achievement of specified performance
standards by the Stynawske field project.
During the year ended December 31, 1997, the Company paid consulting
fees and expenses to Fielden related to the Stynawske field project. Mr.
Dobrotwir was the President and Chief Executive Officer of Fielden until his
resignation May 5, 1997. Mr. Dobrotwir's services as a consultant were provided
to the Company through Fielden from January 1997 through April 1997. After April
30, 1997, Mr. Dobrotwir's services were provided pursuant to a Management
Services Agreement with Trident Petroleum Inc. The Company paid a total of
$288,065.20 to Fielden during the year ended December 31, 1997, of which
$111,562.50 related to consultant services provided by Mr. Dobrotwir, and paid
$100,000 to Trident Petroleum Inc. for Mr. Dobrotwir's services.
Orest Senkiw served as a Vice President of the Company from February 4,
1997 to December 1, 1997. Mr. Senkiw, his wife and his two adult children each
owns 25% of the corporation that holds 10.3% of the outstanding shares of Zhoda
Corporation. Mr. Senkiw was the Company executive who, during 1997, had the
principal operating responsibilities for the Lelyaki field project. On April 26,
1997, Zhoda transferred an effective 36% ownership interest in the Lelyaki field
project to the Company. In consideration for the transfer, a subsidiary of the
Company assumed a $450,000 obligation owed by Zhoda to the Company and issued to
Zhoda special non-voting common shares of that subsidiary which could be
exchanged for 500,000 shares of the Company's Common Stock if certain conditions
relating to performance by the Lelyaki field were achieved. The Company believes
that all of Zhoda's rights to exchange the special shares terminated during 1997
because the conditions were not satisfied. Zhoda has filed suit against the
Company in connection with this transaction. See "BUSINESS -- Legal
Proceedings."
As of December 31, 1998, Zhoda was indebted to the Company in the
principal amount of $ _____________ .
The Company is a 50% shareholder of CanArgo Power Corporation, which in
turn owns 85% of a Georgian private power company. The other 50% of CanArgo
Power is owned by Terrenex Acquisition Corporation, an entity that is affiliated
with two of the Company's directors and is itself a principal stockholder of the
Company. Michael R. Binnion is President and a director of both the Company and
Terrenex, and J. F. Russell Hammond is a director of the Company and Chairman of
Terrenex. During the first half of 1998, Terrenex, on behalf of both itself and
the Company, provided all of the funds required by CanArgo Power. After the July
1998 business combination with CanArgo Oil & Gas Inc. was completed, the Company
reimbursed Terrenex $398,000, representing half of the amount that had been
advanced through that time. The Company and Terrenex have funded CanArgo Power
equally since that time.
55
<PAGE> 58
In May 1998, Terrenex agreed to lend CanArgo Oil & Gas Inc. up to
$1,000,000 through August 31, 1998 and subsequently advanced the $1,000,000.
CanArgo Oil & Gas Inc. paid Terrenex a $10,000 commitment fee, $50,000 in draw
down fees and interest at the rate of 1/2% per month. In addition, CanArgo Oil &
Gas Inc. granted Terrenex options exercisable until December 31, 1998 to acquire
12 1/2% of the stock of the subsidiary holding the Nazvrevi/Block XIII
production sharing contract and 15% of CanArgo Oil & Gas Inc.'s position in any
license received as a result a consortium submission in response to the Dagestan
tender for offshore drilling and production rights. The terms of the loan were
negotiated and approved by the directors of CanArgo Oil & Gas Inc. who had no
affiliation with Terrenex. The Company subsequently extended the options through
March 31, 1999 in consideration of the efforts of Terrenex in attempting to
arrange financing for the Company. Terrenex can exercise either option by paying
the percentage of the amounts expended on such projects through the exercise
date as equals the percentage of the project being acquired through the exercise
of the option. The Company repaid the Terrenex loan following completion of the
business combination in July 1998.
56
<PAGE> 59
OWNERSHIP OF VOTING SECURITIES
DESCRIPTION OF VOTING SECURITIES
The voting securities of the Company consist of Common Stock and Special
Voting Stock. Generally, the Common Stock and Special Voting Stock are voted
together as a single class on all matters. The Common Stock is entitled to one
vote per share. The Special Voting Stock is entitled generally to that number of
votes as is equal to the number of Exchangeable Shares issued by CanArgo Oil &
Gas Inc., a subsidiary of the Company, as are outstanding from time to time. The
Special Voting Stock is held of record by Montreal Trust Company of Canada,
which holds such stock in trust for the benefit of the holders of the
Exchangeable Shares. The Special Voting Stock is voted in the manner directed by
the holders of the Exchangeable Shares. The Exchangeable Shares may be exchanged
for shares of Common Stock on a share-for-share basis. For purposes of the
following tables, the term "Voting Securities" refers to the Common Stock and
the Exchangeable Shares as though they were a single class of voting securities.
See "DESCRIPTION OF CAPITAL STOCK."
SECURITY OWNERSHIP BY MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of the Voting Securities by each director and Named Officer of the
Company and by all directors and executive officers of the Company as a group as
of January 31, 1999, and as adjusted to give effect to the Minimum Offering and
the Maximum Offering. Unless otherwise noted, each stockholder has sole voting
and investment power as to the shares shown.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership Beneficial Ownership
Name Prior to Offering After Minimum Offering After Maximum Offering
- ---- ----------------- ---------------------- ----------------------
Number of Number of Number of
Shares Percentage Shares Percentage Shares Percentage
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Binnion 424,432 (1) 2.07%
Peder Paus 365,894 (2) 1.81%
Nils N. Trulsvik 103,700 (3) *
David Robson 75,000 (4) *
J.F. Russell Hammond 28,750 (5) *
Robert A. Halpin 21,000 (6) *
Rune Falstad 10,500 *
Alfred Kjemperud 0 0
All executive officers 1,038,776 (7) 5.02%
and directors as a group
(8 persons)
</TABLE>
* Less than 1%.
(1) Includes 216,636 Exchangeable Shares and 58,333 shares underlying
presently exercisable options beneficially owned directly by Mr.
Binnion. Also includes 125,463 shares, but excludes 2,197,928 shares
beneficially owned by Terrenex Acquisition Corporation of which Mr.
Binnion is President, a director and an approximately 5.4% shareholder.
Mr. Binnion disclaims beneficial ownership of all shares beneficially
owned by Terrenex, other than the 125,463 shares which represent his
5.4% proportionate interest. See "Top 20 Holders of Voting Securities"
below.
57
<PAGE> 60
(2) Includes 15,715 shares underlying presently exercisable warrants to
acquire Exchangeable Shares and 3,750 shares underlying presently
exercisable options.
(3) Includes 30,000 shares underlying presently exercisable options.
(4) Represents 75,000 shares underlying presently exercisable options.
(5) Represents 28,750 shares underlying presently exercisable options.
Excludes 2,323,391 shares owned by Terrenex Acquisition Corporation of
which Mr. Hammond is Chairman, and 1,671,250 shares owned by Provincial
Securities Limited for which Mr. Hammond is an investment advisor as to
which Mr. Hammond disclaims beneficial ownership. See "Top 20 Holders of
Voting Securities" below.
(6) Includes 15,000 shares underlying presently exercisable options.
(7) See Notes 1-6; also includes 20,000 shares underlying presently
exercisable options held by an executive officer not named in the
foregoing table.
TOP 20 HOLDERS OF VOTING SECURITIES
Except as noted with respect to Terrenex Acquisition Corporation and
Provincial Securities Limited, the following table sets forth information with
respect to the top 20 record holders of the Voting Securities as shown on the
stock and warrant records of the Company and CanArgo Oil & Gas Inc. as of
January 31, 1999, and as adjusted to give effect to the Minimum Offering and the
Maximum Offering. Only Terrenex Acquisition Corporation and Provincial
Securities Limited are known to the Company to be the beneficial owners of more
than 5% of the Voting Securities.
<TABLE>
<CAPTION>
Record Ownership Record Ownership Record Ownership
Prior to Offering After Minimum Offering After Maximum Offering
----------------- ---------------------- ----------------------
Number of Number of Number of
Name Shares Percentage Shares Percentage Shares Percentage
---- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C>
Terrenex Acquisition 2,323,391(1) 11.27%
Corporation
1580, 727 -7th Avenue, S.W.
Calgary, Alberta T2P 0Z5
CANADA
Provincial Securities Limited 1,671,250(2) 8.27%
607 Gilbert House, Barbican
London EC2Y 8BD
UNITED KINGDOM
Independent Oilfield 778,000 3.85%
B.A.S.E 708,750 3.51%
Roytor & Co. 472,500 2.34%
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
Record Ownership Record Ownership Record Ownership
Prior to Offering After Minimum Offering After Maximum Offering
----------------- ---------------------- ----------------------
Number of Number of Number of
Name Shares Percentage Shares Percentage Shares Percentage
- ---------------------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gjensidige Kapital 425,000 2.10%
v/Gjensidige Fondsfo
Michael R. Binnion 424,432(3) 2.07%
Peder Paus 365,894(4) 1.81%
Grizzly Investment Fund 346,416 1.71%
Allen Firstenberg 266,364 1.32%
Yorkton Securities Inc. 254,100(5) 1.24%
Unibank A/S S/A Collective
Clien 238,950 1.18%
Part Invest AS 200,000 0.99%
Eurosecurities Limited 189,200(6) 0.93%
American Enterprises 157,500 0.78%
Okla Finans (Fonds Market
Making) 138,815 0.69%
Arnfred Alvestad 134,000 0.66%
G-Fondspar 2020
v/Gjensidige Fondsfo 120,000 0.59%
Southwest Capital Group
Inc. 119,444 0.59%
Arne Hellesto AS 106,800 0.53%
</TABLE>
(1) Includes 415,360 shares underlying presently exercisable warrants to
acquire Exchangeable Shares. Michael Binnion is President, a director and
an approximately 5.4% shareholder and J.F. Russell Hammond is Chairman of
Terrenex Acquisition Corporation.
(2) J.F. Russell Hammond is an investment advisor to Provincial Securities Ltd.
(3) See Note 1 - "Security Ownership by Management."
(4) See Note 2 - "Security Ownership by Management."
(5) Represents Exchangeable Shares.
(6) Represents shares underlying presently exercisable warrants to acquire
Exchangeable Shares.
59
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the Company to issue
50,000,000 shares of Common Stock, $.10 par value per share, and 5,000,000
shares of Preferred Stock, $.10 par value per share. The Company has authorized
a class of Preferred Stock referred to as "Special Voting Stock." As of February
3, 1999, there were 19,381,120 shares of Common Stock and 100 shares of Special
Voting Stock outstanding.
COMMON STOCK
Holders of Common Stock have no preferences or preemptive, conversion, or
exchange rights. Subject to any preferential rights of any shares of Preferred
Stock which may be outstanding, holders of shares of Common Stock are entitled
to receive dividends if approved by the Board of Directors and to share ratably
in the Company's assets legally available for distribution to its stockholders
in the event of its liquidation, dissolution or winding-up. The Company may not
pay dividends on its Common Stock unless its subsidiary, CanArgo Oil & Gas Inc.,
is able to pay and simultaneously pays an equivalent dividend on the
Exchangeable Shares described below.
Holders of Common Stock are entitled to one vote per share on all matters
voted on generally by the stockholders, including the election of directors.
Cumulative voting for the election of directors is not permitted. Except as
otherwise required by law or except as any series or class of Preferred Stock,
such as the Special Voting Stock, may provide, the holders of Common Stock
possess all voting power.
The shares of Common Stock to be issued in this offering, when issued and
paid for, will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized at any time and from time to time,
without any further vote or action by the Company's stockholders, to provide for
the issuance of all or any shares of Preferred Stock in one or more classes or
series. The Board of Directors may set the terms and provisions of each such
class or series by resolution, including provisions regarding voting,
liquidation preference, redemption, conversion and the right to receive
dividends. The Board of Directors has authorized one class of Preferred Stock,
which we refer to in this Prospectus as "Special Voting Stock". The Board of
Directors has no present plans to issue any additional shares of Preferred
Stock.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions, financings and other corporate
transactions, may have the effect of discouraging, delaying or preventing a
change in control of the Company. Since the voting rights to be accorded to any
series of Preferred Stock remain to be fixed by the Board, the holders of
Preferred Stock may, if the Board so authorizes, be entitled to vote separately
as a class in connection with approval of certain extraordinary corporate
transactions in circumstances where Delaware law 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 Common Stock
under certain circumstances or have other terms which could make it more
difficult or costly for a third party to acquire a significant interest in the
Company. Also, shares of Preferred Stock could be privately placed with
purchasers who might side with the management of the Company in opposing a
hostile tender offer or other attempt to obtain control. As a result, the
issuance of Preferred Stock as an anti-takeover device might preclude
stockholders from
60
<PAGE> 63
taking advantage of a situation which might be favorable to their interests. See
"RISK FACTORS - Future stock issuances could have anti-takeover effects."
SPECIAL VOTING STOCK
In connection with the July 1998 business combination, the Company's Board
of Directors authorized a class of Preferred Stock, referred to as "Special
Voting Stock", consisting of 100 shares. The Special Voting Stock was issued to
Montreal Trust Company of Canada, which is holding such shares as trustee for
the benefit of the holders of the Exchangeable Shares described below. Except as
otherwise required by law or the Company's Certificate of Incorporation, each
share of Special Voting Stock is entitled to a number of votes 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 the
Company by the number of shares of Special Voting Stock outstanding as of the
applicable record date. The Special Voting Stock may be voted in the election of
directors and on all other matters submitted to a vote of stockholders of the
Company. The holders of Common Stock and the holder of the Special Voting Stock
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 Company's Certificate of
Incorporation. In the event of any liquidation, dissolution or winding up of the
Company, the holder of the Special Voting Stock will be entitled to receive the
sum of $1.00 per share from any assets of the Company available for distribution
to its stockholders. The holder of the Special Voting Stock is not entitled to
receive dividends. At such time as the Special Voting Stock has no votes
attached to it because there are no Exchangeable Shares outstanding not owned by
the Company and there are no shares of stock, debt, options or other agreements
that could give rise to the issuance of any additional Exchangeable Shares to
any person (other than the Company), the Special Voting Stock may be redeemed by
the Company for a price of $1.00 per share.
EXCHANGEABLE SHARES
In connection with the July 1998 business combination, the outstanding
Common Shares of CanArgo Oil & Gas Inc. were exchanged for Exchangeable Shares
issued by that corporation. The Exchangeable Shares may be exchanged at any time
at the option of the holders for Company Common Stock on a share-for-share
basis. As of February 3, 1999, there were 1,073,763 outstanding Exchangeable
Shares and 1,907,271 Exchangeable Shares issuable upon exercise of warrants
which may be exchanged for a total of 2,981,034 shares of the Company's Common
Stock. The following is a summary of the principal terms and rights of the
Exchangeable Shares which affect the Company and the holders of its Common
Stock.
DIVIDENDS. Holders of Exchangeable Shares are entitled to receive dividends
equal to the dividends paid by the Company on shares of its Common Stock.
VOTING RIGHTS. The holders of Exchangeable Shares are entitled to provide
directions to the holder of the Company's Special Voting Stock as to the manner
in which the Special Voting Stock should be voted with respect to any matter on
which holders of the Company's Common Stock are entitled to vote. See "Special
Voting Stock" above.
EXCHANGE EVENTS. Exchangeable Shares will be exchanged for shares of the
Company's Common Stock on a share-for-share basis, plus an amount equal to all
declared and unpaid dividends on such Exchangeable Shares, whenever:
61
<PAGE> 64
- the holder requests CanArgo Oil & Gas Inc. to redeem his
Exchangeable Shares;
- CanArgo Oil & Gas Inc. is liquidated, dissolved or wound-up;
- requested by the holder of the Special Voting Stock, in the event
CanArgo Oil & Gas Inc. becomes insolvent or bankrupt, has a
receiver appointed or similar event occurs;
- CanArgo Energy Corporation becomes involved in voluntary or
involuntary liquidation, dissolution or winding-up proceedings;
- either CanArgo Oil & Gas Inc. or CanArgo Energy Corporation
elects to redeem all of the Exchangeable Shares, provided the
request is made after January 30, 2004 or the number of
outstanding Exchangeable Shares in less than 853,071; or
- a holder of Exchangeable Shares instructs the holder of the
Special Voting Stock to require the Company to purchase his
Exchangeable Shares.
PROTECTION RIGHTS. Without the prior approval of CanArgo Oil & Gas Inc. and
the holders of the Exchangeable Shares, the Company may not distribute
additional shares of its Common Stock, subscription rights or other property or
assets to all or substantially all holders of its Common Stock, or change the
Common Stock, unless the same or an economically equivalent action is taken with
respect to the Exchangeable Shares. The CanArgo Oil & Gas Inc. Board of
Directors 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 Company's Common Stock. In the event of any
proposed tender offer, share exchange offer, issuer bid, take-over bid or
similar transaction affecting the Company's Common Stock, the Company must 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 the Company's Common
Stock. The Company has also agreed to take various actions to protect the rights
of the holders of the Exchangeable Shares to receive the same dividends as are
paid on the Company's Common Stock and to exchange shares of Company Common
Stock for Exchangeable Shares.
LIMITATION ON LIABILITY
The Company's Certificate of Incorporation limits or eliminates the
liability of the Company's directors or officers to the Company or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware General Corporation Law. Delaware law provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for a breach of fiduciary duty as a director, except for
liability: (1) for any breach of such person's duty of loyalty; (2) for acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law; (3) for the payment of unlawful dividends any certain other
actions prohibited by Delaware corporate law; and (4) for any transaction
resulting in receipt by such person of an improper personal benefit.
62
<PAGE> 65
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits certain
business combinations between a Delaware corporation and an "interested
stockholder," which is defined as a person who, together with any affiliates or
associates of such person, beneficially owns, directly or indirectly, 15% or
more of the outstanding voting shares of a Delaware corporation. For purposes of
Section 203, business combinations are defined broadly to include mergers,
consolidations, sales or other dispositions 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. Section 203 prohibits any such business
combination for a period of three years commencing on the date the interested
stockholder becomes an interested stockholder, unless:
- the business combination is approved by the corporation's board
of directors prior to the date the interested stockholder becomes
an interest stockholder;
- the interested stockholder acquired at least 85% of the voting
stock of the corporation (other than stock held by directors who
are also officers or by certain employee stock plans) in the
transaction in which it becomes an interested stockholder; or
- the business combination is approved by a majority of the board
of directors and by the affirmative vote of two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Signature Stock
Transfer, Inc., Dallas, Texas.
63
<PAGE> 66
SHARES ELIGIBLE FOR FUTURE RESALE
Upon completion of this offering, assuming that the Maximum Offering is
sold, the Company will have outstanding _______ shares of Common Stock. Of these
shares, approximately ___________ shares will be freely tradable without
restriction or further registration under the Securities Act unless purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act described below. An "affiliate" is generally an executive
officer, director or stockholder of 10% of more of the equity securities the
Company.
The only material restriction on the approximately ____________ of the
shares of Common Stock outstanding prior to this offering which are held by
affiliates is the limitation on the number of shares that may be sold in any
three-month period under Rule 144. In general, under Rule 144 as currently in
effect, any person, including an affiliate, who has beneficially owned
restricted shares for at least one year, and an affiliate with respect to all of
his shares, is entitled to sell, within any three-month period, a number of
shares at least equal to 1% of the number of then outstanding shares of Common
Stock. In addition, a person who has not been an affiliate of the Company at any
time during the 90 days preceding the sale and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell an
unlimited number of restricted shares.
In addition to the outstanding shares, at February 3, 1999 the Company had
reserved the following shares for future issuance:
- 2,981,034 shares issuable upon exchange of the Exchangeable Shares
outstanding and which may become outstanding upon exercise of warrants
to purchase Exchangeable Shares;
- 1,717,084 shares issuable upon exercise of outstanding stock options;
- 94,916 shares that may be issued upon exercise of options available
for future grant under the Company's stock option plans; and
- 187,500 shares issuable in connection with an oil and gas project.
Of the foregoing shares, all but the 187,500 shares issuable in connection with
an oil and gas project will be freely tradeable without restriction or further
registration under the Securities Act, except for shares which may be acquired
by affiliates of the Company which would be subject to Rule 144 as described
above.
LEGAL MATTERS
Kelly Lytton Mintz & Vann, LLP, special securities counsel to the Company,
has provided an opinion concerning the validity of the shares of Common Stock
offered hereby. Alan D. Jacobson, a partner in that firm, owns 25,972 shares of
the Company's Common Stock, representing less than 1% of the outstanding shares
at February 3, 1999.
64
<PAGE> 67
EXPERTS
The consolidated financial statements of the Company 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 Prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report appearing herein, and have been included here in reliance upon the report
of such firm, given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of CanArgo Oil & Gas Inc. for the six
month period ended December 31, 1997 included in this Prospectus have been
audited by Ernst & Young, Chartered Accountants, as set forth in their report
appearing herein, and have been included here in reliance upon the report of
such firm, given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of NOC for the periods ended June 30, 1997 and
December 31, 1996, included in this Prospectus have been audited by Ernst &
Young, Chartered Accountants, as set forth in their report appearing herein, and
have been included here 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 Group Ltd., a firm of independent
petroleum consultants. Information from that report has been included in this
Prospectus in reliance on the fact that AMH Group Ltd. is an expert in the
evaluation of oil and gas reserves.
AVAILABLE INFORMATION
This Prospectus is part of a Registration Statement on Form S-1 (file no.
_____ ) filed by the Company with the Securities and Exchange Commission. This
Prospectus does not contain all of the information set forth in the Registration
Statement. Additional information about the Company and its Common Stock is
contained in the Registration Statement and the exhibits thereto. This
Prospectus contains summary descriptions of some of the documents that are filed
as exhibits to the Registration Statement. You should read the entire document
filed as an exhibit and not rely solely on the summaries in the Prospectus.
The Company files reports with the SEC such as annual and quarterly
reports, proxy and information statements, and other information. The public may
read and copy any materials the Company files with the SEC, including the
Registration Statement and its exhibits, at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers, such
as the Company, that file electronically with the SEC. The address of that site
is: http://www.sec.gov.
65
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CANARGO ENERGY CORPORATION:
Consolidated Balance Sheet as of December 31, 1997,
December 31, 1996 and August 31, 1996.................. F-4
Consolidated Statement of Operations for the years ended
December 31, 1997 and August 31, 1996 and 1995......... F-5
Consolidated Statement of Operations for the four month
periods ended December 31, 1996 and 1995 (Unaudited)... F-6
Consolidated Statement of Stockholders' Equity for the
period August 31, 1994 through December 31, 1997....... F-7
Consolidated Statement of Cash Flows for the years ended
December 31, 1997 and August 31, 1996 and 1995......... F-8
Consolidated Statement of Cash Flows for the four month
periods ended December 31, 1996 and 1995 (Unaudited)... F-9
Notes to Consolidated Financial Statements................ F-10
Supplemental Financial Information: Supplemental Oil and
Gas Disclosures -- Unaudited........................... F-38
Consolidated Condensed Balance Sheet as at September 30,
1998 and December 31, 1997............................. F-42
Consolidated Condensed Statements of Operations for the
three and nine months ended September 30, 1998 and
1997................................................... F-43
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997.......... F-44
Notes to Unaudited Consolidated Condensed Financial
Statements............................................. F-45
CANARGO OIL & GAS INC.:
Consolidated Balance Sheet as of June 30, 1998
(Unaudited)............................................ F-57
Consolidated Statement of Operations and Deficit for the
six months ended June 30, 1998 (Unaudited)............. F-58
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 (Unaudited)........................ F-59
Notes to Unaudited Consolidated Financial Statements...... F-60
Auditors' Report.......................................... F-67
Consolidated Balance Sheet as of December 31, 1997........ F-68
Consolidated Statement of Operations and Deficit for the
six months ended December 31, 1997..................... F-69
Consolidated Statement of Cash Flows for the six months
ended December 31, 1997................................ F-70
Notes to Consolidated Financial Statements................ F-71
Supplemental Disclosures about oil and gas production
activities............................................. F-78
</TABLE>
F-1
<PAGE> 69
<TABLE>
<S> <C>
NINOTSMINDA OIL COMPANY LIMITED:
Balance Sheet............................................. F-83
Statement of Operations and Retained Earnings............. F-84
Statement of Cash Flows................................... F-85
Notes to Consolidated Financial Statements................ F-86
PRO FORMA FINANCIAL INFORMATION............................. F-90
</TABLE>
F-2
<PAGE> 70
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.
<TABLE>
<S> <C>
Houston, Texas /S/ PRICEWATERHOUSECOOPERS LLP
March 9, 1998, except for COOPERS & LYBRAND L.L.P.
the sixth paragraph of Note
6 as to which the date is
June 8, 1998 and the first
paragraph of Note 1 as to
which the date is February
11, 1999.
</TABLE>
F-3
<PAGE> 71
CANARGO ENERGY CORPORATION
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 and $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:
11,223,744, 11,084,244, and 8,688,304
shares issued and outstanding
respectively........................... 1,122,374 1,108,424 868,830
Capital in excess of par value........... 83,162,531 81,959,545 56,854,403
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-4
<PAGE> 72
CANARGO ENERGY CORPORATION
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 of 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....... $ (2.47) $ (1.04) $ (1.82)
============ =========== ===========
NET LOSS PER COMMON SHARE -- DILUTED..... $ (2.47) $ (1.04) $ (1.82)
============ =========== ===========
Weighted average number of common shares
outstanding............................ 11,206,506 6,247,568 4,170,891
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-5
<PAGE> 73
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FOUR MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
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.................. $ (0.28) $ (0.27)
=========== ===========
NET LOSS PER COMMON SHARE -- DILUTED................ $ (0.28) $ (0.27)
=========== ===========
Weighted average number of common shares
outstanding....................................... 9,348,106 5,417,031
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE> 74
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 31, 1994 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
NUMBER ADDITIONAL TOTAL
OF SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1994... 2,987,154 $ 298,715 $17,007,158 $(13,125,080) $ 4,180,793
Sale of common stock, net
of offering expenses of
$1,033,118............... 1,979,499 197,950 11,098,880 -- 11,296,830
Issuance of common stock as
employee compensation and
for other obligations.... 450,378 45,038 1,684,840 -- 1,729,878
Net loss................... -- -- -- (7,599,611) (7,599,611)
---------- ---------- ----------- ------------ ------------
BALANCE, AUGUST 31, 1995... 5,417,031 $ 541,703 $29,790,878 $(20,724,691) $ 9,607,890
========== ========== =========== ============ ============
Sale of common stock, net
of offering expenses of
$1,539,646............... 2,500,000 250,000 20,710,354 -- 20,960,354
Issuance of common stock
for purchase of interests
in oil and gas
ventures................. 225,000 22,500 2,330,625 -- 2,353,125
Issuance of common stock
upon conversion of
debentures............... 498,662 49,866 3,884,472 -- 3,934,338
Issuance of common stock
upon exercise of warrants
and options.............. 47,611 4,761 138,074 -- 142,835
Net loss................... -- -- -- (6,493,552) (6,493,552)
---------- ---------- ----------- ------------ ------------
BALANCE, AUGUST 31, 1996... 8,688,304 $ 868,830 $56,854,403 $(27,218,243) $ 30,504,990
========== ========== =========== ============ ============
Issuance of common stock
upon conversion of
debentures............... 29,563 2,956 277,438 -- 280,394
Issuance of common stock
upon exercise of warrants
and options.............. 2,366,377 236,638 24,827,704 -- 25,064,342
Net loss................... -- -- -- (2,604,455) (2,604,455)
---------- ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996..................... 11,084,244 $1,108,424 $81,959,545 $(29,822,698) $ 53,245,271
========== ========== =========== ============ ============
Issuance of common stock
for purchase of interest
in oil and gas venture... 87,500 8,750 1,052,186 -- 1,060,936
Issuance of common stock
upon exercise of warrants
and options.............. 52,000 5,200 150,800 -- 156,000
Net loss................... -- -- -- (27,682,951) (27,682,951)
---------- ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1997..................... 11,223,744 $1,122,374 $83,162,531 $(57,505,649) $ 26,779,256
========== ========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-7
<PAGE> 75
CANARGO ENERGY CORPORATION
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-8
<PAGE> 76
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- CONTINUED
FOR THE FOUR MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
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-9
<PAGE> 77
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
On July 15, 1998, the Company completed the purchase of CanArgo Energy,
described below, changed its name to CanArgo Energy Corporation and effected a
one-for-two reverse split of its common stock. The reverse split has been
reflected retroactively in the accompanying financial statements.
The principal activities of CanArgo Energy Corporation 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.
F-10
<PAGE> 78
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
CanArgo Energy Corporation 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.
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
F-11
<PAGE> 79
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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.
F-12
<PAGE> 80
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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-13
<PAGE> 81
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-14
<PAGE> 82
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT, NET -- (CONTINUED)
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:
<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.
F-15
<PAGE> 83
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
Oil and Gas Properties
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.
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.
F-16
<PAGE> 84
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OIL AND GAS PROPERTIES AND INVESTMENTS -- (CONTINUED)
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>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Investments in and Advances to Oil and
Gas Ventures
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>
F-17
<PAGE> 85
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OIL AND GAS PROPERTIES AND INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Equity in Profit (Loss) of Oil and Gas
Ventures
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>
F-18
<PAGE> 86
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OIL AND GAS PROPERTIES AND INVESTMENTS -- (CONTINUED)
The following supplemental information relates to the Company's investment in
and advances to its two most significant oil and gas ventures:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1997 1996 1996 1995
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Total funding from owners:
Kashtan................... $ 304,508 $ -- $303,472 $ --
Intergas.................. 2,529,292 609,780 963,949 174,564
Total cash expenditures by
the venture:
Kashtan................... $7,275,440 (1) (1) $ --
Intergas.................. 2,529,292 609,780 963,949 174,564
<CAPTION>
TANGIBLE
ASSETS LIABILITIES
---------- ----------
Tangible assets and
liabilities at December
31, 1997:
Kashtan................... $ 943,830 $8,315,811(2)
Intergas.................. 26,906 --
</TABLE>
- -------------------------
(1) For the period from inception, December 8, 1995 through December 31, 1996,
total cash expenditures by Kashtan amounted to $1,475,254.
(2) See Note 4, Restricted Cash, of Notes to Consolidated Financial Statements
regarding Kashtan's indebtedness supported by the Company's restricted cash
deposits.
During the fourth quarter of 1997, the Company recognized impairment losses
totaling $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.
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 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 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. The Company believes that it has no further
obligation to fund operations of Kashtan.
F-19
<PAGE> 87
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OIL AND GAS PROPERTIES AND INVESTMENTS -- (CONTINUED)
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. The Company believes that it has no further
obligation to fund operations of Intergas.
In March 1997, the Company declared the political unrest in Albania to be a
force majeure with respect to the Gorisht-Kocul project, and 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 totaling $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 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. 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
F-20
<PAGE> 88
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OIL AND GAS PROPERTIES AND INVESTMENTS -- (CONTINUED)
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 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 totaling $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-21
<PAGE> 89
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997, December 31, 1996 and August 31, 1996
included the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ ----------
<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 (Note 6).................. 8,280,000 -- --
Close down costs -- Kashtan project
(Note 6).............................. 690,622 -- --
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 154,750 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 498,662 shares of Common Stock. During the
four months ended December 31, 1996, the remaining $300,000 principal amount of
Debentures was converted into 29,563 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.
F-22
<PAGE> 90
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 187,500 shares 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 operations of Kashtan or Intergas. Also see Note 6,
Oil and Gas Properties and Investments, of 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. Fountain has been advised that Intergas and another shareholder of
Intergas are considering asserting such claims.
F-23
<PAGE> 91
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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>
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, 11,223,744 shares
of Common Stock were issued and outstanding. No shares of preferred stock have
been issued.
F-24
<PAGE> 92
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' EQUITY -- (CONTINUED)
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
-- The following are included in the sales or retirement of Common Stock:
-- The issuance of 10,000 shares at a price of $0.50 per share in a warrant
exercise.
-- The issuance to investors of 1,622,000 shares and warrants exercisable at
$12.00 per share to purchase 1,622,000 shares, for aggregate proceeds of
$10,320,882 net of $1,033,118 of related offering costs.
-- The issuance of 240,390 shares at a price of $3.00 per share, 100,000
shares at a price of $2.25 per share and 7,143 shares at a price of $3.50
per share in a series of warrant exercises.
-- The retirement of 34 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.
-- The following are included in the issuance of Common Stock as employee
compensation:
-- 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.
-- The issuance of 11,740 shares at a price of $6.18 per share, 2,000 shares
at a price of $8.76 per share, and 5,000 shares at a price of $11.54 per
share to employees resulting in aggregate compensation of $147,763.
-- The issuance of 395,000 restricted shares at a value of $3.28 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.
-- The issuance of 2,353 shares at a price of $8.50 per share for legal
services in the amount of $20,000.
-- The issuance of 14,285 shares and warrants exercisable at $3.50 per share
to purchase 14,286 shares upon conversion of notes payable in an aggregate
principal amount of $50,000.
-- The issuance of warrants exercisable at $10.20 per share to purchase
569,900 shares to firms that participated in the distribution of the
Company's securities.
-- The issuance of 15,000 shares at a price of $11.76 per share for
consulting services in the amount of $176,250.
F-25
<PAGE> 93
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' EQUITY -- (CONTINUED)
-- The issuance of 5,000 restricted shares at a price of $7.12 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
-- The issuance to investors of 2,500,000 shares for aggregate proceeds of
$20,960,354 net of $1,539,646 of related offering costs.
-- The following are included in the issuance of Common Stock for purchase of
interests in oil and gas ventures:
-- The issuance of 75,000 shares at a price of $9.125 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.
-- The issuance of 150,000 shares at a price of $11.125 per share in
exchange for 6% of the equity of Intergas JSC, a joint stock company
incorporated in the Russian Federation.
-- The following are included in the issuance of Common Stock upon conversion
of debentures:
-- The issuance of 498,662 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.
-- 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.
-- The following are included in the issuance of Common Stock upon warrant
and option exercises:
-- The issuance of 26,000 shares at a price of $3.00 per share in a series
of option exercises.
-- The issuance of 21,611 shares at a price of $3.00 per share in a series
of warrant exercises.
-- The issuance of options exercisable at $7.6875 per share to purchase
15,000 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.
F-26
<PAGE> 94
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' EQUITY -- (CONTINUED)
FOUR MONTH PERIOD ENDED DECEMBER 31, 1996
-- The following are included in the issuance of Common Stock upon conversion
of debentures:
-- The issuance of 29,653 shares upon conversion of $300,000 principal
amount of debentures convertible at 82 1/2% of market price at the time
of conversion.
-- The adjustment to capital in excess of par in the amount of $19,599
related to deferred costs incurred in the issuance of debentures.
-- The following are included in the issuance of Common Stock upon warrant
and option exercises:
-- The issuance of 6,000 shares at a price of $3.00 per share in a series of
option exercises.
-- The issuance of 243,334 shares at a price of $3.00 per share in a series
of warrant exercises.
-- The issuance of 7,143 shares at a price of $3.50 per share in a warrant
exercise.
-- The issuance of 569,900 shares at a price of $10.20 per share in a series
of warrant exercises.
-- The issuance of 1,540,000 shares at a price of $12.00 per share in a
series of warrant exercises.
-- The issuance of options exercisable at $14.50 per share to purchase
190,750 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.
-- The issuance of options exercisable at $17.98 per share to purchase
222,500 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.
YEAR ENDED DECEMBER 31, 1997
-- The issuance of 87,500 shares at a price of $12.125 per share in
connection with the acquisition of an interest in the Stynawske Field,
Ukraine.
-- The issuance of 52,000 shares at a price of $3.00 per share in a series of
option exercises.
-- The issuance of options exercisable at $9.00 per share to purchase 15,000
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.
-- The issuance of options exercisable at $8.50 per share to purchase 3,500
shares granted to employees at June 30, 1997 pursuant to the Company's
1995 Long-Term Incentive
F-27
<PAGE> 95
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' EQUITY -- (CONTINUED)
Plan. See Note 16, Stock-Based Compensation Plans, of Notes to Consolidated
Financial Statements.
-- The issuance of options exercisable at $10.54 per share to purchase 77,500
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.
-- The cancellation of options to purchase an aggregate 63,084 shares which
had been granted to employees pursuant to the Company's 1995 Long-Term
Incentive Plan. Of the options cancelled, 59,584 were exercisable at
$14.50, 2,500 were exercisable at $17.98, and 1,000 were exercisable at
$8.50. See Note 16, Stock-Based Compensation Plans, of Notes to
Consolidated Financial Statements.
The following table summarizes warrants to purchase the Company's Common Stock,
which were outstanding:
<TABLE>
<CAPTION>
NUMBER OF
OUTSTANDING AT: WARRANTS EXERCISE PRICE EXPIRATION DATE
- --------------- ---------- --------------- -------------------------------------
<S> <C> <C> <C>
August 31, 1994...... 629,621 $ .50 - $ 3.50 August 1, 1995 to November 3, 1997
Issued............. 2,191,900 $10.20 - $12.00 February 28, 1997
Exercised.......... (357,533) $ .50 - $ 3.50 August 1, 1995 to November 3, 1997
----------
August 31, 1995...... 2,463,988 $ 3.00 - $12.00 February 28, 1997 to November 3, 1997
----------
Exercised.......... (21,611) $ 3.00 November 3, 1997
----------
August 31, 1996...... 2,442,377 $ 3.00 - $12.00 February 28, 1997 to November 3, 1997
----------
Exercised.......... (2,360,377) $ 3.00 - $12.00 February 28, 1997 to November 3, 1997
Redeemed........... (82,000) $12.00 February 28, 1997 to November 3, 1997
----------
December 31, 1996.... 0
----------
</TABLE>
During the four month period ended December 31, 1996, an aggregate of 2,191,900
warrants were called for redemption by the Company. If the average closing price
of the Company's Common Stock exceeded $12.20 and $14.00 per share for 10
consecutive trading days, upon election of the Company and notice to the warrant
holders, the holders of 569,900 warrants and 1,622,000 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 82,000 of the 2,191,900 warrants called for redemption were exercised during
the four month period ended December 31, 1996; the 82,000 warrants were
redeemed. During the same period, an additional 250,477 warrants were also
exercised by their holders. There were no outstanding warrants at December 31,
1996 and 1997.
F-28
<PAGE> 96
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 11,206,506, 6,247,568, 4,170,891, 9,348,106 and
5,417,031, respectively. The Debentures, which were convertible into a maximum
of 154,750 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
antidilutive. 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.
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
YEAR ENDED PERIOD ENDED PERIOD 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>
F-29
<PAGE> 97
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES -- (CONTINUED)
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>
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.
F-30
<PAGE> 98
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
DECEMBER 31, AUGUST 31, AUGUST 31, DECEMBER 31,
1997 1996 1995 1996
------------ ----------- ----------- ------------
<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>
F-31
<PAGE> 99
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SEGMENTS -- (CONTINUED)
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>
DECEMBER 31, AUGUST 31, AUGUST 31, DECEMBER 31,
1997 1996 1995 1996
------------ ----------- ----------- ------------
<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.
F-32
<PAGE> 100
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SEGMENTS -- (CONTINUED)
Identifiable Assets as of December 31, 1997 and 1996 and August 31, 1996 by
business segment and geographical area were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ -----------
<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>
DECEMBER 31, AUGUST 31, AUGUST 31, DECEMBER 31,
1997 1996 1995 1996
------------ ---------- ---------- ------------
<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>
F-33
<PAGE> 101
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDED 4 MONTHS ENDED
------------------------------------------ -----------------------------
DECEMBER 31, AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1996 1995
------------ ---------- ---------- ------------ ------------
ALL AMOUNTS IN $000'S
<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>
16. STOCK-BASED COMPENSATION PLANS
On August 17, 1994, options to purchase 200,000 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 $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.
F-34
<PAGE> 102
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. STOCK-BASED COMPENSATION PLANS -- (CONTINUED)
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan") adopted by the
Company in February 1996, 750,000 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.
F-35
<PAGE> 103
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. STOCK-BASED COMPENSATION PLANS -- (CONTINUED)
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.......... 0 200,000
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 $ 3.37
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 $12.39
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
Cancelled...................... 63,084 (63,084) $14.54
--------- ----------
Balance at December 31, 1997........ 288,834 577,166 $12.64
--------- ----------
</TABLE>
The shares issuable upon exercise of vested options and the corresponding
weighted average exercise price are as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE WEIGHTED
UNDER EXERCISABLE AVERAGE
OPTIONS EXERCISE PRICE
----------------- --------------
<S> <C> <C>
August 31, 1995................................. 172,000 $3.00
August 31, 1996................................. 171,000 $3.42
December 31, 1996............................... 165,000 $3.42
December 31, 1997............................... 177,832 $7.12
</TABLE>
The weighted average fair value of options granted at market was $2.92, $7.30
and $2.02 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 $1.84 and $3.46
for the year ended December 31, 1997
F-36
<PAGE> 104
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. STOCK-BASED COMPENSATION PLANS -- (CONTINUED)
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 $2.06, $5.04 and $2.02, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------- ------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
OUTSTANDING AT EXERCISABLE AT
RANGE OF DECEMBER 31, WEIGHTED AVERAGE WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES 1997 REMAINING TERM EXERCISE PRICE 1997 EXERCISE PRICE
- ---------------- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.00 to $ 7.68 131,000 1.57 $ 3.54 131,000 $ 3.62
$ 7.70 to $10.60 95,000 1.92 $10.24 15,000 $ 9.00
$10.62 to $17.98 351,166 2.95 $16.68 49,832 $14.50
- ---------------- ------- -------
$ 3.00 to $17.98 577,166 177,832
================ ======= =======
</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 $2.56, respectively, for the fiscal year ended December 31, 1997 and
approximately $6,500,000 and $1.04, 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 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-37
<PAGE> 105
CANARGO ENERGY CORPORATION
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-38
<PAGE> 106
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION -- CONTINUED
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>
DECEMBER 31, 1997 CANADA
- ----------------- -------------
<S> <C>
Property Acquisition
Unproved*........................ $ 324,500
Proved........................... 684,500
Exploration......................... --
Development......................... 680,974
----------
Total costs incurred............. $1,689,974
==========
<CAPTION>
DECEMBER 31, 1996 UNITED STATES
- -------------------------------------- ----------
Property acquisition:
Unproved*........................ $ 259,338
Proved........................... 0
Exploration......................... --
Development......................... --
----------
Total costs incurred............. $ 259,338
==========
<CAPTION>
AUGUST 31, 1996 UNITED STATES
- -------------------------------------- ----------
Property acquisition:
Unproved*........................ $ 287,788
Proved........................... 0
Exploration......................... --
Development......................... --
----------
Total costs incurred............. $ 287,788
==========
<CAPTION>
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-39
<PAGE> 107
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION -- CONTINUED
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 has been computed by applying period-end statutory tax rates
to aggregate future pre-tax net cash flows, reduced by the tax basis of the
properties involved and tax carryforwards. 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.
F-40
<PAGE> 108
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION -- CONTINUED
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
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>
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-41
<PAGE> 109
CANARGO ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
AS AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 6,091,216 $ 14,164,177
Restricted cash................................. -- 9,700,000
Accounts receivable............................. 454,422 --
Advances to operator............................ 1,764,305 --
Inventory....................................... 170,405 --
Other current assets............................ 344,534 761,904
------------ ------------
Total current assets.............................. 8,824,882 24,626,081
Property and equipment, net....................... 7,161,187 5,942,273
Oil and gas properties, net, full cost method
(including unevaluated amounts of $11,451,363
and $324,500, respectively)..................... 26,729,009 1,478,974
Investment in and advances to oil and gas
ventures, net................................... 5,361,531 5,386,707
------------ ------------
TOTAL ASSETS...................................... $ 48,076,609 $ 37,434,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 460,916 $ 328,171
Due to affiliated entity........................ 338,728 --
Accrued liabilities............................. 1,308,187 10,326,608
------------ ------------
Total current liabilities......................... 2,107,831 10,654,779
------------ ------------
Long-term debt.................................... 895,500 --
Minority interest in subsidiaries................. 3,384,503 --
------------ ------------
Total liabilities................................. 6,387,834 10,654,779
------------ ------------
Stockholders' Equity:
Preferred stock................................. -- --
Common stock,
11,223,744 shares issued and outstanding;
9,970,900 additional shares issuable without
receipt of further consideration............. 2,119,464 1,122,374
Capital in excess of par value.................. 101,865,441 83,162,531
Accumulated deficit since October 31, 1988...... (62,296,130) (57,505,649)
------------ ------------
Total stockholders' equity........................ 41,688,775 26,779,256
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 48,076,609 $ 37,434,035
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
F-42
<PAGE> 110
CANARGO ENERGY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and gas production..... $ 375,502 $ 63,158 $ 508,018 $ 172,818
Other...................... (28) -- 11,972 --
---------- ---------- ---------- ----------
375,474 63,158 519,990 172,818
---------- ---------- ---------- ----------
Operating Expenses:
Lease operating expense.... 299,636 48,696 477,263 116,746
Cost of sales.............. -- -- 10,891 --
Other direct project
cost..................... 227,961 420,656 1,012,445 814,509
General and
administrative........... 517,069 569,444 2,720,932 2,716,823
Depreciation, depletion and
amortization............. 100,949 80,483 261,420 158,111
Equity loss in
unconsolidated
subsidiaries............. 16,848 1,646,587 152,225 3,011,369
Writedown of oil and gas
properties............... -- -- 900,000 --
---------- ---------- ---------- ----------
1,162,463 2,765,866 5,535,176 6,817,558
---------- ---------- ---------- ----------
OPERATING LOSS............... 786,989 2,702,708 5,015,186 6,644,740
---------- ---------- ---------- ----------
Other Income (Expense):
Interest, net.............. (1,590) 417,083 241,209 1,117,363
Other income (expense)..... (46,232) (27,153) (42,232) (68,460)
Loss on disposition of
equipment................ -- (43,824) (27,698) (265,617)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME
(EXPENSE).................. (47,822) 346,106 171,279 783,286
---------- ---------- ---------- ----------
Minority interest in loss of
consolidated subsidiary.... 53,426 106,946 53,426 186,390
---------- ---------- ---------- ----------
NET LOSS..................... $ 781,385 $2,249,656 $4,790,481 $5,675,064
========== ========== ========== ==========
Weighted average number of
common shares issued and
issuable without receipt of
additional consideration... 19,677,333 11,223,744 14,072,572 11,200,757
---------- ---------- ---------- ----------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE........... $ (0.04) $ (0.20) $ (0.34) $ (0.51)
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
F-43
<PAGE> 111
CANARGO ENERGY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss........................................ $ (4,790,481) $ (5,675,064)
Loss on disposition of equipment................ 27,698 265,617
Equity loss in unconsolidated subsidiaries...... 152,225 3,011,369
Minority interest in loss of consolidated
subsidiary................................... (53,426) (186,390)
Depreciation, depletion and amortization........ 261,420 158,111
Writedown of oil and gas properties............. 900,000 --
Changes in assets and liabilities:
Accounts receivable.......................... 423,048 (194,004)
Advances to operator......................... (523,610)
Inventory.................................... (150,000)
Other current assets......................... 440,881 (838,317)
Accounts payable............................. (1,915,108) (288,117)
Accrued liabilities.......................... (9,018,421) (509,586)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES............. (14,245,774) (4,256,381)
------------ ------------
Investing activities:
Restricted cash................................. 9,700,000 (4,300,000)
Acquisition costs............................... (1,214,948) --
Investments in oil and gas properties........... (1,224,145) (997,479)
Purchase of property and equipment.............. (1,896,493) (907,275)
Proceeds from disposition of assets............. -- 232,638
Investments in and advances to oil and gas
ventures..................................... (127,049) (4,386,669)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES...................................... 5,237,365 (10,358,785)
------------ ------------
Financing activities:
Cash acquired................................... 935,448 --
Proceeds from exercise of options............... -- 156,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 935,448 156,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (8,072,961) (14,459,166)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 14,164,177 31,424,064
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 6,091,216 $ 16,964,898
============ ============
Non cash investing and financing activities:
Issuance of common stock in connection with
investments in oil and gas ventures.......... $ -- $ 1,060,937
============ ============
Common stock issuable in connection with
acquisition of subsidiary....................... $ 19,700,000 $ --
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
F-44
<PAGE> 112
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated condensed financial statements and notes thereto of
CanArgo Energy Corporation and its subsidiaries (collectively, the Company) have
been prepared by management without audit. In the opinion of management, the
consolidated condensed financial statements include all adjustments, consisting
of normal recurring adjustments, necessary for a fair statement of the results
for the interim period. The accompanying consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Report on Form 10-K/A for
the year ended December 31, 1997 filed with the Securities and Exchange
Commission.
On July 15, 1998 the Company filed with the Delaware Secretary of State
amendments to its Certificate of Incorporation to effect a one-for-two reverse
split of the shares of the Company's Common Stock (the "Reverse Split") and to
change the Company's name from Fountain Oil Incorporated to CanArgo Energy
Corporation. The reverse split has been reflected retroactively in the
accompanying financial statements.
OIL AND GAS PROPERTIES
The Company and the unconsolidated entities for which it accounts using the
equity method account for oil and gas properties and interests under the full
cost method. Under this accounting method, costs, including a portion of
internal costs associated with property acquisition and exploration for and
development of oil and gas reserves, are capitalized within cost centers
established on a country-by-country basis. Capitalized costs within a cost
center, as well as the estimated future expenditures to develop proved reserves
and estimated net costs of dismantlement and abandonment, are amortized using
the unit-of-production method based on estimated proved oil and gas reserves.
All costs relating to production activities are charged to expense as incurred.
Capitalized oil and gas property costs, less accumulated depreciation, depletion
and amortization and related deferred income taxes, are limited to an amount
(the ceiling limitation) equal to (a) the present value (discounted at 10%) of
estimated future net revenues from the projected production of proved oil and
gas reserves, calculated at prices in effect as of the balance sheet date (with
consideration of price changes only to the extent provided by fixed and
determinable contractual arrangements), plus (b) the lower of cost or estimated
fair value of unproved and unevaluated properties, less (c) income tax effects
related to differences in the book and tax basis of the oil and gas properties.
2. BUSINESS COMBINATION
On July 15, 1998, the Company completed the acquisition of all of the common
stock of CanArgo Energy Inc. ("CEI") for Common Stock consideration valued at
$19,700,000. CEI is an oil and gas exploration, development and production
company whose principal operations are located in the Republic of Georgia. On
completion of the acquisition, CEI
F-45
<PAGE> 113
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
2. BUSINESS COMBINATION -- (CONTINUED)
became a subsidiary of the Company, and each previously outstanding share of CEI
Common Stock was converted into the right to receive 0.8 shares (1.6 shares
pre-Reverse Split) of the Company's Common Stock, giving the former shareholders
of CEI the right to receive approximately 47% of the Company's Common Stock. In
addition, the former management of CEI now hold a majority of the Company's
senior management positions.
Under purchase accounting, CEI's results have been included in the Company's
consolidated financial statements since the date of acquisition. The following
pro forma statements of operations give effect to the business combination as if
such business combination had occurred on January 1, 1997; however, as CEI
commenced operations in June of 1997, the pro forma financial statements of
operations have been adjusted to reflect the results of operations of
Ninotsminda Oil Company Limited ("NOC"), a 55.9% subsidiary of CEI and now the
Company, from January 1, 1997 to June 30, 1997. The historical results of
operations have been adjusted to reflect (i) revenues and expenses attributable
to the Ninotsminda Field and (ii) the difference between the properties,
historical depletion, depreciation and amortization and such expenses calculated
based on the value allocated to the acquired assets. Management does not believe
the pro forma amounts are indicative of the results of operations that would
have been reported had the business combination occurred prior to January 1,
1997 or that may be reported in the future.
<TABLE>
<CAPTION>
PRO FORMA
------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Revenues........................................... $1,512,942 $2,557,818
Operating expenses................................. 7,559,880 9,260,908
---------- ----------
Operating loss..................................... 6,046,938 6,703,090
Other income (loss)................................ 200,962 699,686
Minority interest in loss of Unconsolidated
subsidiary....................................... 320,848 219,232
Net loss........................................... $5,525,128 $5,784,172
========== ==========
Basic and diluted net loss per common share........ $ (0.39) $ (0.52)
========== ==========
</TABLE>
The business combination will result in the issuance of 9,970,900 shares of the
Company's Common Stock without receipt of additional consideration by the
Company. Giving effect to the issuance of such shares, the number of shares of
the Company's Common Stock outstanding as of September 30, 1998 would be
21,194,644.
F-46
<PAGE> 114
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
3. RESTRICTED CASH
In April 1998, restricted cash totaling $8,567,000, which supported letters of
credit issued to assure repayment of borrowings under a bank line of credit
established by Kashtan Petroleum Ltd. ("Kashtan") which operates the Lelyaki
Field project, was applied to repay such bank borrowings and related interest.
The remaining portion of the restricted cash, totaling $783,000, was released to
the Company free of restrictions in May 1998.
In January 1998, $350,000 of restricted cash, which had been used to
collateralize a bank letter of credit relating to the Gorisht-Kocul Field
project, was released.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net of accumulated depreciation and impairment at
September 30, 1998 and December 31, 1997 included the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31,
----------------------------------------------------------- 1997
ACCUMULATED ------------
COST DEPRECIATION IMPAIRMENT NET NET
----------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Electrically enhanced oil
recovery ("EEOR")
equipment................ $ 562,953 $(290,885) $ -- $ 272,068 $ 278,044
Oil and gas related
equipment................ 9,473,968 -- (2,843,997) 6,629,971 5,504,312
Office furniture, fixtures
and equipment and
other.................... 1,072,699 (458,634) (354,917) 259,148 159,917
----------- --------- ----------- ---------- ----------
Property and equipment..... $11,109,620 $(749,519) $(3,198,914) $7,161,187 $5,942,273
=========== ========= =========== ========== ==========
</TABLE>
Oil and gas related equipment includes new or refurbished drilling rigs and
related equipment, substantially all of which the Company now intends to
mobilize in the Republic of Georgia. Much of the equipment was originally
planned to be used in the Maykop Field, Republic of Adygea, Russian Federation,
but following extended delays in resolving operating arrangements with the
entity developing that project, the Company recorded an impairment of $2,844,000
at December 31, 1997, which represented the difference between the book value of
the rigs and related equipment and their estimated fair value.
F-47
<PAGE> 115
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
5. OIL AND GAS PROPERTIES, NET
The Company has acquired interests in oil and gas properties through joint
ventures and joint operating arrangements. A summary of the Company's oil and
gas properties at September 30, 1998 and December 31, 1997 is set out below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31,
---------------------------------------------------------------- 1997
REPUBLIC OF ------------
GEORGIA CANADA USA OTHER TOTAL TOTAL
----------- ----------- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Proved properties.... $15,120,327 $ 1,475,593 $ 1,174,734 $ -- $17,770,654 $ 2,650,327
Unproved
properties......... 10,887,576 324,500 -- 239,287 11,451,363 324,500
Less: accumulated
depletion and
impairment......... (105,000) (1,213,274) (1,174,734) -- (2,493,008) (1,495,853)
----------- ----------- ----------- -------- ----------- -----------
Total Oil and Gas
Properties, net.... $25,902,903 $ 586,819 $ -- $239,287 $26,729,009 $ 1,478,974
=========== =========== =========== ======== =========== ===========
</TABLE>
Oil and gas properties obtained in connection with the acquisition of CEI
includes $15,120,000 of properties in the full cost pool and $10,888,000 of
unevaluated properties. The Ninotsminda Field includes seven producing wells and
since February 1996 has been operated under the terms of a production sharing
contract ("PSC") between NOC and the Republic of Georgia represented by the
state oil company, Georgian Oil. Unproved properties in the Republic of Georgia
include other license areas within the Ninotsminda PSC as well as another
exploration area referred to as the Nazvrevi block operated under the terms of a
PSC between the Company's wholly owned subsidiary, CanArgo Nazvrevi Limited, and
the Republic of Georgia.
During the first quarter of 1997, the Company purchased a 60% interest in a
heavy oil property in the Sylvan Lake area in Alberta, Canada for approximately
$1,009,000. One new well was successfully drilled during the 1997 third quarter,
and was prepared for installation of the Company's EEOR equipment. The Sylvan
Lake project includes a total of four producing wells. During the nine months
ended September 30, 1998, the Company recognized writedowns aggregating $900,000
on its oil and gas properties in the Sylvan Lake project as a result of a
decline of heavy oil prices and the application of the quarterly full cost
ceiling test. The writedowns relate to proved properties.
Unproved properties and associated costs not currently being amortized and
included in oil and gas properties were $11,451,000 and $324,500 at September
30, 1998 and December 31, 1997 respectively, $324,500 of which relates to the
Sylvan Lake Field. The Sylvan Lake Field is expected to be evaluated over the
next 15 months, and if no proved reserves are added, those properties could
result in additional impairment. All other unproved properties are expected to
be evaluated over the next five years.
F-48
<PAGE> 116
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
6. INVESTMENTS IN AND ADVANCES TO OIL AND GAS VENTURES
The Company has acquired interests in oil and gas ventures through less than
majority interests in corporate and corporate-like entities. A summary of the
Company's net investment in and advances to oil and gas ventures as of September
30, 1998 and December 31, 1997 is set out below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Ukraine -- Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company..... $5,361,531 $5,386,707
Ukraine -- Lelyaki Field, Pryluki Region
Through an effective 40.5% ownership of Kashtan
Petroleum Ltd.................................. -- --
Adygea, Russian Federation -- Maykop Field
Through 37% ownership in Intergas JSC............. -- --
Albania -- Gorisht-Kocul Field
Through 50% ownership of joint venture............ -- --
---------- ----------
Total Investments In and Advances to Oil and Gas
Ventures, Net of Equity Loss and Impairment....... $5,361,531 $5,386,707
========== ==========
</TABLE>
As of September 30, 1998, the Company had remaining net investments in and
advances to oil and gas ventures totaling $5,362,000, all of which relate to
Boryslaw Oil Company ("BOC"), the entity holding the license to develop the
Stynawske Field, for which development operations have not yet begun. Included
are advances to BOC totaling $1,635,000 at September 30, 1998 and $1,508,000 at
December 31, 1997. Such advances may be recoverable only from future revenue of
or payments from future participants in the venture, if any.
Based on its analysis of initial Lelyaki Field development efforts completed in
the fourth quarter of 1997, the Company concluded that the Lelyaki Field would
not support a successful commercial development. As a result, the Company
recorded an impairment charge totaling $9,108,000. In addition, the Company
recognized a loss in 1997 of $2,080,000 reflecting its equity in the loss of
Kashtan. The Company believes that it has no further obligation to fund any
operations of Kashtan.
Because of extended delays in resolving operating arrangements and other matters
associated with Intergas JSC ("Intergas"), the entity developing the Maykop
Field project, the Company during the fourth quarter of 1997 recorded an
impairment for the entire amount of its investment in and advances to Intergas
of $5,258,000. In addition, the Company recognized a loss in 1997 of $851,000,
reflecting its equity in the loss of Intergas. The Company believes that it has
no further obligation to fund any operations of Intergas.
F-49
<PAGE> 117
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
6. INVESTMENTS IN AND ADVANCES TO OIL AND GAS VENTURES -- (CONTINUED)
In March 1997, the Company declared the political unrest in Albania to be a
force majeure with respect to the Gorisht-Kocul project and suspended
development activities. Due to the extended period that the force majeure
condition has continued and the absence of any indication of an imminent
termination of that condition, the Company during the fourth quarter of 1997
recorded an impairment for the entire amount of its investment in and advances
to the Gorisht-Kocul joint venture of $1,370,000. The Company also recognized a
$433,000 loss in 1997 as its equity in the loss of that joint venture. At
September 30, 1998, the force majeure condition remained in effect.
The Company's investments in and advances to oil and gas ventures are
essentially unevaluated properties. At September 30, 1998 and December 31, 1997,
there were no material operations or assets (other than unevaluated properties)
of entities being accounted for using the equity method. Accordingly, no other
separate financial information has been presented.
7. DUE TO AFFILIATED ENTITY
The loan from Terrenex Acquisition Corporation of $339,000 is due on demand and
is non-interest bearing.
8. ACCRUED LIABILITIES
Accrued liabilities at September 30, 1998 and December 31, 1997 included the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Compensation, including related taxes.................. $ 53,780 $ 337,767
Professional fees...................................... 236,037 276,500
Termination costs...................................... -- 405,833
Effective guarantee of Kashtan obligations............. -- 8,280,000
Close down costs -- Kashtan project.................... 149,182 690,622
Management fees........................................ 142,000 --
Taxes.................................................. 61,000 --
Interest............................................... 198,484 --
Contingent charges..................................... 445,417 --
Oilfield related equipment............................. 10,000 268,000
Other.................................................. 12,287 67,886
---------- -----------
$1,308,187 $10,326,608
========== ===========
</TABLE>
F-50
<PAGE> 118
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
8. ACCRUED LIABILITIES -- (CONTINUED)
At September 30, 1998 the contingent charges consists of charges for goods and
services billed to NOC by its non-controlling shareholder which have not yet
been agreed to by NOC.
At September 30, 1998 management fees consists of charges for services provided
to NOC by its non-controlling shareholder.
9. LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Advance............................................. $220,500 $ --
Loan................................................ 675,000 --
-------- --------
$895,500 $ --
======== ========
</TABLE>
The advances, made by NOC's non-controlling shareholder to NOC, bears no
interest unless it is not repaid by June 30, 2000, at which time it would begin
to bear interest at 15% per anum until repayment.
The loan from NOC's non-controlling shareholder to NOC bears interest at a rate
of 10% per anum and is repayable out of surplus funds of NOC as and when
available.
10. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997.... 22,447,489 $ 2,244,749 $ 82,040,156 $(57,505,649) $26,779,256
Net loss...................... -- -- -- (4,790,481) (4,790,481)
----------- ----------- ------------ ------------ -----------
22,447,489 $ 2,244,749 $ 82,040,156 $(62,296,130) $21,988,775
One-for-two reverse split of
the shares of the Company's
Common Stock (July 15,
1998)....................... (11,223,745) (1,122,375) 1,122,375 -- --
Shares issuable without
payment of additional
consideration............... 9,970,900 997,090 18,702,910 -- 19,700,000
----------- ----------- ------------ ------------ -----------
Balance, September 30, 1998... 21,194,644 $ 2,119,464 $101,865,441 $(62,296,130) $41,688,775
=========== =========== ============ ============ ===========
</TABLE>
F-51
<PAGE> 119
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
10. STOCKHOLDERS' EQUITY -- (CONTINUED)
The business combination will result in the issuance of 9,970,900 shares of the
Company's Common Stock determined as follows:
<TABLE>
<CAPTION>
COMMON STOCK RESERVED FOR ISSUANCE TO
CEI SECURITY HOLDERS (POST 1:2 REVERSE SPLIT) # OF SHARES
- --------------------------------------------- -----------
<S> <C>
Exchangeable Shares issued by CEI......................... 8,543,014
Special Warrants issued by CEI............................ 1,427,886
---------
Total CEI Exchangeable Shares Issued and Reserved as of
September 30, 1998........................................ 9,970,900
=========
</TABLE>
The Exchangeable Shares are securities issued by CEI that are exchangeable
generally at the option of the holders for shares of the Company's Common Stock
on a share-for-share basis and entitle the holders to dividends and other rights
economically equivalent to those to which holders of the Company's Common Stock
are entitled. Through contractual arrangements, holders of Exchangeable Shares
have the right to direct votes at meetings of stockholders of the Company
commensurate with the number of shares of the Company's Common Stock such
holders, respectively, have the right to receive upon exchange of the
Exchangeable Shares. As a result of such contractual arrangements, the
Exchangeable Shares represent the same rights to dividends and rights upon
liquidation and generally have the same voting rights as shares of the Company's
Common Stock.
PREFERRED STOCK
The accompanying financial statements do not give effect to the issuance of one
hundred shares (the "Preferred Shares") of Series Voting Preferred Stock to the
Montreal Trust Company of Canada (the "Trustee") under the Voting, Support and
Exchange Trust Agreement entered into among the Company, CEI and the Trustee.
The Preferred Shares embody the right to (i) the voting power of the holders of
unexchanged Exchangeable Shares following the exchange thereof for shares of the
Company's Common Stock and (ii) the right to receive an aggregate of $100 upon
redemption at the rate of $1.00 per Preferred Share following the exchange of
all outstanding Exchangeable Shares.
The Preferred Shares will be stripped of their voting power proportionately as
Exchangeable Shares are exchanged for shares of the Company's Common Stock. When
fully divested of voting rights through the exchange of all Exchangeable Shares,
the Preferred Shares can be redeemed by the Company for nominal consideration.
Thus, the Preferred Shares do not have substance for accounting purposes.
OPTIONS
On August 17, 1994, options to purchase 200,000 shares (400,000 shares
pre-Reverse Split) of the Company's Common Stock were issued to various
individuals who were
F-52
<PAGE> 120
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
10. STOCKHOLDERS' EQUITY -- (CONTINUED)
serving or were expected in the future to serve the Company as officers,
directors, employees, consultants and advisors (the "1994 Plan"). The options
are exercisable at an exercise price of $3.00 and are only exercisable at the
time or within six months after services are rendered by such individuals.
88,000 of the options remained outstanding at September 30, 1998, all of which
expire August 16, 1999.
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan") adopted by the
Company in February 1996, 750,000 shares (1,500,000 shares pre-Reverse Split) of
the Company's Common Stock have been authorized for possible issuance under the
1995 Plan. Stock options granted under the 1995 Plan may be either incentive
stock options or non-qualified stock options. Options expire on such date as is
determined by the committee administering the 1995 Plan, except that incentive
stock options may expire no later than 10 years from the date of grant. Pursuant
to the 1995 Plan, a specified number of stock options exercisable at the then
market price are granted annually to non-employee directors of the Company,
which become 100% vested six months from the date of grant. Stock appreciation
rights entitle the holder to receive payment in cash or Common Stock equal in
value to the excess of the fair market value of a specified number of shares of
Common Stock on the date of exercise over the exercise price of the stock
appreciation right. No stock appreciation rights have been granted through
September 30, 1998. The exercise price and vesting schedule of stock
appreciation rights are determined at the date of grant. 544,500 of the options
remained outstanding at September 30, 1998.
Pursuant to the terms of an Amended and Restated Combination Agreement between
the Company and CEI (the "Combination Agreement"), on July 15, 1998 each stock
option granted under CEI's Stock Option Plan ("CEI Plan") to purchase a CEI
Common Share was converted into an option to purchase 0.8 shares of the
Company's Common Stock. Pursuant to the CEI Plan, which has been adopted by the
Company, a total of 988,000 shares of the Company's Common Stock have been
authorized for issuance under the CEI Plan of which 848,000 options were
outstanding at September 30, 1998. Stock options granted under the CEI Plan
expire on such date as is determined by the committee administering the CEI
Plan, except that the term of stock options may not exceed 10 years from the
date of grant.
The purpose of the Company's Stock Option Plans is to further the interest of
the Company by enabling officers, directors, employees, consultants and advisors
of the Company to acquire an interest in the Company by ownership of its stock
through the exercise of stock options granted under its various Stock Option
Plans.
F-53
<PAGE> 121
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
10. STOCKHOLDERS' EQUITY -- (CONTINUED)
A summary of the status of stock options granted under the 1994 Plan, the 1995
Plan and the CEI Plan, restated to give effect to the Reverse Split, is as
follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE WEIGHTED
SHARES AVAILABLE UNDER AVERAGE
FOR ISSUE OUTSTANDING OPTIONS EXERCISE PRICE
---------------- ------------------- --------------
<S> <C> <C> <C>
Balance at August 31, 1995.... 0 200,000 $ 3.00
1995 Plan Authorization..... 750,000
Options:
Granted at market........ (15,000) 15,000 $ 7.68
Exercised................ -- (26,000) $ 3.00
-------- ---------
Balance at August 31, 1996.... 735,000 189,000 $ 3.38
Options:
Granted at market........ (190,750) 190,750 $14.50
Granted at a premium..... (222,500) 222,500 $17.98
Exercised................ -- (6,000) $ 3.00
-------- ---------
Balance at December 31,
1996........................ 321,750 596,250 $12.38
Options:
Granted at market........ (18,500) 18,500 $ 8.90
Granted at a premium..... (77,500) 77,500 $10.54
Exercised................ -- (52,000) $ 3.00
Canceled................. 63,084 (63,084) $14.54
-------- ---------
Balance at December 31,
1997........................ 288,834 577,166 $12.64
CEI Plan Authorization...... 988,000
Outstanding CEI Plan
Options................ (848,000) 848,000 $ 1.85
Options:
Granted at market........ (447,500) 447,500 $ 1.25
Canceled................. 364,166 (364,166) $15.75
Canceled................. -- (28,000) $ 3.00
-------- ---------
Balance at September 30,
1998........................ 345,500 1,480,500 $ 2.43
======== =========
</TABLE>
F-54
<PAGE> 122
CANARGO ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
10. STOCKHOLDERS' EQUITY -- (CONTINUED)
WARRANTS
Pursuant to the terms of the Combination Agreement, holders of CEI Stock
Purchase Warrants have the right to purchase CEI Exchangeable Shares which are
exchangeable generally at the option of the holder for shares of the Company's
Common Stock on a share-for-share basis. As of September 30, 1998, a total of
1,097,511 CEI Stock Purchase Warrants were outstanding. A summary of the CEI
Stock Purchase Warrants is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE IN
OF WARRANTS CANADIAN DOLLARS EXPIRATION DATE
- ----------- ----------------- ----------------
<C> <C> <S>
164,008 C$2.750 April 30, 1999
32,000 C$2.875 July 31, 1999
901,503 C$3.250 November 1, 1999
- -----------
1,097,511
===========
</TABLE>
11. NET LOSS PER COMMON SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings Per
Share. Basic and diluted net loss per common share for the periods ended
September 30, 1998 and September 30, 1997 are based on the weighted average
number of common shares outstanding during those periods. The weighted average
numbers of shares issued and issuable without receipt of additional
consideration for the nine month periods ended September 30, 1998 and 1997 is
14,072,572 and 11,200,757, respectively. The weighted average number of common
shares outstanding includes 8,543,014 and 0 Exchangeable Shares issued in
connection with the Transaction, respectively, and excludes 1,480,500 and
603,250 shares issuable upon exercise of options, respectively, because they are
anti-dilutive.
F-55
<PAGE> 123
CONSOLIDATED FINANCIAL STATEMENTS
CANARGO OIL & GAS INC.
(FORMERLY CANARGO ENERGY INC.)
F-56
<PAGE> 124
CANARGO OIL & GAS INC.
CONSOLIDATED BALANCE SHEET
(SEE BASIS OF PRESENTATION -- NOTE 1)
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current
Cash...................................................... $ 935,443
Accounts receivable....................................... 2,116,286
Prepaid expenses.......................................... 23,511
Inventory................................................. 20,405
-----------
$ 3,095,645
Oil and gas properties [note 5]............................. 9,061,436
-----------
$12,157,081
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities.................. $ 3,051,742
Taxes payable............................................. 61,000
-----------
$ 3,112,742
Long term debt [note 6]..................................... 895,500
Non-controlling interest.................................... 3,437,929
-----------
$ 7,446,171
-----------
CONTINGENCIES [NOTES 7 AND 8]
SHAREHOLDERS' EQUITY
Share capital and special warrants [note 7]................. $ 5,701,384
Deficit..................................................... (990,474)
-----------
$ 4,710,910
-----------
$12,157,081
===========
</TABLE>
See accompanying notes
F-57
<PAGE> 125
CANARGO OIL & GAS INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
REVENUE
Oil......................................................... $ 992,952
Interest.................................................... 46,979
-----------
$ 1,039,931
-----------
EXPENSES
Operating costs............................................. $ 771,652
General and administration.................................. 703,652
Depletion................................................... 527,676
Interest.................................................... 39,020
-----------
$ 2,042,000
-----------
Loss before non-controlling interest........................ $(1,002,069)
Non-controlling interest.................................... 267,422
-----------
LOSS FOR THE PERIOD......................................... $ (734,647)
DEFICIT -- BEGINNING OF PERIOD.............................. $ (255,827)
-----------
DEFICIT -- END OF PERIOD.................................... $ (990,474)
===========
BASIC AND FULLY DILUTED LOSS PER SHARE...................... $ (0.07)
-----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING
PERIOD.................................................... 10,438,391
===========
</TABLE>
See accompanying notes
F-58
<PAGE> 126
CANARGO OIL & GAS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period......................................... $ (734,647)
Items not requiring cash
Depletion................................................. 527,676
Non-controlling interest.................................. (267,422)
-----------
Funds from operations....................................... $ (474,393)
Net change in non-cash working capital related to operating
activities................................................ 522,401
-----------
$ 48,008
-----------
INVESTING ACTIVITIES
Additions to capital assets................................. $(2,527,655)
-----------
$(2,527,655)
-----------
FINANCING ACTIVITIES
Contribution from non-controlling interest.................. $ 1,820,000
Share issue costs........................................... (238,358)
-----------
$ 1,581,642
-----------
INCREASE (DECREASE) IN CASH................................. $ (898,005)
Cash position, beginning of period.......................... $ 1,833,448
-----------
CASH POSITION, END OF PERIOD................................ $ 935,443
===========
</TABLE>
See accompanying notes
F-59
<PAGE> 127
CANARGO OIL & GAS INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
Prior to July 1, 1997, CanArgo Oil & Gas Inc. (formerly 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.
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 96.4 tons 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.
F-60
<PAGE> 128
CANARGO OIL & GAS INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION -- (CONTINUED)
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 is
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.
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.
F-61
<PAGE> 129
CANARGO OIL & GAS INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 June 30, 1998 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.
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)
-----------
SHARES ISSUED: 8,275,250 common shares...................... $ 3,187,000
===========
</TABLE>
F-62
<PAGE> 130
CANARGO OIL & GAS INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
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>
5. OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
Oil and gas properties...................................... $10,887,172
Accumulated Depletion....................................... (1,825,736)
-----------
$ 9,091,436
===========
</TABLE>
General and administrative expenses of $535,363 were capitalized during the six
months ended June 30, 1998.
6. LONG TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(UNAUDITED)
<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-63
<PAGE> 131
CANARGO OIL & GAS INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
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
<TABLE>
<CAPTION>
ISSUED COMMON SHARES NUMBER AMOUNT
- -------------------- ---------- ----------
<S> <C> <C>
Balance, December 31, 1997............................ 10,438,391 $3,917,465
---------- ----------
Share issue costs..................................... (238,358)
---------- ----------
Balance, June 30, 1998................................ 3,679,107
---------- ----------
SPECIAL WARRANTS
Special warrants issued............................... 1,636,597 $2,520,359
Issue costs........................................... -- (498,082)
---------- ----------
Balance, December 31, 1997 and June 30, 1998.......... 1,636,597 $2,022,277
---------- ----------
WARRANTS ISSUED AND BALANCE, DECEMBER 31, 1997 AND
JUNE 30, 1998....................................... 681,760 $ --
---------- ----------
TOTAL SHARE CAPITAL AND SPECIAL WARRANTS, DECEMBER 31,
1997................................................ 5,701,389
---------- ----------
</TABLE>
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, 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.
F-64
<PAGE> 132
CANARGO OIL & GAS INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
8. 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 0.8 (1.6 preReverse Split) common shares of Fountain. This
business combination is subject to regulatory and shareholder approval.
9. 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 June 30, 1998, conforms in all material respects with
United States GAAP.
F-65
<PAGE> 133
CONSOLIDATED FINANCIAL STATEMENTS
CANARGO OIL & GAS INC.
(FORMERLY CANARGO ENERGY INC.)
F-66
<PAGE> 134
AUDITORS' REPORT
To the Directors of
CanArgo Oil & Gas Inc.
We have audited the consolidated balance sheet of CanArgo Oil & Gas Inc.
(formerly 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.
<TABLE>
<S> <C>
/s/ Ernst & Young
Calgary, Canada Ernst & Young
February 18, 1998 Chartered Accountants
</TABLE>
F-67
<PAGE> 135
CANARGO OIL & GAS INC.
CONSOLIDATED BALANCE SHEET
(SEE BASIS OF PRESENTATION -- NOTE 1)
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
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-68
<PAGE> 136
CANARGO OIL & GAS INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
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......................................... $ (255,827)
DEFICIT -- BEGINNING OF PERIOD.............................. --
-----------
DEFICIT -- END OF PERIOD.................................... $ (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-69
<PAGE> 137
CANARGO OIL & GAS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 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-70
<PAGE> 138
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
1. BASIS OF PRESENTATION
Prior to July 1, 1997, CanArgo Oil & Gas Inc. (formerly 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 96.4 tons 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.
F-71
<PAGE> 139
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(STATED IN U.S. DOLLARS)
1. BASIS OF PRESENTATION -- (CONTINUED)
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 is
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.
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.
F-72
<PAGE> 140
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(STATED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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>
F-73
<PAGE> 141
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(STATED IN U.S. DOLLARS)
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>
5. OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
DECEMBER 31,
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>
<CAPTION>
DECEMBER 31,
1997
-----------------
<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.
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
F-74
<PAGE> 142
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(STATED IN U.S. DOLLARS)
7. SHARE CAPITAL AND SPECIAL WARRANTS -- (CONTINUED)
<TABLE>
<CAPTION>
ISSUED 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 WARRANT, DECEMBER 31,
1997................................................ $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 warrant 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, 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
F-75
<PAGE> 143
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(STATED IN U.S. DOLLARS)
7. SHARE CAPITAL AND SPECIAL WARRANTS -- (CONTINUED)
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
<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>
F-76
<PAGE> 144
CANARGO OIL & GAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(STATED IN U.S. DOLLARS)
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN THE UNITED
STATES -- (CONTINUED)
(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
In accordance with Canadian GAAP............................ $ 6,810,242
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-77
<PAGE> 145
CANARGO OIL & GAS INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS
PRODUCTION ACTIVITIES
(UNAUDITED, STATED 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:
<TABLE>
<CAPTION>
NET PROVED RESERVES NOC
- ------------------- -------------
(THOUSANDS OF
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
F-78
<PAGE> 146
CANARGO OIL & GAS INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS -- CONTINUED
PRODUCTION ACTIVITIES
(UNAUDITED, STATED U.S. DOLLARS)
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.
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.
F-79
<PAGE> 147
CANARGO OIL & GAS INC.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS -- CONTINUED
PRODUCTION ACTIVITIES
(UNAUDITED, STATED U.S. DOLLARS)
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................................................. --
------
$2,869
======
</TABLE>
Depletion per unit of net production:
<TABLE>
<CAPTION>
NOC
-----------
($ 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>
NOC's share of revenues under the PSC is determined by the price of Brent crude
oil, less transportation charges. At current world oil prices, NOC's share of
revenues under the PSC is insufficient to cover royalty, production and
depletion expenses. In order to cover royalty, production and depletion expenses
under the PSC, at current production volumes of approximately 1,900 barrels per
day, the price for Brent crude will need to be approximately US$16.50 per
barrel. The closing price for Brent crude on May 25, 1998 was US$14.26 per
barrel.
F-80
<PAGE> 148
FINANCIAL STATEMENTS
NINOTSMINDA OIL COMPANY LIMITED
(FORMERLY JKX (NINOTSMINDA) LIMITED)
F-81
<PAGE> 149
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.
<TABLE>
<S> <C>
/s/ Ernst & Young
Limassol, Cyprus Ernst & Young
February 18, 1998 Chartered Accountants
</TABLE>
F-82
<PAGE> 150
NINOTSMINDA OIL COMPANY LIMITED
BALANCE SHEET
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 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-83
<PAGE> 151
NINOTSMINDA OIL COMPANY LIMITED
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD
SIX MONTHS OCTOBER 24,
ENDED 1995 TO
JUNE 30, DECEMBER 31,
1997 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-84
<PAGE> 152
NINOTSMINDA OIL COMPANY LIMITED
STATEMENT OF CASH FLOWS
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD OCTOBER 24,
ENDED 1995 TO
JUNE 30, 1997 DECEMBER 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-85
<PAGE> 153
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
(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 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.
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.
ACCOUNTING CONVENTION
The financial statements are drawn up under the historical cost convention.
F-86
<PAGE> 154
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(STATED IN U.S. DOLLARS)
3. ACCOUNTING POLICIES -- (CONTINUED)
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.
4. INTEREST PAYABLE
The following amounts are included in the due to shareholder:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 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%.
F-87
<PAGE> 155
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(STATED IN U.S. DOLLARS)
6. OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 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>
7. DUE TO SHAREHOLDERS
Amounts falling due within one year:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 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, DECEMBER 31,
1997 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.
F-88
<PAGE> 156
NINOTSMINDA OIL COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(STATED IN U.S. DOLLARS)
9. SHARE CAPITAL
AUTHORIZED
10,000 shares at a par value of L1 each
ISSUED
<TABLE>
<CAPTION>
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>
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, totaled
$531,300 for the six month period ended June 30, 1997 (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-89
<PAGE> 157
PRO FORMA FINANCIAL INFORMATION
Effective March 4, 1997 various stockholders, who together owned 55.9% of
Ninotsminda Oil Company Limited ("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 Alberta Business Corporation Act. 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.
The following unaudited pro forma condensed combined statements of operations
for the nine months ended September 30, 1998 give effect to the July 1998
business combination between the Company and CanArgo Energy Inc., now the
Company's subsidiary CanArgo Oil & Gas Inc. (the "Transaction") as if it had
occurred on January 1, 1997. In addition, the unaudited pro forma condensed
combined statement of operations for the year ended December 31, 1997 reflects
the effect of the reorganization on the Company's statements 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 financial statements included elsewhere in this Prospectus.
The unaudited pro forma condensed combined financial statements do not purport
to represent (i) what the Company's financial position or results of operations
would have been had the Transaction occurred on the dates indicated or to
project the Company's financial position or results of operations for any future
period or (ii) what the Company's results of operations would have been had the
reorganization occurred on the date indicated or to project the Company'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.
F-90
<PAGE> 158
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
CANARGO
COMPANY OIL & GAS ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES.............................. $ 519,990 $ 992,952 $ -- $ 1,512,942
----------- ----------- --------- -----------
Operating expenses
Lease operating expenses............ 477,263 771,652 -- 1,248,915
Direct project costs................ 1,023,336 -- -- 1,023,336
General and administrative.......... 2,720,932 703,652 -- 3,424,584
Depreciation and amortization....... 261,420 527,676 100,000(2) 889,096
Loss from investment in
unconsolidated subsidiaries....... 152,225 -- -- 152,225
Writedown of oil and gas
properties........................ 900,000 -- -- 900,000
----------- ----------- --------- -----------
Total operating expenses.............. 5,535,176 2,002,980 100,000 7,638,156
----------- ----------- --------- -----------
OPERATING LOSS........................ (5,015,186) (1,010,028) (100,000) (6,125,214)
Other income (expense), net........... 171,279 7,959 -- 179,238
----------- ----------- --------- -----------
Net loss before income tax............ (4,843,907) (1,002,069) (100,000) (5,945,976)
Income tax expense.................... -- -- -- --
----------- ----------- --------- -----------
Net loss before minority interest..... (4,843,907) (1,002,069) (100,000) (5,945,976)
Minority interest in loss of
subsidiary.......................... 53,426 267,422 -- 320,848
----------- ----------- --------- -----------
Net loss.............................. $(4,790,481) $ (734,647) $(100,000) $(5,625,128)
=========== =========== ========= ===========
Net loss per common share
-- basic............................ $ (0.34) $ (0.26)(3)
=========== ===========
Net loss per common share
-- diluted.......................... $ (0.34) $ (0.26)(3)
=========== ===========
Weighted average number of common
shares outstanding.................. 14,072,572 21,194,663
=========== ===========
</TABLE>
F-91
<PAGE> 159
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
------------------------- ADJUSTMENTS
CANARGO ----------------------------
COMPANY OIL & GAS 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(2) 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)
Income tax expense......... -- -- -- -- --
------------ ---------- ---------- -------- ------------
Net loss before minority
interest................. (27,888,331) (420,259) (76,200) (89,000) (28,473,790)
Minority interest in loss
of subsidiary............ 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................. $ (2.47) $ (1.33)(3)
============ ============
Net loss per common share
-- diluted............... $ (2.47) $ (1.33)(3)
============ ============
Weighted average number of
common shares
outstanding.............. 11,206,507 21,177,425(5)
============ ============
</TABLE>
F-92
<PAGE> 160
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
1. To adjust the historical financial statements of CanArgo Oil & Gas Inc. 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 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
capitalized costs as adjusted for the purchase of CanArgo Oil & Gas Inc.
and estimates of pro forma proved developed and undeveloped reserves. For
the nine months ended September 30, 1998, the actual depreciation,
depletion and amortization rate for the Company and CanArgo Oil & Gas Inc.
was $13.94 and $5.33 per barrel produced, respectively. For the year ended
December 31, 1997, the actual depreciation, depletion and amortization rate
for the Company and CanArgo Oil & Gas Inc. was $13.15 and $4.06 per barrel
produced, respectively. The pro forma depreciation, depletion and
amortization rate was approximately $6.93 and $9.92 per barrel produced for
the nine months ended September 30, 1998 and the year ended December 31,
1997, respectively.
3. To reflect pro forma basic and diluted loss per share. Pro forma earnings
per share do not reflect 2,253,512 shares of Company Common Stock issuable
after the consummation of the Transaction upon exercise of options to
purchase shares of CanArgo Oil & Gas Inc. Common Stock pursuant to
outstanding CanArgo Oil & Gas Inc. options and upon the exchange of
Exchangeable Shares issuable upon the exercise of warrants because they are
antidilutive.
4. The unaudited pro forma condensed combined financial statements do not give
effect to the issuance of the one hundred (100) shares (the "Preferred
Shares") of Special Voting Stock. The Preferred Shares embody the right to
(i) the voting power of the holders of unexchanged Exchangeable Shares
following the exchange thereof for shares of Company Common Stock and (ii)
the right to receive an aggregate of One Hundred Dollars ($100) upon
redemption at the rate of $1.00 per Preferred Share following the exchange
of all outstanding Exchangeable Shares.
The Preferred Shares will be stripped of their voting power proportionately
as Exchangeable Shares are exchanged for shares of Company Common Stock.
When fully divested of voting rights through the exchange of all
Exchangeable Shares, the Preferred Shares can be redeemed for nominal
consideration. Thus, the Preferred Shares do not have substance for
accounting purposes.
F-93
<PAGE> 161
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 the Company included elsewhere
in this 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.
F-94
<PAGE> 162
SUPPLEMENTARY PRO FORMA COMBINED RESERVE QUANTITY INFORMATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
REPUBLIC TOTAL
CANADA OF GEORGIA PRO FORMA
------ ---------- ---------
(OIL IN MBLS)
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
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.
F-95
<PAGE> 163
SUPPLEMENTARY PRO FORMA COMBINED STANDARDIZED MEASURE
OF DISCOUNTED FUTURE CASH FLOWS AND CHANGES THEREIN
RELATED TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
REPUBLIC PRO FORMA
CANADA OF GEORGIA TOTAL
------ ---------- ---------
(IN THOUSANDS OF $)
<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:
<TABLE>
<CAPTION>
REPUBLIC PRO FORMA
CANADA OF GEORGIA TOTAL
------ ---------- ---------
(IN THOUSANDS OF $)
<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>
F-96
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets 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 .................. $ 1,663.00
Printing expenses .............................................. *
Legal fees and expenses ........................................ *
Accounting fees and expenses ................................... *
Miscellaneous .................................................. *
------------
Total ........................................... $ *
</TABLE>
* To be filed by amendment.
All of the amounts shown are estimates except for the fees paid to the
Securities and Exchange Commission.
Item 14. 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
Company's Bylaws provide for indemnification of directors and officers to the
fullest extent permitted by the DGCL.
The DGCL permits, and the Company'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. The Company has directors' and
officers' liability insurance covering losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts.
S-1
<PAGE> 165
Item 15. Recent Sales of Unregistered Securities
All amounts have been restated to give effect to 1-for-2 reverse stock
split on July 15, 1998. Except as stated in paragraphs 3 and 5 below, no
underwriters were used in the offerings.
Whenever reference is made to securities sold in reliance on Regulation S,
the registrant obtained (i) representations from the purchaser of the securities
that (A) the purchaser was not a U.S. person; (B) the purchaser acquired the
securities for his own account and not for the account or benefit of any other
person, including without limitation any U.S. person; and (C) the purchaser was
outside the United States at the time the securities were purchased; and (ii)
the agreement of the purchaser that the securities would not be transferred in
the United States or to any U.S. person or to any person who would hold the
securities for the account or benefit of a U.S. person unless the securities
were registered under the Securities Act of 1933, as amended (the "Act") or an
exemption from such registration were available. The certificates representing
the securities were delivered outside the United States.
(1) The registrant issued shares upon the exercise of stock options
originally issued in August 1994 at various dates set forth below. The options
expire August 16, 1999 and are exercisable at $3.00 per share. The shares were
sold in reliance on Regulation S. Total proceeds to registrant: $252,000.
<TABLE>
<CAPTION>
Date exercised No. of Shares No. of Purchasers
-------------- ------------- -----------------
<S> <C> <C>
2/2/96 6,000 1
6/10/96 20,000 1
9/96 6,000 1
1/7/97 34,000 1
5/19/97 18,000 1
------
84,000
</TABLE>
(2) The registrant issued shares upon the exercise of stock purchase
warrants that were originally issued in August 1994 at various dates set forth
below. The warrants expired November 3, 1997 and were exercisable at $3.00 per
share. 220,661 warrants and the underlying shares were issued and sold to a
total of 19 purchasers in reliance on Regulation S and 7,112 warrants and
underlying shares were sold to one purchaser in reliance on Section 4(2) of the
Act in the manner described in paragraph 8. Total proceeds to registrant:
$683,169.
<TABLE>
<CAPTION>
Date exercised No. of Shares No. of Purchasers
-------------- ------------- -----------------
<S> <C> <C>
6/96 14,611 3
7/96 - 8/96 7,000 2
10/96 75,000 6
</TABLE>
S-2
<PAGE> 166
<TABLE>
<CAPTION>
Date exercised No. of Shares No. of Purchasers
-------------- ------------- -----------------
<S> <C> <C>
11/96 -12/96 131,112 9
-------
227,723
</TABLE>
(3) Between April 1, 1996 and October 16, 1996, registrant issued and sold
528,225 shares of its Common Stock, upon conversion of its 8% Convertible
Subordinated Debentures. The Company issued $3,750,000 principal amount of
Debentures at par in January and February 1996. The Debentures were issued and
sold to fifteen (15) offshore investors in reliance upon Regulation S. U.S.
Sachem Financial Consultants, L.P. acted as the placement agent. Placement fees
were 8% of gross proceeds, plus 1% of gross proceeds and $15,000 for expenses.
(4) On May 9, 1996, registrant issued and sold 75,000 shares of its Common
Stock, paid $161,000 and assumed a $50,000 loan in exchange for 10 shares (10%)
of UK-RAN Oil Corporation and 500,000 shares (33%) of UK-RAN Energy Corporation.
The 75,000 shares were valued at market price on date of issuance - $684,375.
The shares were issued to a Canadian company in reliance on Regulation S.
(5) On June 5, 1996, registrant issued and sold an aggregate of 2,500,000
shares of its Common Stock in a private placement to a total of fifty (50)
institutional and other qualified investors in Norway and other European
countries in reliance upon Regulation S. The placement was made at $9.00 per
share and registrant received aggregate proceeds of $22,500,000. Orkla Finans
(Fondsmegling) AS of Norway acted as placement agent. Placement fees were 6% of
gross proceeds plus out-of-pocket expenses.
(6) On June 12, 1996, registrant issued and sold 150,000 shares of its
Common Stock in exchange for 25,206 shares (6%) of Intergas JSC. The 150,000
shares were valued at market price on date of issuance - $1,668,750. The shares
were issued to a British Virgin Islands company, the designee of the two Russian
individuals who transferred their ownership of the 25,206 shares of Intergas JSC
to the registrant. The shares were sold in reliance on Regulation S.
(7) On September 9, 1996, registrant called for redemption a series of
stock purchase warrants issued in March 1995, having an original expiration date
of February 28, 1997, and entitling the two holders thereof to purchase shares
of registrant's Common Stock at an exercise price of $10.20 per share. In
connection therewith, registrant set October 4, 1996 as the redemption date for
the warrants. On September 25 and October 2, 1996, Registrant issued and sold an
aggregate of 569,900 shares of its Common Stock upon exercise of the warrants
for aggregate proceeds of $5,812,980. The shares were issued in reliance on
Regulation S.
(8) On October 29, 1996, a registered holder exercised 7,143 warrants
issued in July 1994, having an original expiration date of June 30, 1997, and
entitling the holder thereof to purchase shares of registrant's Common Stock at
an exercise price of $3.50 per share. In connection with such exercise of
warrants, registrant issued and sold an aggregate of 7,143 shares of its Common
Stock, and registrant received aggregate proceeds of $25,000.
S-3
<PAGE> 167
The offer and sale of the shares was exempt from the registration
requirements of the Act under Section 4(2) of the Act as a transaction by an
issuer not involving a public offering. The purchaser of the warrant shares
represented to the registrant, among other things, that he was acquiring the
warrant shares for his own account and that he was acquiring the shares for
investment and not with a view towards the distribution thereof; and agreed that
he would not sell the shares without registration under the Act or an applicable
exemption from such registration requirement. The certificate representing the
shares has a restrictive legend endorsed thereon reflecting the restrictions on
transferability arising out of the foregoing matters, and the Company has issued
"stop transfer" instructions to its transfer agent with respect to the shares.
(9) On November 29, 1996, registrant called for redemption a series of
stock purchase warrants issued in February and March 1995, having an original
expiration date of February 28, 1997, and entitling the 34 holders thereof to
purchase shares of registrant's Common Stock at an exercise price of $12.00 per
share. Registrant set December 31, 1996 as the redemption date. Between December
13 and December 31, 1996, registrant issued and sold an aggregate of 1,540,000
shares of its Common Stock upon exercise of the warrants for aggregate proceeds
of $18,840,000. The shares were sold in reliance on Regulation S.
(10) On February 11, 1997, the registrant issued 87,500 shares of its
Common Stock, pursuant to an obligation to issue the shares upon the signing of
a joint venture agreement formed to acquire rights to develop and produce
hydrocarbons from an oil and gas field in Western Ukraine. The Shares were
issued to the assignee of an Australian corporation that transferred to
registrant all of such corporation's rights to pursue a project relating to that
oil and gas field, in partial consideration of the transfer. The 87,500 shares
were valued at market price on date of issuance - $1,060,938. The shares were
issued in reliance on Regulation S.
(11) On January 15, 1999, the registrant sold 250,000 shares of Common
Stock in exchange for oil and gas interests in the Republic of Georgia,
including contractual obligations of NOC. The shares were valued at the market
price on the date of issuance: $109,500. The shares were sold in reliance on
Section 4(2) of the Act on the same basis as described in paragraph 8 above.
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed herewith or incorporated herein by
reference:
(*) Management Contracts, Compensation Plans and Arrangements are
identified by an asterisk
2(1) 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(2) 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).
S-4
<PAGE> 168
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(1) Form of 8% Convertible Subordinated Debenture (Incorporated
herein by reference from February 29, 1996 Form 10- QSB).
5(1) Opinion of Kelly Lytton Mintz & Vann LLP. -- to be filed by
amendment.
*10(1) Securities Compensation Plan (Incorporated herein by reference
from August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
*10(2) 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., the Company's
predecessor).
*10(3) 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., the Company's predecessor).
*10(4) 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., the
Company's predecessor).
*10(5) Restated Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated herein by
reference from December 31, 1997 Form 10-K/A).
*10(6) Employment Agreement between Fountain Oil Incorporated and
Ravinder S. Sierra (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(7) Amended and Restated 1995 Long-Term Incentive Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
*10(8) 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(9) Fee Agreement between Fountain Oil Incorporated and Eugene J.
Meyers (Incorporated herein by reference from August 31, 1996
Form 10-KSB).
S-5
<PAGE> 169
*10(10) 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(11) Employment Agreement between Fountain Oil Incorporated and
Alfred Kjemperud (Incorporated herein by reference from March
31, 1997 Form 10-Q).
*10(12) Employment Agreement between Fountain Oil Norway AS and Rune
Falstad (Incorporated herein by reference from December 31,
1997 Form 10-K/A).
*10(13) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
*10(14) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September
30, 1998 Form 10-Q).
*10(15) Consultancy Agreement between CanArgo Energy Corporation and
Fincom AS, Norway (Incorporated herein by reference from
September 30, 1998 Form 10-Q).
*10(16) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30,
1998 Form 10-Q).
*10(17) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as
Consultant.
10(18) Convertible Loan Agreement between Ninotsminda Oil Company
(NOC) and International Finance Corporation (IFC) dated
December 17, 1998.
10(19) Put Option Agreement between CanArgo Energy Corporation, JKX
Oil & Gas PLC. and IFC dated December 17, 1998.
10(20) Guarantee Agreement between CanArgo Energy Corporation and IFC
dated December 17, 1998.
10(21) Agreement between Georgian Oil Refinery Company and CanArgo
Petroleum Products Ltd. dated September 26, 1998.
10(22) Terrenex Acquisition Corporation Option regarding CanArgo
(Nazvrevi) Limited.
21 List of Subsidiaries.
23(1) Consent of PricewaterhouseCoopers LLP
23(2) Consent of Ernst & Young LLP, Chartered Accountants, Calgary,
Canada.
S-6
<PAGE> 170
23(3) Consent of Ernst & Young, Chartered Accountants, Limassol,
Cyprus.
23(4) Consent of AMH Group Ltd.
23(5) Consent of Kelly Lytton Mintz & Vann LLP, contained in Exhibit
5(1).
24 Power of Attorney - contained on page S-9 of the Registration
Statement.
27 Financial Data Schedules - filed with Edgar version only.
(b) No financial statement schedules are required to be filed herewith.
Item 17. Undertakings
The Company hereby undertakes:
(1) To file, during any period in which offers or sales of the Common
Stock 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, as amended (the "Securities Act");
(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 a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
S-7
<PAGE> 171
(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.
(2) That, for the purpose of determining any liability under the
Securities Act, 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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the Company's Bylaws, contract or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
S-8
<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Calgary, Alberta,
Canada, on February 12, 1999.
CANARGO ENERGY CORPORATION
By: /S/ David Robson
----------------------------------
David Robson,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
follows constitutes and appoints each of MICHAEL BINNION and SUSAN E. PALMER,
and either of them, 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 and all amendments (including
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 said 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, as fully to all
intents and purposes as the undersigned might or could do in person, and hereby
ratifying and confirming all that said attorney-in-fact, or his or her
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ David Robson Chief Executive Officer and February 12, 1999
- ---------------------------- Director (Principal Executive
David Robson Officer)
/S/ Michael Binnion President, Chief Financial February 12, 1999
- ---------------------------- Officer and Director (Principal
Michael Binnion Financial Officer)
Director February 12, 1999
- ----------------------------
Robert A. Halpin
</TABLE>
S-9
<PAGE> 173
<TABLE>
<S> <C> <C>
/S/ J.F. Russell Hammond Director February 12, 1999
- ----------------------------
J.F. Russell Hammond
/S/ Peder Paus Director February 12, 1999
- ----------------------------
Peder Paus
/S/ Nils N. Trulsvik Director February 12, 1999
- ----------------------------
Nils N. Trulsvik
/S/ Anthony J. Potter Controller (Principal February 12, 1999
- ---------------------------- Accounting Officer)
Anthony J. Potter
</TABLE>
S-10
<PAGE> 174
CANARGO ENERGY CORPORATION
FORM S-1 REGISTRATION STATEMENT
Exhibit Index
Filed
Herewith
Management Contracts, Compensation Plans and Arrangements are identified by an
asterisk (*)
2(1) 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(2) Voting, Support and Exchange Trust Agreement
(Incorporated herein by reference as Annex G from
Form S-3 Registration Statement, File No. 333-
48287 filed on June 9, 1998).
3(1) Registrant's Certificate of Incorporation and
amendments thereto (Incorporated herein by
reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by
reference from December 31, 1996 Form 10-K).
4(1) Form of 8% Convertible Subordinated Debenture
(Incorporated herein by reference from February
29, 1996 Form 10-QSB).
5(1) Opinion of Kelly Lytton Mintz & Vann LLP. -- to be filed by amendment.
*10(1) Securities Compensation Plan (Incorporated herein
by reference from August 31, 1994 Form 10-KSB,
filed by Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
*10(2) 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., the
Company's predecessor).
*10(3) 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., the Company's predecessor).
*10(4) Form of Certificate for Common Stock Purchase
Warrants issued to certain
<PAGE> 175
Filed
Herewith
investors in August 1994, including Directors (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by Electromagnetic
Oil Recovery, Inc., the Company's predecessor).
*10(5) Restated Employment Agreement between Fountain Oil Incorporated and
Nils N. Trulsvik (Incorporated herein by reference from December 31,
1997 Form 10-K/A).
*10(6) Employment Agreement between Fountain Oil Incorporated and Ravinder S.
Sierra (Incorporated herein by reference from August 31, 1995 Form
10-KSB).
*10(7) Amended and Restated 1995 Long-Term Incentive
Plan (Incorporated herein by reference from
September 30, 1998 Form 10-Q).
*10(8) 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(9) Fee Agreement between Fountain Oil Incorporated and Eugene J. Meyers
(Incorporated herein by reference from August 31, 1996 Form 10-KSB).
*10(10) 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(11) Employment Agreement between Fountain Oil
Incorporated and Alfred Kjemperud (Incorporated
herein by reference from March 31, 1997 Form
10-Q).
*10(12) Employment Agreement between Fountain Oil Norway
AS and Rune Falstad (Incorporated herein by
reference from December 31, 1997 Form 10-K/A).
*10(13) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(14) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September 30, 1998
Form 10-Q).
*10(15) Consultancy Agreement between CanArgo Energy
Corporation and Fincom AS, Norway (Incorporated
herein by reference from September 30, 1998 Form
10-Q).
*10(16) Employment Contract between CanArgo Energy Inc. and Anthony J. Potter
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
<PAGE> 176
X *10(17) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as
Consultant.
X 10(18) Convertible Loan Agreement between Ninotsminda Oil Company (NOC)
and International Finance Corporation (IFC) dated
December 17, 1998.
X 10(19) Put Option Agreement between CanArgo Energy Corporation, JKX Oil
& Gas PLC. and IFC dated December 17, 1998.
X 10(20) Guarantee Agreement between CanArgo Energy Corporation and IFC
dated December 17, 1998.
X 10(21) Agreement between Georgian Oil Refinery Company and CanArgo
Petroleum Products Ltd. dated September 26, 1998.
X 10(22) Terrenex Acquisition Corporation Option regarding CanArgo
Nazvrevi) Limited.
X 21 List of Subsidiaries.
X 23(1) Consent of PricewaterhouseCoopers LLP
X 23(2) Consent of Ernst & Young LLP, Chartered Accountants, Calgary,
Canada.
X 23(3) Consent of Ernst & Young, Chartered Accountants, Limassol, Cyprus.
X 23(4) Consent of AMH Group Ltd.
23(5) Consent of Kelly Lytton Mintz & Vann LLP, contained in Exhibit
5(1).
X 24 Power of Attorney - contained on page S-9 of the Registration
Statement.
X 27 Financial Data Schedules - Filed with Edgar version only.
<PAGE> 1
EXHIBIT 10(17)
WORKORDER
CanArgo Energy Inc.
(CanArgo)
to
Alfred Kjemperud
(The Consultant)
INTRODUCTION
This workorder made on the 1 August 1998, is between CanArgo and the Consultant.
The workorder is covered by the General Conditions for Consultants entered by
the two parties.
SCOPE OF WORK
The scope of work for the Consultant is:
- Assist in developing Canargo's present and future oil and gas assets
worldwide
The Consultant's home base will be Oslo, Norway, but he will be travelling
frequently for shorter stays to Canargo's operational companies.
The Consultant will report to:
- David Robson
The Assignment is 80% of a full time job, i.e. on average 126 hours per month,
and a total of 1510 hours for the defined time period.
PERIOD
1 August 1998 - 31 July 1999.
TERMS
The Consultant will be paid a monthly fee of US$ 13,000-. The rate includes all
normal office expenses the Consultant may have, except for travel, accommodation
& other expenses as given below.
PAYMENT
CanArgo will pay the Consultant based on a monthly invoice and time sheets
approved by David Robson or other CanArgo project leader. Payment is due 10
working days after receipt of invoice.
1
<PAGE> 2
TRAVEL, ACCOMODATION & OTHER EXPENSES
Travel, accommodation and courier and other agreed out of pocket expenses
related to the above work will be covered by CanArgo according to General
Conditions for Consultants.
OTHER ISSUES
Based on Board approval the Consultant shall be entitled to a stock option of
100,000 shares in the merged Fountain Oil/CanArgo company. The options shall be
issued as soon as possible and no later than August 1 1998. The price of the
options shall be the best possible.
TAXES
The Consultant is responsible for his own taxes.
INSURANCE
The Consultant will himself pay for the insurances and social security which are
necessary during his consultancy work period for CanArgo, except for Life & AD&D
in areas of particular high risk.
DISPUTES
The agreement shall be governed by the laws of Norway.
CANARGO ENERGY INC.
/s/David Robson
Date: 4/6/98
FOR THE CONSULTANT:
/s/Alfred Kjemperud
Date: 29/5 - 98
2
<PAGE> 1
EXHIBIT 10(18)
CONFORMED COPY
INVESTMENT NUMBER 8138
================================================================================
CONVERTIBLE LOAN AGREEMENT
BETWEEN
NINOTSMINDA OIL COMPANY
AND
INTERNATIONAL FINANCE CORPORATION
DATED DECEMBER 17, 1998
================================================================================
<PAGE> 2
- i -
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article or
Section Item Page No.
------- ---- --------
<S> <C>
ARTICLE I...................................................................................1
DEFINITIONS AND INTERPRETATION..............................................................1
Section 1.01. General Definitions......................................................1
Section 1.02. Financial Definitions...................................................15
Section 1.03. Interpretation..........................................................19
Section 1.04. Business Day Adjustment.................................................19
ARTICLE II.................................................................................19
THE PROJECT, PROJECT COST AND FINANCIAL PLAN...............................................19
Section 2.01. The Project.............................................................19
Section 2.02. Project Cost and Financial Plan.........................................20
ARTICLE III................................................................................20
THE LOAN...................................................................................20
Section 3.01. The Loan................................................................20
Section 3.02. Disbursement Procedure..................................................20
Section 3.03. A Loan Interest.........................................................21
Section 3.04. Additional Interest.....................................................22
Section 3.05. Repayment...............................................................22
Section 3.06. Prepayment..............................................................23
Section 3.07. Conversion.............................................................23
Section 3.08. Fees....................................................................23
Section 3.09. Currency and Place of Payments..........................................23
Section 3.10. Allocation of Partial Payments..........................................24
Section 3.11. Maintenance Amount......................................................24
Section 3.12. Funding Costs...........................................................24
Section 3.13. Suspension or Cancellation of Disbursements by IFC......................25
Section 3.14. Taxes..................................................................25
ARTICLE IV.................................................................................27
CONVERSION OPTION..........................................................................27
Section 4.01. The Conversion Option...................................................27
Section 4.02. Exercise of the Conversion Option......................................27
</TABLE>
<PAGE> 3
- ii -
<TABLE>
<CAPTION>
Article or
Section Item Page No.
------- ---- --------
<S> <C>
Section 4.03. Actions to be Taken by the Company.....................................27
Section 4.04. Settlement.............................................................28
Section 4.05. Rights Carried by the Conversion Shares................................29
Section 4.06. Reporting Obligation...................................................29
ARTICLE V..................................................................................29
REPRESENTATIONS AND WARRANTIES.............................................................29
Section 5.01. Representations and Warranties..........................................29
Section 5.02. IFC Reliance............................................................31
Section 5.03. Rights and Remedies not Limited.........................................32
ARTICLE VI.................................................................................32
CONDITIONS OF DISBURSEMENT.................................................................32
Section 6.01. Initial Conditions......................................................32
Section 6.02. Conditions of all Disbursements.........................................36
Section 6.03. Company Certification...................................................37
Section 6.04. Conditions for IFC Benefit..............................................37
Section 6.05. Saving of Rights........................................................37
ARTICLE VII................................................................................37
PARTICULAR COVENANTS.......................................................................37
Section 7.01. Affirmative Covenants...................................................37
Section 7.02. Negative Covenants......................................................44
Section 7.03. Insurance...............................................................47
Section 7.04. Application of Insurance Proceeds.......................................49
Section 7.05. Document Taxes..........................................................49
ARTICLE VIII...............................................................................49
EVENTS OF DEFAULT..........................................................................49
Section 8.01. Acceleration after Default..............................................49
Section 8.02. Events of Default.......................................................50
Section 8.03. Bankruptcy..............................................................52
Section 8.04. Notice of Events........................................................53
SECTION 8.05. DISCLOSURE OF INFORMATION....................................................53
</TABLE>
<PAGE> 4
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<TABLE>
<CAPTION>
Article or
Section Item Page No.
------- ---- --------
<S> <C>
ARTICLE IX.................................................................................53
MISCELLANEOUS..............................................................................53
Section 9.01. Notices.................................................................53
Section 9.02. English Language........................................................54
Section 9.03. Expenses................................................................55
Section 9.04. Financial Calculations..................................................55
Section 9.05. Termination of Agreement................................................56
Section 9.06. Applicable Law and Jurisdiction.........................................56
Section 9.07. Successors and Assigns..................................................58
Section 9.08. Amendment...............................................................58
Section 9.09. Counterparts............................................................58
Section 9.10. Remedies and Waivers....................................................58
SCHEDULE 1.................................................................................60
FORM OF REQUEST FOR DISBURSEMENT [(LOAN)]..................................................60
SCHEDULE 2.................................................................................63
FORM OF LOAN DISBURSEMENT RECEIPT..........................................................63
SCHEDULE 3.................................................................................64
FORM OF CERTIFICATE OF INCUMBENCY AND AUTHORITY............................................64
SCHEDULE 4.................................................................................67
FORM OF LETTER TO COMPANY'S AUDITORS.......................................................67
SCHEDULE 5.................................................................................69
INFORMATION TO BE INCLUDED IN ANNUAL REVIEW OF OPERATIONS..................................69
SCHEDULE 6.................................................................................70
INSURANCE REQUIREMENTS.....................................................................70
SCHEDULE 7.................................................................................71
TERMS OF SUBORDINATED LOANS................................................................71
</TABLE>
<PAGE> 5
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<TABLE>
<CAPTION>
Article or
Section Item Page No.
------- ---- --------
<S> <C>
SCHEDULE 8.................................................................................73
REQUIREMENTS FOR SPONSOR LOAN..............................................................73
SCHEDULE 9.................................................................................74
FIELD DEVELOPMENT PLAN.....................................................................74
SCHEDULE 10................................................................................75
MINIMUM WORK PROGRAM.......................................................................75
</TABLE>
<PAGE> 6
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AGREEMENT, dated December 17, 1998 between NINOTSMINDA OIL COMPANY, a
company organized and existing under the laws of Cyprus (the "Company"), and
INTERNATIONAL FINANCE CORPORATION, an international organization established by
Articles of Agreement among its member countries ("IFC").
1
DEFINITIONS AND INTERPRETATION
Section 1.01. General Definitions. Wherever used in this Agreement,
unless the context otherwise requires, the following terms have the meanings
opposite them:
"Affiliate"
any entity of which the Company is a
Subsidiary; or any entity in whose share
capital the Company, any entity of which the
Company is a Subsidiary, or any of their
respective Subsidiaries has a direct or
indirect interest exceeding ten percent
(10%);
"Agreement on Pledge
of Interest and
Deed of Pledge" the Agreement on Pledge of Interest and Deed
of Pledge dated as of even date herewith
between IFC and the Company and witnessed by
Georgian Oil, the state oil company of
Georgia;
"Assignment of Contractual
Rights, Security
Agreement and Financing
Statement" the Assignment of Contractual Rights,
Security Agreement and Financing Statement
dated as of even date herewith between IFC
and the Company and witnessed by Georgian Oil
and GBOC;
"Auditors" PriceWaterhouseCoopers or such other firm of
independent public accountants as the
Company, with IFC's consent, from time to
time appoints as its auditors;
"Authority" any government or governmental,
administrative, fiscal, judicial, or
government-owned, body, department,
commission, authority, tribunal, agency or
entity;
"Authorization" any consent, registration, filing, agreement,
notarization, certificate, license, approval,
permit, authority or exemption from, by or
with any Authority, whether given by express
action or deemed given by failure to act
within any specified time period and all
corporate, creditors' and stockholders'
approvals or consents;
"Bank" United States Trust Company, a New York bank,
with which the Debt Service Reserve Account
and Revenue Account required under this
Agreement have been established and are held;
"Business Day" a day when banks are open for business in New
York, New York and, for the purpose of
determining the Loan Interest Rate, London,
England as well;
"Conversion Option" the right of IFC to convert the Loan into
shares as described in Article IV;
<PAGE> 7
- 2 -
"Conversion Period" the period beginning on the date of the first
Disbursement and ending on the third monthly
anniversary of the Physical Completion Date;
"Conversion Price" subject to any adjustment made in accordance
with the provisions of Article IV, the price
payable by IFC for the Conversion Shares
under the Conversion Option which will be an
amount determined on a pro-rata basis,
assuming that if IFC determined to convert
the entire Loan, it would obtain 20% of the
Shares on a fully diluted basis; using for
purposes of such calculation, the number of
issued and outstanding Shares reflected on
the Company's latest audited financial
statements;
"Conversion Settlement
Date" the date on which the Conversion Option shall
be effected and the Conversion Shares shall
be issued, sold and delivered to IFC, which
date shall be a Business Day that is not less
than twenty nor more than thirty (30) days
after the date of the Notice of Exercise;
"Conversion Shares" the Shares to be acquired by IFC pursuant to
the terms of the Notice of Exercise;
"Debt Service
Reserve Account" the account established with the Bank and
designated by such name pursuant to the
Security Agreement (Debt Service Reserve
Account);
"Debt Service Reserve
Account Requirement" an amount equal to the aggregate of all
scheduled amounts of principal, interest and
fees payable in respect of the Loan during
the next six months required to be maintained
in the Debt Service Reserve Account;
"Deed of Adherence" the Deed of Adherence dated as of even date
herewith by and among IFC, the Sponsors and
the Immediate Shareholders;
"Disbursement" any disbursement of the Loan;
"Dollars" and
the sign "US$" or "$" the lawful currency of the United States of
America;
"Dow Jones Screen
Page " the display of interest settlement rates
(commonly known as LIBOR) for Dollar deposits
in London designated as page 3750 on the Dow
Jones Markets Service (or any other page that
replaces page 3750 and displays London
interbank settlement rates for Dollar
deposits);
"Event of Default" any one of the events specified in Section
7.02;
<PAGE> 8
- 3 -
"Field Development Plan" the Field Development Plan substantially in
the form attached as Schedule 9 hereto or as
otherwise acceptable to IFC , prepared by the
Company and covering the full development
plans for the Ninotsminda, Manavi and West
Rustavi License area in form and substance
reasonably acceptable to IFC;
"Financial Plan" the proposed sources of financing for the
Project set out in Section 2.02(b);
"Financial Completion
Date" the date (following the Physical Completion
Date) on which IFC advises the Company in
writing that the Company's Financial
Completion Notice is acceptable (which
acceptance is in IFC's sole reasonable
discretion), such notice to be delivered
within 10 days of IFC's receipt of the
Company's Financial Completion Notice;
"Financial Completion
Notice" a written notice from the Company, signed by
an authorized representative of the Company,
together with relevant supporting
information, as applicable, stating and
providing evidence to the effect that:
(a) the Debt Service Reserve Account is at
least equal to the Debt Service Reserve
Account Requirement, as certified by the
Bank;
(b) the following ratios are met, as
certified by the Auditors and/or the
Independent Reserves Engineer, as
applicable and if so requested by IFC:
(i) the Current Ratio is at least 1.3;
(ii) the Debt Service Coverage Ratio is
at least 1.6;
(iii) no single Life of Loan Cover
Ratio, calculated for each year
from the date of calculation until
maturity of the Loan, is less than
1.6; and
(iv) the Debt to Equity Ratio does not
exceed 50:50;
(c) all of the unspent portion of the funds
received by the Company under the
Financial Plan are deposited in the
Revenue Account;
(d) no Event of Default or Potential Event
of Default has occurred or is
continuing;
(e) no legal or administrative action in any
court or tribunal is pending or, to the
Company's knowledge, threatened which
would materially and adversely affect
the Project;
"Fiscal Year" the accounting year of the Company commencing
each year on January 1 and ending on the
following December 31, or such other period
(of at least 52 consecutive
<PAGE> 9
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weeks) as the Company, with IFC's consent,
from time to time designates as its
accounting year;
"Gas Sale Agreement" the gas sales agreements between the Company
and purchasers named therein, in form and
substance reasonably satisfactory to IFC;
"Government Consent" the consent of the Georgian Government to the
IFC financing as contemplated under this
Agreement and acknowledgement of the security
arrangements provided by the Company to IFC
in connection therewith;
"Guaranty" the several guaranty (pursuant to separate
Guaranty Agreements) from each Sponsor (based
on and up to its pro-rata ownership interest
in the Company plus an assumed pro-rata share
of the ownership interest in the Company held
by any person other than the Sponsors) of the
Loan and all other amounts payable under this
Agreement, in effect until the Financial
Completion Date;
"Hedging Facility" any agreement between the Company and a
counterpart, setting forth a framework for,
or terms and conditions of, one or more
Hedging Transactions between the Company and
such counterpart or any of its Affiliates,
which is approved in writing by IFC;
"Hedging Transaction" any option agreement, swap agreement, cap
agreement, collar agreement, futures
contract, spot contract, forward contract or
similar arrangement or combination of any of
the foregoing with respect to interest rates,
currencies, oil, natural gas or other
commodities;
"IFC Security" the security created by or pursuant to the
Security Documents to secure all amounts
owing by the Company to IFC under this
Agreement;
"Immediate Shareholders" each of the CanArgo Limited and JKX
Nederlands B.V.;
"Independent Engineer" the petroleum engineering or other consulting
entity appointed by IFC following
consultation with the Company, for the
purpose of advising IFC on Project petroleum
reserves and for such other reviews and
certifications as required under the terms of
this Agreement;
"Interest Determination
Date" the second Business Day before the beginning
of each Interest Period;
"Interest Payment Date" any day which is June 15 or December 15 in
any year, provided that, if any such day is
not a Business Day, the Interest Payment Date
which would otherwise fall on that day shall
fall on the immediately succeeding Business
Day;
"Interest Period" each six (6) month period beginning on an
Interest Payment Date and ending on the day
immediately before the next following
Interest Payment Date; except in the case
<PAGE> 10
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of the first period applicable to each
Disbursement when it shall mean the period
beginning on the date on which that
Disbursement is made and ending on the day
immediately before the next following
Interest Payment Date;
"Lien" any mortgage, pledge, charge, assignment,
hypothecation, security interest, title
retention, preferential right, trust
arrangement, right of set-off, counterclaim
or bankers lien, privilege or priority of any
kind having the effect of security, any
designation of loss payees or beneficiaries
or any similar arrangement under or in
respect of any insurance policy or any
preference of one creditor over another
arising by operation of law;
"Loan" the loan specified in Section 3.01(a) or, as
the context requires, its principal amount
outstanding from time to time;
"Loan Interest
Rate" or any Interest Period, the rate at which
interest is payable on the Loan during that
Interest Period, determined in accordance
with Section 3.03;
"Maintenance Amount" the amount certified in the Maintenance
Amount Certification to be the net
incremental costs of or reduction in return
of IFC in connection with the making or
maintaining of the Loan which result from:
(i) any change in any applicable law or
regulation or directive (whether or
not having force of law) or in its
interpretation or application by any
Authority charged with its
administration; or
(ii) compliance with any request from, or
requirement of, any central bank or
other monetary or other Authority;
which in any case, after the date of
this Agreement:
(A) imposes, modifies or makes
applicable any reserve, special
deposit or similar requirements
against assets held by, or
deposits with or for the account
of, or loans by IFC;
(B) imposes a cost on IFC as a
result of IFC having made the
Loan or reduces the rate of
return on the overall capital of
IFC which it would have
achieved, had IFC not made the
Loan, as the case may be;
(C) changes the basis of taxation on
payments received by IFC in
respect of the Loan (otherwise
than by a change in taxation of
the overall net income of IFC
imposed by the jurisdiction of
its incorporation or in any
political subdivision of any
such jurisdiction); or
<PAGE> 11
- 6 -
(D) imposes on IFC any other
condition regarding the making
or maintaining of the Loan;
"Maintenance Amount
Certification" a certification furnished from time to time
by IFC certifying:
(i) the circumstances giving rise to the
Maintenance Amount;
(ii) that the costs of IFC, have increased
or the rate of return of IFC has been
reduced;
(iii) that, in the opinion of IFC it has
exercised reasonable efforts to
minimize or eliminate such increase
or reduction as the case may be; and
(iv) the Maintenance Amount;
"Makoil License Transfer
Agreement" the agreement between the Company and Makoil
Inc. dated November 10, 1995;
"Minimum Work Program" the Company's work program, substantially in
the form of Schedule 10 attached hereto or
otherwise as reasonably satisfactory to IFC,
which will include: (a) drilling, completion
and testing of at least five development
wells on the Ninotsminda field, (b) workovers
on the Ninotsminda and West Rustavi fields,
(c) equipment and facilities required for the
increase of oil and gas production on the
Ninotsminda and West Rustavi fields, and (d)
seismic acquisition and interpretation
required specifically for the Ninotsminda
field and for the planning of workovers on
the West Rustavi field. The Minimum Work
Program shall exclude any activities relating
to: (x) the assessment and exploration of the
Manavi prospect, (y) drilling and exploration
work in the West Rustavi area other than the
workovers and related activities described
(b) above, and (z) any activities funded by
the Company which are carried out for any
other parties on a reimbursable basis. The
Minimum Work Program shall also exclude any
activities carried out prior to January 1,
1998, and any activities subsequent to the
successful completion and testing of five
development wells on the Ninotsminda field
(all of which will have been drilled after
January 1, 1998). For the purposes of
assessing the cost of the Minimum Work
Program, expenditures which were committed to
by the Company prior to January 1, 1998 shall
be excluded.
"NOC Administration
Overhead Charges" all payments made by the Company for services
related to the regular operating expenses of
the Project that are not specifically
allowable and recoverable under Section II of
Annex C of the PSC, except for payments to
GBOC for regular operating expenses of the
Project, payments directly required (i.e.
excluding payments permitted) by the other
Transaction Documents, and payments directly
required under the Makoil License Transfer
Agreement;
<PAGE> 12
- 7 -
"NOC Direct Overhead
Charges" all payments made by the Company for services
related to the regular operating expenses of
the Project that are specifically allowable
and recoverable under Section II of Annex C
of the Production Sharing Contract between
the Company and Georgian Oil ("PSC"), except
for payments to GBOC for regular operating
expenses of the Project, payments directly
required (i.e. excluding payments permitted)
by the other Transaction Documents, and
payments directly required under the Makoil
License Transfer Agreement;
"Notice of Exercise" the notice issued by IFC pursuant to Section
4.02;
"Operator or GBOC" Georgia British Oil Company (GBOC);
"Permitted Investments" any of the following:
(i) investments in direct obligations of
the United States of America or
obligations of any instrumentality or
agency thereof, the payment of the
principal and interest of which is
unconditionally and timely guaranteed
by the United States, in each case
having a maturity not in excess of 12
months from the date of its
acquisition;
(ii) investments in certificates of
deposit or time deposits maturing not
more than 12 months from the date of
acquisition issued by any bank or
trust company having a combined
capital, surplus and undivided
profits of not less than
US$100,000,000 and having a minimum
long term credit rating by an
internationally recognized
independent rating service of at
least A (in the case of Standard &
Poor's Rating Services or Moody's
Investors Service) or its equivalent;
"Physical Completion
Date" the day on which IFC advises the Company in
writing that the Company's Physical
Completion Notice is acceptable, (which
acceptance is in IFC's sole reasonable
discretion) such notice to be delivered
within 10 days of IFC's receipt of the
Company's Physical Completion Notice ;
"Physical Completion
Notice" a written notice from the Company, signed by
an authorized representative of the Company
together with relevant supporting
information, as applicable, stating and
providing evidence, concurred with in writing
by the Independent Reserves Engineer if so
required by IFC, to the effect that:
(i) the Project facilities have been
constructed, installed, re-entered,
recompleted, tested and commissioned
in accordance with the Minimum Work
Program;
<PAGE> 13
- 8 -
(ii) the Project facilities and all other
facilities in the Ninotsminda and
West Rustavi fields have been
constructed and are operating in
accordance with good international
oil industry practices and IFC's
environmental, health and safety
guidelines and policies as well as
those of the applicable Georgia
Authorities;
(iii) production from the Ninotsminda,
Manavi and West Rustavi License area
shall have averaged 4,500 barrels of
crude oil per day, of which at least
4,200 barrels of crude oil per day
shall have come from the Ninotsminda
field, over a period of at least 90
days within the six months prior to
the Physical Completion Date, or the
Minimum Work Program is complete;
(iv) the Company shall have supplied to
IFC an updated calculation, based on
the latest available information and
performed less than four months
previously, of the present value
(discounted at the Discount Rate) of
all future volumes and Net Cash Flows
from the proven and proven and
probable, oil reserves of the
Ninotsminda oil field, including the
assumptions and other relevant
information underlying such
calculation;
"Potential Event
of Default" any event or circumstance which would, with
notice, lapse of time, the making of a
determination or any combination thereof,
become an Event of Default;
"Project" the project described in Section 2.01;
"Put Option Agreement" the Put Option Agreement dated as of even
date herewith between IFC and the Sponsors;
"Relevant Portion of the
Loan" the portion (up to 100%, at IFC's election)
of the Loan which IFC opts to convert and
apply as payment for the Conversion Price
upon exercise of its Conversion Option;
"Revenue Account" the account established with the Bank and
designated by such name pursuant to the
Security Agreement (Revenue Account);
"Rig Service Contract" the Rig Service Contract between the Company
and CanArgo Energy Corporation in form and
substance acceptable to IFC;
"Security
Documents" the following agreements:
(i) the Security Agreement (Accounts
Receivable);
(ii) the Security Agreement (Debt Service
Reserve Account)
<PAGE> 14
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(iii) the Security Agreement (Revenue
Account)
(iv) the Guaranty Agreements;
(v) the Share Pledge Agreement;
(vi) the Agreement on Pledge of Interest
and Deed of Pledge;
(vii) the Assignment of Contractual Rights,
Security Agreement and Financing
Statement;
(viii) the Government Consent;
"Settlement Place" the place or places designated in the Notice
of Exercise as being the place or places
where the actions specified in Section 4.04
as taking place on the Settlement Date are to
be performed;
"Shareholder Loans" the loans from the Sponsors or their
Affiliates to the Company (other than the
Sponsor Loan) in the aggregate outstanding
principal amount of $2,765,380 as of December
31, 1997;
"Share Pledge Agreement" the Share Pledge Agreement dated as of even
date herewith by and among IFC, the Company
and the Immediate Shareholders;
"Share Retention
Agreement" the Share Retention Agreement dated as of
even date herewith by and among IFC, the
Company, the Immediate Shareholders and the
Sponsors;
"Sponsors" each of CanArgo Energy Corporation and JKX
Oil & Gas plc.;
"Sponsor Loan" the subordinated loan in the amount of two
million Dollars (US$2,000,000) granted by the
Sponsors to the Company pursuant to the
Sponsor Loan Agreement on substantially the
terms and conditions set forth in Schedule 8;
"Sponsor Loan Agreement" the Sponsor Loan Agreement dated as of even
date herewith between the Sponsors and the
Company;
"Subsidiary" in respect of any person, any entity:
(i) over 50% of whose capital is owned,
directly or indirectly, by that
person;
(ii) for which that person may nominate or
appoint a majority of the members of
the board of directors or other
governing body or persons performing
similar functions; or
<PAGE> 15
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(iii) which is otherwise effectively
controlled by that person;
"Transaction
Documents" the following Agreements and other documents;
(i) this Agreement;
(ii) the Security Documents;
(iii) the Share Retention Agreement;
(iv) the Put Option Agreement;
(v) the Deed of Adherence;
(vi) the Sponsor Loan Agreement;
(vii) the Minimum Work Program;
(viii) the Field Development Plan;
(ix) the Gas Sales Agreement and the Rig
Service Contract;
(x) the Production Sharing Contract
between the Company and Georgian Oil
dated February 15, 1996;
(xi) the Complex License granted by the
Republic of Georgia to Georgia Makoil
Joint Venture dated December 1994;
(xii) the Mineral Use License granted by
the Republic of Georgia to GBOC;
(xiii) the re-registration of the GBOC
license in the name of
GBOC-Ninotsminda dated [July 1998];
(xiv) charter documents of GBOC -
Ninotsminda.
Section 1.02. Financial Definitions. Wherever used in this Agreement,
unless the context otherwise requires, the following terms have the meanings
opposite them:
"Current Assets" the aggregate of the Company's cash,
marketable securities, trade and other
receivables realizable within one year,
prepaid expenses which are to be charged to
income within one year and inventories;
<PAGE> 16
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"Current
Liabilities" the aggregate of all liabilities of the
Company falling due on demand or within one
year (including the portion of Long-term Debt
falling due within one year);
"Current Ratio" the result obtained by dividing Current
Assets by Current Liabilities;
"Debt" the aggregate of all obligations (whether
actual or contingent) of the Company to pay
or repay money including, without limitation:
(i) all Indebtedness for Money Borrowed;
(ii) the aggregate amount then outstanding
of all liabilities of any party to
the extent the Company guarantees
them or otherwise obligates itself to
pay them to the relevant creditor;
(iii) all liabilities of the Company
(actual or contingent) under any
conditional sale or a transfer with
recourse or obligation to repurchase,
including, without limitation, by way
of discount or factoring of book
debts or receivables;
"Debt to Equity Ratio" the ratio of Long-term Debt (excluding the
portion of Long-term Debt falling due within
one year) to Shareholders' Equity;
"Debt Service Coverage
Ratio" as of the relevant date of calculation, the
ratio obtained by dividing (i) Net Cash Flow
for the immediately preceding four quarters
by (ii) all scheduled payments (whether or
not actually paid) on account of principal
and interest and charges on all Long-term
Debt for the immediately succeeding four
quarters;
"Discount Rate" the higher of 10% per annum or the Loan
Interest Rate;
"Indebtedness for
Money Borrowed" all obligations of the Company to repay money
including, without limitation, in respect of:
(i) borrowed money;
(ii) the outstanding principal amount of
any bonds, notes, loan stock,
commercial paper, acceptance credits,
debentures and bills or promissory
notes drawn, accepted, endorsed or
issued by the Company;
(iii) any credit to the Company from a
supplier of goods or under any
installment purchase or other similar
arrangement in respect of goods or
services (except trade accounts
payable within ninety (90) days in
the ordinary course of business);
<PAGE> 17
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(iv) non-contingent obligations of the
Company to reimburse any other person
in respect of amounts paid by such
person under a letter of credit or
similar instrument (excluding any
such letter of credit or similar
instrument issued for the benefit of
the Company in respect of trade
accounts payable within ninety (90)
days in the ordinary course of
business);
(v) amounts raised under any other
transaction having the financial
effect of a borrowing and which would
be classified as a borrowing (and not
as an off-balance sheet financing)
under internationally generally
accepted accounting principles
consistently applied including,
without limitation, under leases or
similar arrangements entered into
primarily as a means of financing the
acquisition of the asset leased; and
(vi) any premium payable on a redemption
or replacement of any of the
foregoing obligations;
"Life of Loan Cover
Ratio" as of the relevant date of calculation, the
ratio obtained by dividing (i) the present
value, discounted at the Discount Rate, of
future Net Cash Flows from the proven oil
reserves of the Ninotsminda oil field from
the date of calculation to the date of final
maturity of the Loan, by (ii) the amount of
principal outstanding of all Long-term Debt.
The projections for this calculation shall be
based upon the latest reserves valuation
submitted to a recognized securities exchange
or to IFC, or an equivalent independent
valuation to be obtained at IFC's option, and
on the most recently published World Bank oil
price and inflation forecasts;
"Net Asset Value" the net present value, discounted at the
Discount Rate, of future Net Cash Flows of
all probable reserves (risked at 50%) and all
proven reserves, plus Current Assets, plus
non-exploration and production fixed assets,
less liabilities excluding related party
debt; the calculation of Net Cash Flows being
based on the latest valuation submitted to a
recognized securities exchange, or an
equivalent independent valuation to be
obtained at IFC's option.
"Net Cash Flow" for any period, Operating Cash Flow less the
Company's proportionate share of Project
capital development expenses.
"Operating Cash Flow" for any period, the sum of all proceeds from
the sale of the Company's share of oil and
natural gas, less the Company's proportionate
share of operating costs, operating
overheads, royalties, transportation costs
and taxes.
"Long-term Debt" that part of the Debt the final maturity of
which, by its terms or the terms of any
agreement relating to it, falls due more than
one year after the date of its incurrence;
"Shareholders'
Equity" the amount paid up on the share capital of
the Company (including, without limitation,
any share premium account and capital
redemption reserve funds); after
<PAGE> 18
- 13 -
deducting from such amount any impairment of
the issued share capital of the Company,
amounts set aside for dividends or taxation
(including deferred taxation) or attributable
to goodwill or other intangible assets;
"Short-term Debt" all Debt other than Long-term Debt; and
"Working Capital" the amount by which Current Assets exceed
Current Liabilities.
Section 1.03. Interpretation. In this Agreement, unless the context
otherwise requires:
(a) headings are for convenience only and do not affect the
interpretation of this Agreement;
(b) words importing the singular include the plural and vice versa;
(c) a reference to a natural person includes any company, partnership,
trust, joint venture, association, corporation or other body corporate and any
governmental authority or agency;
(d) a reference to a Section, Article, party, Exhibit, Annex or
Schedule is a reference to that Section or Article of, or that party, Exhibit,
Annex or Schedule to, this Agreement;
(e) a reference to a document includes an amendment or supplement to,
or replacement or novation of, that document but disregarding any amendment,
supplement, replacement or novation made in breach of this Agreement; and
(f) a reference to a party to any document includes that party's
successors and permitted assigns.
Section 1.04. Business Day Adjustment. Where the day on or by which a
payment is due to be made is not a Business Day, that payment shall be made on
or by the next succeeding Business Day. Interest, fees and charges (if any)
shall continue to accrue for the period from the due date which is not a
Business Day to that next succeeding Business Day.
ARTICLE II
THE PROJECT, PROJECT COST AND FINANCIAL PLAN
Section 2.01. The Project. The project to be financed consists of the
further development of the Ninotsminda field, through the drilling of five
development wells over an eighteen month period, the installation of processing
and handling facilities, and the carrying out of related work on oil and natural
gas within the Ninotsminda, Manavi and West Rustavi License area.
Section 2.02. Project Cost and Financial Plan. (a) The estimated cost
of the Project is as follows:
<PAGE> 19
- 14 -
<TABLE>
<CAPTION>
Project Cost US$ Million
------------ -----------
<S> <C>
Development wells 13.0
Workovers 2.0
Facilities 1.4
Working Capital 1.1
Interest During Construction 0.5
Contingencies 0.9
TOTAL 18.9
</TABLE>
(b) The proposed sources of financing for the Project are as follows:
<TABLE>
<CAPTION>
Financing Plan US$ Million
-------------- -----------
<S> <C>
IFC Loan 6.0
Sponsors' Equity (escrowed) 8.0
Sponsor Loan (escrowed) 2.0
Cash Generation (or additional 2.9
equity)
TOTAL 18.9
</TABLE>
ARTICLE III
THE LOAN
Section 3.01. The Loan. On the terms and subject to the conditions of
this Agreement, IFC agrees to lend to the Company a convertible loan in the
amount of up to six million Dollars (US$6,000,000).
Section 3.02. Disbursement Procedure. (a) The Company may request
disbursements of the Loan by delivering to IFC, at least fifteen (15) Business
Days prior to the proposed date of disbursement, a disbursement request
substantially in the form of Schedule 1 and a receipt substantially in the form
of Schedule 2.
(b) IFC shall make Disbursements to the credit of Northern Trust
International Banking Corporation (Chips ID 142255) in New York for further
credit to the Revenue Account.
(c) Each Disbursement shall be made in an amount (except with respect
to the last Disbursement) of not less than one and one-half million Dollars
(US$1,500,000).
Section 3.03. Loan Interest. Subject to Section 3.04, the Company shall
pay interest on the Loan in accordance with this Section 3.03.
<PAGE> 20
- 15 -
(a) During each Interest Period, the Loan (or, in respect of the first
Interest Period of each Disbursement, the amount of that Disbursement) shall
bear interest at the rate as determined under subsection (c) or (d) below for
that Interest Period.
(b) Interest on the Loan shall accrue from day to day, be prorated on
the basis of a 360-day year for the actual number of days in the relevant
Interest Period and be payable in arrears on the Interest Payment Date
immediately following the end of that Interest Period.
(c) The interest payable on the Loan for any Interest Period shall be
three percent (3%) per annum above the rate which appears on the Dow Jones
Markets, Inc. Page in the column headed "USD" as of 11:00 a.m., London time, on
the Interest Determination Date for that Interest Period for six months (or, in
the case of the first Interest Period for any Disbursement, for one month, two
months, three months or six months, whichever period is closest to the duration
of the relevant Interest Period (or, if two periods are equally close, the
longer one)) rounded upward to the nearest three decimal places.
(d) If, for any reason, IFC cannot determine the Interest Rate for any
Interest Period from the Dow Jones Markets, Inc. Page (whether as a result of
the discontinuation of Dow Jones Markets, Inc. Page or otherwise), IFC shall
notify the Company and instead determine that Interest Rate using the
arithmetical average (rounded upward to the nearest three decimal places) of the
offered rates advised to IFC by any three major banks active in the eurodollar
interbank market in London selected by IFC after consultation with the Company
and otherwise in accordance with subsection (c) above.
(e) On each Interest Determination Date for any Interest Period, IFC
shall, in accordance with the relevant subsection above, determine the Loan
Interest Rate applicable to that Interest Period and promptly notify the Company
of such rate.
(f) The determination by IFC, from time to time, of the Interest Rates
shall be final and conclusive and shall bind the Company (unless the Company
shows to IFC's satisfaction that the determination involves clerical error).
Section 3.04. Additional Interest. Without limiting the remedies
available to IFC under this Agreement or otherwise, if the Company fails to make
any payment of principal or interest (including interest payable pursuant to
this Section) on or before its due date as specified in this Agreement (whether
scheduled, upon voluntary prepayment, mandatory prepayment, at stated maturity
or upon prematuring by acceleration or otherwise) or, if not so specified, as
notified by IFC to the Company, the Company shall pay in respect of the amount
of such payment due and unpaid, interest at the rate of two percent (2%) per
annum plus the Loan Interest Rate in effect from time to time from the date any
such payment became due until the date of actual payment (as well after as
before judgment). Such interest shall be payable on demand, or if not demanded,
on each Interest Payment Date after such failure.
Section 3.05. Repayment. (a) The Company shall repay the Loan on the
following dates and in the following amounts:
<PAGE> 21
- 16 -
<TABLE>
<CAPTION>
Date Payment Due Principal Amount Due
---------------- --------------------
<S> <C>
December 15, 2001 $1,200,000
June 15, 2002 1,200,000
December 15, 2002 1,200,000
June 15, 2003 1,200,000
December 15, 2003 1,200,000
</TABLE>
(b) Upon each Disbursement, the amount disbursed shall be allocated for
repayment on each of the respective dates for repayment of principal set out in
the tables in the above subsections in amounts which are pro rata to the amounts
of the respective installments shown opposite those dates in those tables (with
IFC adjusting those allocations as necessary so as to achieve whole numbers in
each case).
Section 3.06. Prepayment. The Loan is not subject to prepayment and may
not be voluntarily prepaid by the Company.
Section 3.07. Conversion. The Loan may be converted at IFC's option
into shares of the Company in accordance with the provisions of Article IV.
Section 3.08. Fees. (a) The Company shall pay to IFC a commitment fee
at the rate of one-half of one percent (1/2%) per annum on that part of the
Loan which from time to time has not been disbursed or canceled. The commitment
fee shall begin to accrue on the date of this Agreement, be pro rated on the
basis of a 360-day year for the actual number of days elapsed, and be payable
semi-annually, in arrears, on the Interest Payment Dates in each year, with the
first such payment to be due on the immediately succeeding Interest Payment Date
following the date hereof.
(b) The Company shall also pay to IFC a front-end fee of one percent
(1%) of the aggregate amount of the Loan, to be paid within thirty (30) days
after the date of this Agreement, but in any event prior to the date of the
first Disbursement;
Section 3.09. Currency and Place of Payments. (a) The Company shall
make all payments of principal, interest, fees, and any other amount due to IFC
under this Agreement in Dollars, in same day funds, at such bank or banks in New
York as IFC from time to time designates.
(b) The tender or payment of any amount payable under this Agreement
(whether or not by recovery under a judgment) in any currency other than Dollars
shall not novate, discharge or satisfy the obligation of the Company to pay in
Dollars all amounts payable under this Agreement except to the extent that (and
as of the date when) IFC actually receives Dollars in its account in New York.
(c) If a currency other than Dollars is tendered or paid (or recovered
under any judgment) and the amount IFC receives at its designated account in New
York falls short of the full amount of Dollars owed to IFC, then the Company
shall continue to owe IFC, as a separate obligation, the amount of the shortfall
(regardless of any judgment for any other amounts due under this Agreement).
(d) Notwithstanding subsections (a) through (c) above, IFC may require
the Company to pay (or reimburse IFC) in any currency other than Dollars for:
<PAGE> 22
- 17 -
(i) any taxes and other amounts payable under Section 6.05; and
(ii) any fees, costs and expenses payable under Section 9.03;
to the extent those taxes, amounts, fees, costs, and expenses are payable in
that other currency.
Section 3.10. Allocation of Partial Payments. If IFC shall at any time
receive less than the full amount then due and payable to it under this
Agreement, IFC may allocate and apply such payment in any way or manner and for
such purpose or purposes under this Agreement as IFC in its sole discretion
determines, notwithstanding any instruction that the Company may give to the
contrary.
Section 3.11. Maintenance Amount. On each Interest Payment Date, the
Company shall pay, in addition to interest, the amount which IFC from time to
time notifies to the Company in a Maintenance Amount Certification as being the
aggregate Maintenance Amount of IFC accrued and unpaid prior to that Interest
Payment Date.
Section 3.12. Funding Costs. (a) If the Company fails to pay any amount
due under this Agreement on its due date, or fails to borrow in accordance with
a request for disbursement made pursuant to Section 3.02 and as a result IFC
incurs any cost, expense or loss, then the Company shall immediately pay to IFC
the amount which IFC from time to time notifies to the Company as being the
amount of such costs, expenses and losses incurred.
(b) For the purposes of this Section, "costs, expenses or losses"
include any interest paid or payable to carry any unpaid amount and any premium,
penalty or expense incurred to liquidate or obtain third party deposits or
borrowings in order to make, maintain or fund all or any part of the Loan (but
in the case of a late payment, after taking into account any additional interest
received under Section 3.04).
Section 3.13. Suspension or Cancellation of Disbursements by IFC. (a)
IFC may, by notice to the Company, suspend or cancel the right of the Company to
Disbursements:
(i) if the first Disbursement has not been made by June 30,
1999, or such other date as the parties agree;
(ii) if any Event of Default has occurred and is continuing or
if the Event of Default specified in Section 7.02 (d) is,
in the reasonable opinion of IFC, imminent;
(iii) if at any time in the reasonable opinion of IFC, there
exists any situation which indicates that performance by
the Company, the Immediate Shareholders, or the Sponsors of
any of their respective obligations under the Transaction
Documents cannot be expected; or
(iv) on or after June 30, 2000.
(b) Upon the giving of any such notice, the right of the Company to any
further Disbursement shall be suspended or canceled as the case may be. The
exercise by IFC of its right of suspension shall not preclude IFC from
exercising its right of cancellation, either for the same or any other reason
specified in subsection (a) above. Upon such cancellation the Company shall pay
to IFC all fees and other amounts accrued (whether or not then due
<PAGE> 23
- 18 -
and payable) under this Agreement up to the date of such cancellation. A
suspension shall not limit any other provision of this Agreement.
Section 3.14. Taxes. (a) The Company shall pay or cause to be paid all
present and future taxes, duties, fees and other charges of whatsoever nature,
if any, now or in the future levied or imposed by Georgia or by any Authority of
Georgia or any jurisdiction through or out of which a payment is made on or in
connection with the payment of any and all amounts due under this Agreement.
(b) All payments of principal, interest and other amounts due under
this Agreement shall be made without deduction for or on account of any such
taxes, duties, fees or other charges.
(c) If the Company is prevented by operation of law or otherwise from
making or causing to be made such payments without deduction, the principal or
(as the case may be) interest or other amounts due under this Agreement shall be
increased to such amount as may be necessary so that IFC receives the full
amount it would have received (taking into account any such taxes, duties, fees
or other charges payable on amounts payable by the Company under this
subsection) had such payments been made without such deduction.
(d) If subsection (c) above applies and IFC so requires, the Company
shall deliver to IFC official tax receipts evidencing payment (or certified
copies of them) within thirty (30) days of the date of payment.
<PAGE> 24
- 19 -
ARTICLE IV
CONVERSION OPTION
Section 4.01. The Conversion Option. On the terms and subject to the
conditions of this Agreement, the Company hereby grants to IFC an option, which
may be exercised once only, to convert, at any time during the Conversion Period
and at the Conversion Price, all or any part of the principal amount then
outstanding of the Loan into issued, outstanding and fully paid Shares.
Section 4.02. Exercise of the Conversion Option. The Conversion Option
may be exercised by IFC delivering a Notice of Exercise specifying:
(i) the amount of the Loan to be converted into Shares;
(ii) the Settlement Date;
(iii) the Settlement Place;
(iv) the name or names in which the certificate of title
evidencing ownership of the Conversion Shares are to be
registered;
(v) the Conversion Price;
(vi) the number of Conversion Shares that IFC is entitled to
upon the conversion; and
(vii) the amount of accrued but unpaid interest, and any other
amount accrued but unpaid, in respect of the amount of the
Loan to be converted, which shall become due and payable to
IFC on the Settlement Date.
Section 4.03. Actions to be Taken by the Company. Immediately upon
receipt of the Notice of Exercise, the Company shall take all necessary
corporate and other action required to issue, sell and deliver the Conversion
Shares to IFC on the Settlement Date; and shall apply for all the necessary
consents and approvals of the requisite governmental authorities in Cyprus and
Georgia, as applicable, in connection with the conversion of the Loan to equity.
<PAGE> 25
- 20 -
Section 4.04. Settlement. On the Settlement Date:
(a) IFC shall, against, and subject to, delivery of the documents
specified in Subsection (b) below and payment of the amounts specified in
Subsection (c) below, pay to the Company the Conversion Price by delivering its
release of the Relevant Portion of the Loan;
(b) the Company shall, against delivery of IFC's release referred to in
Subsection (a) above, issue to IFC the Conversion Shares and shall also deliver
to IFC (or as IFC may direct):
(i) the share certificate (or certificates) issued by the
Company, evidencing that the Conversion Shares are validly
issued and properly registered in the name of IFC or its
designee and that such registration grants valid title to
the Conversion Shares;
(ii) evidence satisfactory to IFC that:
(A) the Conversion Shares are free and clear of liens,
charges and encumbrances, and are voting shares
ranking pari passu with all existing voting shares
in the Company with all of the rights specified in
the Memorandum and Articles of Association of the
Company; and
(B) all necessary corporate formalities in connection
with IFC's title to the Conversion Shares and the
delivery of the Conversion Shares have been complied
with (such evidence to be confirmed by a legal
opinion of counsel in Cyprus (and such other
relevant jurisdiction) acceptable to IFC, at the
Company's expense); and
(iii) deliver to IFC certified copies of the necessary consents
and approvals referred to in Section 4.03.
(c) the Company shall pay to IFC the amount specified in the Notice of
Exercise as payable on account of interest on, and all other amounts payable in
accordance with the provisions of the Convertible Loan Agreement in respect of,
the Loan being converted into the Conversion Shares;
(d) Upon receipt of all documents and evidence referred to in Section
4.04(b) and of payment of the amounts referred to in Section 4.04(c), the
Relevant Portion of the Loan shall be deemed to be satisfied in full and the
Company shall be released from its obligations in respect thereto.
Section 4.05. Rights Carried by the Conversion Shares. The Conversion
Shares shall carry the right to all profits and/or dividends payable on Shares
generally to shareholders of record.
Section 4.06. Reporting Obligation. Should any change be proposed in
the share capital of the Company or any other action be proposed which could
result in an adjustment to the Conversion Price under this Agreement during the
Conversion Period, the Company shall provide IFC with a report setting forth the
relevant information related to such change(s), including a statement of:
<PAGE> 26
- 21 -
(a) the consideration expected to be received or receivable by the
Company for any additional stock issued or issuable;
(b) the capital immediately before and after such change(s); and
(c) any other information or event relevant to IFC's exercise of the
Conversion Option.
Each such report shall be delivered to IFC as promptly as possible but
in any event within thirty (30) days from the date the relevant change is
proposed, provided that, in any case, such report shall be delivered prior to
such change.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.01. Representations and Warranties. The Company represents
and warrants that:
(a) it is a company duly organized, validly existing and in good
standing under the laws of Cyprus; it is registered and in good standing in
Georgia and in any other jurisdiction in which it carries on its business and it
has the corporate power to own its assets, conduct its business as presently
conducted and to enter into, observe and perform its obligations under, the
Transaction Documents to which it is a party or will, in the case of any
Transaction Document not executed as at the date of this Agreement, when that
Transaction Document is executed, have the corporate power to enter into,
observe and perform its obligations under that Transaction Document;
(b) each Transaction Document to which it is a party has been, or will
be, duly authorized and executed by the Company and constitutes, or will, when
executed constitute, a valid and legally binding obligation of the Company,
enforceable in accordance with its terms;
(c) neither the making of any Transaction Document to which it is a
party nor (when all the consents referred to in Section 6.01(h) have been
obtained) the compliance with its terms will conflict with or result in a breach
of any of the terms, conditions or provisions of, or constitute a default or
require any consent under, any indenture, mortgage, agreement or other
instrument or arrangement to which the Company is a party or by which it is
bound, or violate any of the terms or provisions of the Company's Memorandum and
Articles of Association or any judgment, decree or order or any statute, rule or
regulation applicable to the Company;
(d) neither the Company nor any of its property enjoys any right of
immunity from set-off, suit or execution in respect of its assets or its
obligations under any Transaction Document to which it is a party;
(e) since December 31, 1997, the Company:
(i) has not suffered any material adverse change in its
business prospects or financial condition or incurred any
substantial or unusual loss or liability;
<PAGE> 27
- 22 -
(ii) has not undertaken or agreed to undertake any substantial
or unusual obligation;
(f) the financial statements of the Company for the period ending on
December 31, 1997:
(i) have been prepared in accordance with International
Accounting Standards consistently applied, and give a true
and fair view of the financial condition of the Company as
of the date as of which they were prepared and the results
of the Company's operations during the period then ended;
(ii) disclose all liabilities (contingent or other wise) of the
Company, and the reserves, if any, for such liabilities and
all unrealized or anticipated losses arising from
commitments entered into by the Company (whether or not
such commitments have been disclosed in such financial
statements);
(g) except for the Transaction Documents to which it is party, the
Company is not a party to or committed to enter into, any material contract;
(h) the Company has no outstanding Lien on any of its assets, and no
contracts or arrangements, conditional or unconditional, exist for the creation
by the Company of any Lien, except for the IFC Security;
(i) all tax returns and reports of the Company required by law to be
filed have been duly filed and all tax assessments, fees and other governmental
charges upon the Company, or its properties, or its income or assets, which are
due and payable, have been paid, other than those presently payable without
penalty or interest;
(j) except as previously disclosed in writing to IFC, the Company is
not engaged in nor, to the best of its knowledge, threatened by, any litigation,
arbitration or administrative proceedings, the outcome of which might materially
and adversely affect its business prospects or financial condition or make it
improbable that the Company will be able to observe or perform its obligations
under any Transaction document to which it is a party; and
(k) to the best of its knowledge and belief, the Company is not in
violation of any statute or regulation of any Authority and no judgment or order
has been issued which has or is likely to have any materially adverse effect on
the Company's business prospects or financial condition or make it improbable
that the Company will be able to observe or perform its obligations under any
Transaction Document to which it is a party
Section 5.02. IFC Reliance. (a) The Company acknowledges that it makes
the representations and warranties in Section 5.01 with the intention of
inducing IFC to enter into this Agreement and that IFC enters into this
Agreement on the basis of, and in full reliance on, each of such representations
and warranties.
(b) The Company warrants to IFC that each of such representations is
true and correct in all material respects as of the date of this Agreement and
that none of them omits any matter the omission of which makes any of such
representations misleading.
Section 5.03. Rights and Remedies not Limited. IFC's rights and
remedies in relation to any misrepresentation or breach of warranty on the part
of the Company are not prejudiced:
<PAGE> 28
- 23 -
(a) by any investigation by or on behalf of IFC into the affairs of the
Company;
(b) by the execution or the performance of this Agreement or any other
Transaction Document; or
(c) by any other act or thing which may be done by or on behalf of IFC
in connection with this Agreement and which might, apart from this Section,
prejudice such rights or remedies.
ARTICLE VI
CONDITIONS OF DISBURSEMENT
Section 6.01. Initial Conditions. The obligation of IFC to make the
first Disbursement is subject to the fulfillment, in a manner satisfactory to
IFC, prior to or concurrently with the making of such first Disbursement, of the
following conditions:
(a) Each of the Company, the Sponsors and the Immediate Shareholders
has performed all of its respective obligations due to be performed under the
Transaction Documents prior to the first Disbursement;
(b) arrangements satisfactory to IFC have been made with respect to the
installation and operation of an accounting and cost control system, a
management information system, and the appointment of the Auditors;
(c) the Company has insured its properties and business in accordance
with Section 7.03 and has provided to IFC copies of all insurance policies
required to be in force as at the date of the first Disbursement together with a
certificate of the insurer, insurance broker or agent confirming that such
policies are in effect;
(d) the Transaction Documents, each in form and substance satisfactory
to IFC, have been entered into by all parties to them and have become (or, as
the case may be, remain) unconditional and fully effective in accordance with
their respective terms (except for this Agreement having become unconditional
and fully effective, if that is a condition of any of such agreements) and, if
IFC requires, IFC has received a copy of each Transaction Document to which it
is not a party, certified as a true and complete copy by the Company;
(e) the Memorandum and Articles of Association of the Company is in
form and substance satisfactory to IFC;
(f) the IFC Security has been duly created and perfected/registered as
first priority security interests in all assets subject to the Security
Documents;
(g) the Debt Service Reserve Account and the Revenue Account shall have
been established with the Bank;
(h) the Company has obtained, or made arrangements satisfactory to IFC
for obtaining, all Authorizations for:
<PAGE> 29
- 24 -
(i) the Loan;
(ii) the carrying on of the business of the Company as it is
presently carried on and is contemplated to be carried on;
(iii) the carrying out of the Project and the implementation of
the Financial Plan;
(iv) the due execution, delivery, validity and enforceability
of, and performance under, each Transaction Document, and
any other documents necessary or desirable to the
implementation of any of those Agreements or Documents; and
(v) the remittance to IFC in Dollars of all monies payable in
respect of the Transaction Documents;
and has provided IFC with copies of those Authorizations, certified as true and
complete copies by the Company, if IFC so requires;
(i) IFC has received a legal opinion or opinions, in form and substance
satisfactory to it, from counsel in Georgia, Cyprus and New York, with respect
to:
(i) the organization, existence and operations of the Company
and its authorized and subscribed share capital;
(ii) the matters referred to in subsections (d), (e), (f), and
(h), above;
(iii) the title of the Company to, or other interest of the
Company in, the assets which are the subject of the IFC
Security;
(iv) the authorization, execution, validity and enforceability
of the Transaction Documents and any other documents
necessary or desirable to the implementation of any of
them;
(v) the compliance with all obligations referred to in Sections
3.14 and 7.05;
(vi) the priorities or privileges, if any, that creditors of the
Company, other than IFC, may have by reason of law; and
(vii) such other matters relating to the transactions
contemplated by this Agreement as IFC reasonably requests;
(j) IFC has received:
(i) (if IFC so requires) the reimbursement of fees and expenses
of IFC's counsel as provided in Section 8.03; and
<PAGE> 30
- 25 -
(ii) the fees specified in Section 3.08 required to be paid on
or before the date of the first Disbursement;
(k) arrangements satisfactory to IFC have been made for appointment of
an agent for service of process pursuant to Section 9.06;
(l) IFC has received a copy of the authorization to the Auditors
referred to in Section 6.01 (h) and has received from the Auditors a letter or
copy of a management letter from the auditor to the Company commenting on the
adequacy of the Company's accounting and cost control system, and management
information system;
(m) IFC has received evidence, in the form of Schedule 3, of the
authority of the person or persons who will, on behalf of the Company, sign the
requests and certifications provided for in this Agreement, or take any other
action or execute any other document required or permitted to be taken or
executed by the Company under this Agreement, and the authenticated specimen
signature of each such person;
(n) IFC has received evidence that all Shareholders Loans have been
capitalized into Shareholders Equity;
(o) IFC has approved the Gas Sales Agreements and the Company's
arrangements for sale of crude oil;
(p) IFC has received evidence of: (i) the amount of new equity
contributed by the Sponsors to the company in Fiscal Year 1998 and already spent
on the Minimum Work Program; (ii) the amount of new equity contributed by the
Sponsors to the Company which has been transferred as a cash balance to the
Revenue Account; and (iii) the payment by the Sponsors of the proceeds of the
Sponsor Loan into the Revenue Account; and the sum of the foregoing amounts
shall be at least ten million Dollars (US$10,000,000); provided, however, that
the requirement under subclause (iii) above shall not be applicable and
accordingly, the sum of the foregoing amounts referred to above shall be reduced
by the amount of the Sponsor Loan and therefore be equal only to at least eight
million Dollars (US$8,000,000), if an irrevocable letter of credit, in form and
substance satisfactory to IFC (including, in this respect, the satisfactory
identity of the financial institution issuing such letter of credit), is
obtained and is in full force and effect prior to the date of the first
Disbursement, to support the future ability of the Sponsors to disburse the
Sponsor Loan following a disbursement request by the Company;
(q) [intentionally omitted];
(r) IFC has received a copy of the Company's audited financial
statements for the previous Fiscal Year, as well as copies of the Company's
unaudited quarterly financial statements for the period between the date of the
audited financial statements and the date of Disbursement;
(s) the Company has appointed a full-time project manager, acceptable
to IFC (which acceptance shall not be unreasonably withheld), who will be based
mostly in Georgia, and has provided IFC with a copy of such project manager's
employment contract;
(t) the Company has supplied IFC with a list of all beneficiaries of
past payments from the Company and/or its predecessor (JKX (Ninotsminda)), which
IFC agrees to keep strictly confidential;
<PAGE> 31
- 26 -
Section 6.02. Conditions of all Disbursements. The obligation of IFC to
make any Disbursement is also subject to the conditions that:
(a) the Debt to Equity Ratio does not exceed 50:50;
(b) the Life of Loan Cover Ratio exceeds 1.6;
(c) no Event of Default and no Potential Event of Default has occurred
and is continuing;
(d) the proceeds of such Disbursement are not in reimbursement of, or
to be used for, expenditures in the territories of any country which is not a
member of IFC or the World Bank or for goods produced in or services supplied
from any such country; but are, at the date of the relevant request, needed by
the Company for the purpose of the Project, or will be needed for that purpose
within three (3) months of such date and shall be spent only in countries which
are members of the World Bank;
(e) since the date of this Agreement nothing has occurred which can
reasonably be expected to materially and adversely affect the carrying out of
the Project or the Company's business prospects or financial condition or make
it improbable that the Company will be able to observe or perform any of its
obligations under this Agreement;
(f) since the date of this Agreement the Company has not incurred any
material loss or liability (except such liabilities as may be incurred in
accordance with Section 6.02); and
(g) the representations and warranties made in Article V are true on
and as of the date of that Disbursement with the same effect as if such
representations and warranties had been made on and as of the date of that
Disbursement (but in the case of Section 5.01 (c), without the words in
parenthesis).
(h) all fees due and payable under Section 3.08 shall have been paid in
full.
Section 6.03. Company Certification. The Company shall deliver to IFC:
(a) as part of each request for Disbursement a certification,
substantially in the form of Schedule 1, with respect to the conditions
specified in Sections 6.01 and 6.02, expressed to be effective as of the date of
the relevant Disbursement and in the case of Section 6.02 (e), certified by the
Auditors if IFC so requires;
(b) such evidence as IFC reasonably requests of the proposed
utilization of the proceeds of the relevant Disbursement or the utilization of
the proceeds of any prior Disbursement; and
(c) if IFC requests, a legal opinion or opinions in form and substance
satisfactory to IFC, of counsel acceptable to IFC, and concurred in by counsel
for the Company, with respect to any matters relating to the relevant
Disbursement.
Section 6.04. Conditions for IFC Benefit. The conditions in Sections
6.01 through 6.05 are for the benefit of IFC and may be waived only by IFC at
its sole discretion.
<PAGE> 32
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Section 6.05. Saving of Rights. Unless IFC otherwise notifies the
Company and without limiting the generality of Section 9.10, the right of IFC to
require compliance with any condition under this Agreement which IFC waives in
respect of any Disbursement shall be preserved for the purposes of any
subsequent Disbursement.
ARTICLE VII
PARTICULAR COVENANTS
Section 7.01. Affirmative Covenants. Unless IFC otherwise agrees, the
Company shall:
(a) carry out the Project in accordance with the Field Development
Plan, subject to such substantial modifications which have been previously
approved in writing by IFC, and otherwise conduct its business with due
diligence and efficiency and in accordance with sound engineering, financial and
business practices;
(b) cause the financing specified in the Financial Plan to be applied
exclusively to the Project and use its best efforts to cause the Physical
Completion Date to occur before December 31, 1999;
(c) promptly install and/or maintain the accounting and cost control
system and management information system referred to in Section 6.01 (b),
maintain books of account and other records adequate to reflect truly and fairly
the financial condition of the Company and the results of its operations
(including the progress of the Project) in conformity with International
Accounting Standards, consistently applied;
(d) Maintain a system for marketing and sales of oil produced from the
Project satisfactory to IFC and endeavor to find economic markets for all
natural gas produced by the Project in excess of requirements for field
operations and to sell such natural gas pursuant to a Gas Sales Agreement;
(e) during implementation of the Project, within 20 days of the end of
each calendar month commencing with the calendar month following the date of the
first Disbursement, deliver to IFC a monthly report, providing project
implementation and operations information, including, without limitation,
information on production of oil and natural gas from the License Area by field,
production and disposal of formation water by field, principal investments and
works carried out within the License Area, material works or services contracts
entered into, significant events relating to the environment, occupational
health and safety matters, and such other information as IFC may reasonably
request to be provided on such monthly basis.
(f) as soon as available but in any event within forty-five (45) days
after the end of each of the first three quarters of each Fiscal Year, deliver
to IFC:
(i) two (2) copies of the Company's complete financial
statements for such quarter prepared in accordance with
International Accounting Standards consistently applied,
certified by the chief financial officer of the Company;
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(ii) a calculation of the Debt Service Coverage Ratio as of the
first day of such quarter, certified by the chief financial
officer of the Company;
(iii) two (2) copies of a quarterly report, providing operations
information, including, without limitation, production of
oil and natural gas by well, production of formation water
by well, all investments and works carried out within the
License Area, contracts for works and services entered
into, a complete record of health, safety and environmental
incidents, details of all contracts in effect relating to
the sale and/or transportation of oil and natural gas from
the Project, a record of individual sales including
customer, quantities and price of both crude oil or natural
gas sold, as well as a report on any factors materially
affecting or which might materially affect the Company's
business and operations or its financial condition and
ability to meet its obligations under any Transaction
Document, and such other information as IFC may reasonably
request to be provided on such quarterly basis;
(iv) a statement of all financial transactions between the
Company and its directors, each Immediate Shareholder, any
other shareholder, each Sponsor, and any other of its
Affiliates and a certification by the chief financial
officer of the Company that those transactions were on the
basis of arms'-length arrangements and competitive bidding
in compliance with the requirements of this Agreement;
(v) a statement of the Company's Indebtedness for Borrowed
Money in respect of Hedging Transactions as of the last day
of such quarter;
(g) as soon as available but in any event within one hundred and twenty
(120) days after the end of each Fiscal Year, deliver to IFC:
(i) two (2) copies of its complete and audited financial
statements for such Fiscal Year (which are in agreement
with its books of account and prepared in accordance with
International Accounting Standards consistently applied),
together with the Auditors' audit report on them, all in
form satisfactory to IFC;
(ii) a copy of any management letter or other communication from
the Auditors to the Company or to its management
commenting, with respect to such Fiscal Year, on, among
other things, the adequacy of the Company's financial
control procedures, accounting systems and management
information system;
(iii) (following the Financial Completion Date) a calculation of
the Debt Service Coverage Ratio and Debt to Equity Ratio,
certified by the chief financial officer of the Company;
(iv) a report by the Auditors to the effect that, on the basis
of its audited financial statements, the Company was in
compliance with the financial covenants contained in
Section 7.01 (y) as of the end of the relevant Fiscal Year
or, as the case may be, detailing any non-compliance;
(v) a review by the Company of the operations of the Company
during such Fiscal Year, in a form satisfactory to IFC,
containing the information listed in Schedule 5;
<PAGE> 34
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(vi) a copy of the latest estimates and evaluation of the
Company's proven and probable reserves, as submitted by
CanArgo Energy Corporation to the United States Securities
and Exchange Commission, or a recognized securities
exchange or other securities regulatory authority together
with supporting information;
(vii) a statement by the Company of all financial transactions
between the Company and its directors, each Immediate
Shareholder, any other shareholder, each Sponsor, and any
other of its Affiliates during such Fiscal Year and a
certification by the chief financial officer of the Company
that those transactions were on the basis of arms'-length
arrangements and competitive bidding in compliance with the
provisions of this Agreement;
(viii) a statement of the Company's Indebtedness for Borrowed
Money in respect of Hedging Transactions as of the last day
of such Fiscal Year;
(h) deliver to IFC, no later than December 1 of each year, a copy of
the Project budget for the next Fiscal Year which has been approved by the
Company's board of directors;
(i) deliver to IFC, promptly following receipt, a copy of any
management letter or other communication sent by the Auditors (or any other
accountants retained by the Company) to the Company or its management in
relation to the Company's and/or the Project's financial, accounting and other
systems, management or accounts if not provided pursuant to subsection (g) (ii)
above;
(j) authorize, in the form of Schedule 4, the Auditors (whose fees and
expenses shall be for the account of the Company) to communicate directly with
IFC at any time regarding the Company's accounts and operations and furnish to
IFC a copy of such authorization;
(k) endeavor to notify IFC not less than fifteen (15) days before any
meeting of its shareholders, including the agenda of the meeting and permit a
representative of IFC, at IFC's discretion, to attend such meeting as an
observer;
(l) promptly deliver to IFC two (2) copies of all notices, reports and
other communications of the Company to its shareholders and endeavor to promptly
deliver to IFC the minutes of all shareholders' meetings;
(m) promptly provide to IFC such information as IFC from time to time
reasonably requests about the Company, its assets and the Project;
(n) permit representatives of IFC and the Independent Engineer to visit
any of the premises where the business of the Company is conducted and to have
access to its books of account and records;
(o) promptly notify IFC of any proposed change in the nature or scope
of the Project, the Field Development Plan, the Minimum Work Program, or the
business or operations of the Company, and of any event or condition which might
materially and adversely affect the carrying out of the Project or the carrying
on of the Company's business or operations including, without limitation any
Event of Default or Potential Event of Default under any Transaction Document;
<PAGE> 35
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(p) promptly notify IFC as soon as it becomes aware of any litigation
or administrative proceedings before any Authority or arbitral body which does
or may materially and adversely affect the Company, its assets or the Project or
the ability of the Company to perform and observe its obligations under any
Transaction Document;
(q) take all actions necessary to comply, and cause the Operator to
comply, with (A) the "ecological passport", issued by the Georgian Ministry of
Environmental Protection and all other applicable environmental and occupational
health and safety requirements of Georgia and any local authorities, (B)
applicable World Bank environmental policies, occupational health and safety
guidelines, (C) the environmental and social actions specified in the
Environmental Review Summary, and (D) the Supplemental Archaeological Policy and
Procedures;
(r) [intentionally omitted];
(s) within one hundred and twenty (120) days after the end of each
Fiscal Year, deliver to IFC an annual monitoring report, confirming compliance
by the Company and by the Operator with the requirements of Section 7.01(r)
above or, as the case may be, detailing any non-compliance together with the
action being taken to ensure compliance;
(t) maintain a full-time project manager acceptable to IFC, who shall
be based mostly in Georgia, and provide to IFC a copy of such project manager's
employment contract to the extent materially changed from the prior one
submitted to IFC;
(u) if PriceWaterhouseCoopers cease to be the auditors of the Company
for any reason, appoint and maintain as the auditors of the Company a firm of
independent public accountants satisfactory to IFC and, within thirty (30) days
after such appointment, deliver to IFC a copy of an authorization to such firm
in the form of Schedule 4;
(v) obtain and maintain in force (or where appropriate, promptly renew)
all Authorizations necessary for carrying out the Project and the Company's
business and operations generally and the performance of the Company's
obligations under the Transaction Documents;
(w) perform and observe all the conditions and restrictions contained
in, or imposed on the Company by, any of the Authorizations referred to in
7.01(v);
(x) grant and assign the IFC Security to IFC and from time to time,
execute, acknowledge and deliver, or cause to be executed, acknowledged and
delivered, such further instruments as may reasonably be requested by IFC for
perfecting or maintaining in full force and effect the perfection of the IFC
Security or for re-registering the IFC Security or otherwise to comply with the
Company's obligations under the Transaction Documents;
(y) maintain at all times, commencing with the Financial Completion
Date:
(i) a Debt Service Coverage Ratio of at least 1.6;
(ii) a Current Ratio of at least 1.3; and
(iii) a Debt to Equity Ratio of less than 50:50;
<PAGE> 36
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(z) maintain the credit balance in the Debt Service Reserve Account at
all times equal to the Debt Service Reserve Account Requirement and replenish,
if necessary, the balance in such Account within five Business Days of the date
on which IFC notifies the Company of the Loan Interest Rate applicable to any
Interest Period, provided that, if the balance of the Debt Service Reserve
Account is at any time greater that the Debt Service Reserve Account
Requirement, the Company may, in a written notice to IFC stating the amount by
which the Debt Service Reserve Account is overfunded, request IFC to direct the
Bank to transfer the amount of such excess to the Revenue Account, and IFC
agrees to give such direction within five Business Days of such request or such
later date as shall be specified therein;
(aa) require purchasers of its share of the oil produced from the
Project and purchasers of natural gas under any Gas Sales Agreement to make all
payments in Dollars on purchases of such oil or natural gas, within 45 days of
lifting, to the Revenue Account and if, notwithstanding the Company's
directions, a purchaser makes any such payment to any other account of the
Company (or of any of the Sponsors or Immediate Shareholders), deposit or cause
to be deposited into the Revenue Account an amount equal to that payment;
(bb) use funds available in the Revenue Account only for the following
purposes and in the following order of priority, and otherwise subject to the
terms and conditions of this Agreement:
(i) first, to replenish the Debt Service Reserve Account, if
required, so that the balance on deposit therein is at all
times equal to the Debt Service Reserve Account
Requirement;
(ii) second, regular operating expenses of the Project,
including NOC Direct Overhead Charges and NOC
Administration Overhead Charges as permitted by Section
7.02(x) and (y);
(iii) third, to make principal and interest payments on the Loan
as and when they come due, and to pay any fees in
connection with the Loan as and when they come due;
(iv) fourth, to meet Project capital expenditure commitments in
accordance with the Minimum Work Program;
(v) fifth, to meet capital expenditure commitments in
accordance with the Field Development Plan as modified by
the Annual Budgets approved by the Company's Board of
Directors;
(vi) sixth, to any other payment permitted under this Agreement.
Section 7.02. Negative Covenants. Unless IFC otherwise agrees in
writing, the Company shall not:
(a) directly or indirectly, declare or pay any dividend or make any
distribution on its share capital, or purchase, redeem or otherwise acquire any
shares of the Company or any option over them (each such action, a "Restricted
Payment"), if an Event of Default or Potential Event of Default has occurred and
is continuing;
(b) make any Restricted Payment unless:
(i) the Financial Completion Date has occurred;
<PAGE> 37
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(ii) after taking into account and giving effect to each such
Restricted Payment, the balance in the Debt Service Reserve
Account is at least equal to the Debt Service Reserve
Account Requirement;
(iii) after taking into account and giving effect to each such
Restricted Payment, the Debt Service Coverage Ratio, Debt
to Equity Ratio and Current Ratio are at the respective
levels required under Section 7.01(x);
(c) in any Fiscal Year, make any payment, whether by way of repayment
of the Sponsor Loan or otherwise, to any Immediate Shareholder, Sponsor, or any
other Affiliate, except to the extent of funds available therefor in the Revenue
Account in accordance with Section 7.01(bb) and to the extent permitted under
Subsection (b) above, and otherwise in accordance with the provisions of the
Transaction Documents;
(d) in any Fiscal Year, incur expenditures or commitments for
expenditures for fixed or other non-current assets, other than those required
for carrying out the Project or necessary for repairs or replacements essential
to the Company's business or operations, in excess of an aggregate amount
equivalent to $500,000;
(e) incur, assume or permit to exist any indebtedness except:
(i) the Loan;
(ii) other Indebtedness for Money Borrowed contemplated by the
Financial Plan;
(iii) Short Term Debt incurred in the ordinary course of business
in an amount not to exceed $2,000,000;
(iv) subordinated shareholder loans on terms and conditions
substantially in the form of Schedule 7;
(f) except as permitted under a Hedging Facility, enter into any
Hedging Transaction or assume the obligations of any party to any Hedging
Transaction;
(g) enter into any agreement or arrangement to guarantee or, in any way
or under any condition, to become obligated for all or any part of any financial
or other obligation of another person;
(h) create or permit to exist any Lien on any property, revenues or
other assets, present or future, of the Company, other than the IFC Security;
(i) enter into any transaction except in the ordinary course of
business on the basis of arm's-length arrangements (including, without
limitation, transactions whereby the Company might pay more than the ordinary
commercial price for any purchase or might receive less than the full ex-works
commercial price (subject to normal trade discounts) for its products) and, in
the case of transactions with Affiliates, on the basis of competitive bidding;
(j) establish any sole and exclusive purchasing or sales agency;
<PAGE> 38
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(k) enter into any partnership, profit-sharing or royalty agreement or
other similar arrangement whereby the Company's income or profits are, or might
be, shared with any other person;
(l) enter into any management contract or similar arrangement, whereby
its business or operations are managed by any other person;
(m) form or have any Subsidiary;
(n) make or permit to exist loans, advances or investments to or in any
person or enterprise, or make or permit to exist deposits with any person or
enterprise other than commercial bank deposits in the ordinary course of
business which may be invested only in short term investment grade marketable
securities acquired solely to give temporary employment to its idle funds, and
provided, further, that funds in the Debt Service Revenue Account shall only be
invested in Permitted Investments;
(o) change its Memorandum and Articles of Association in any manner
which would be inconsistent with the provisions of any Transaction Document;
(p) change its Fiscal Year;
(q) change the nature or scope of the Project or change the nature of
its business or operations;
(r) sell, transfer, lease or otherwise dispose of all or a substantial
part of its assets (whether in a single transaction or in a series of
transactions, related or otherwise) unless such assets are replaced by assets
("Replacement Assets") of the same or higher value and useful economic life and
unless, as a condition precedent to any such sale, transfer, lease, or
disposition, the Company takes all necessary steps to ensure, and delivers an
opinion of counsel acceptable to IFC (if IFC so requires) to the effect that,
any Replacement Assets will become part of the IFC Security;
(s) sell, farm-out or otherwise assign to any party its interest under
the Production Sharing Contract and/or the Production and Exploration License or
any agreement relating thereto;
(t) undertake or permit any merger, consolidation or reorganization;
(u) terminate, amend or grant any waiver in respect of any provision of
any Transaction Document;
(v) prepay (whether voluntarily or involuntarily) or repurchase any
Long- term Debt (other than the Loan) pursuant to any provision of any agreement
or note in respect of that Long-term Debt, unless:
(i) that Long-term Debt is refinanced using new Long-term Debt
on equivalent terms or terms (as to interest rate and
tenor) more favorable to the Company; or
(ii) if IFC so requires, the Company contemporaneously prepays a
proportionate amount of the Loan;
<PAGE> 39
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(v) enter into any agreement or arrangement to acquire by lease the use
of any property or equipment of any kind, except leases in respect of property
or equipment with respect to which the total annual lease payments does not
exceed the equivalent of $1,000,000; or
(w) use the proceeds of any Disbursement in the territories of any
country which is not a member of IFC or the World Bank or for reimbursements of
expenditures in those territories or for goods produced in or services supplied
from those territories.
(x) make any payment of NOC Direct Overhead Charges in any Fiscal Year
unless the aggregate of all such payments does not exceed, in Fiscal Year 1998,
US$1.2 million, and in any Fiscal Year thereafter, US$1.2 million, escalated at
2% annually. Upon request by IFC, the Company shall provide documentation and
justification for any payments made in compliance with this Section 7.02(x).
(y) make any payment of NOC Administration Overhead Charges in any
Fiscal Year unless the aggregate of all such payments does not exceed, in Fiscal
Year 1998, US$0.5 million, and in any Fiscal Year thereafter, US$0.5 million,
escalated at 2% annually. Upon request by IFC, the Company shall provide
documentation and justification for any payments made in compliance with this
Section 7.02(y).
Section 7.03. Insurance. Unless IFC otherwise agrees, the Company
shall:
(a) insure and keep insured with financially sound and reputable
insurer or insurers all its assets and business which can be insured, against
all insurable losses, on a reinstatement basis utilizing current full
replacement values, including, without limitation, the insurance specified in
Schedule 6 and any other insurance required by law; all such insurance policies
shall be in the English language and governed by New York law;
(b) punctually pay any premium, commission and any other amounts
necessary for effecting and maintaining in force each insurance policy;
(c) ensure that every insurance and reinsurance policy on its assets
and for business interruption or delayed start-up cannot be terminated by the
insurer for any reason (including failure to pay the premium or any other
amount) unless both IFC and the Company receive at least forty-five (45) days
notice;
(d) ensure that every insurance policy on its assets which are the
subject of the IFC Security and for business interruption or delayed start-up
names IFC as sole loss payee for any claim in excess of five hundred thousand
Dollars (US$500,000);
(e) ensure that IFC and all contractors working at the Project site
(but only with respect to construction work) are named as additional named
insured, on all public liability policies;
(f) not do or omit to do, or permit to be done or not done, anything
which might prejudice the Company's, right to claim or recover under any
insurance policy;
(g) deliver to IFC:
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(i) within thirty (30) days after any insurance policy is
issued to the Company, a copy of that policy incorporating
any loss payee provisions required under subsection (d)
above (unless that policy has already been provided to IFC
pursuant to Section 6.01(c));
(ii) not less than ten (10) days prior to the expiry date of any
insurance policy (or, for insurance with multiple renewal
dates, not less than ten (10) days prior to the expiry date
of the policy on the principal asset), a certificate of
renewal from the insurer, insurance broker or agent
confirming the renewal of that policy and the renewal
period, the premium, the amounts insured for each asset or
item and any changes in terms or conditions from the
policy's issue date or last renewal and confirmation from
the insurer that provisions naming IFC as loss payee remain
in effect; and
(iii) any other information or documents on each insurance policy
IFC requests from time to time;
(h) notify IFC as soon as possible of any event entitling the Company
to claim for an aggregate amount exceeding the equivalent of five hundred
thousand Dollars ($500,000) under any one or more insurance policies;
(i) promptly notify the relevant insurer of any claim by the Company
under any policy written by that insurer and diligently pursue that claim; and
(j) not vary, rescind, cancel, terminate or cause a material change to
any insurance policy, nor do or omit to do, or permit to be done or not done,
anything which might prejudice the Company's right to claim or recover under any
insurance policy.
Section 7.04. Application of Insurance Proceeds. (a) At its discretion,
IFC may remit the proceeds of any insurance paid to it to the Company to repair
or replace the relevant damaged assets or may apply such proceeds to prepay all
or any part of the Loan (or any other amounts owing to IFC).
(b) The Company shall use any insurance proceeds it receives (whether
from IFC or directly from the insurers) for loss of or damage to any asset
solely to replace or repair that asset.
Section 7.05. Document Taxes. (a) The Company shall pay all taxes
(including stamp taxes), duties, fees or other charges payable on or in
connection with the execution, issue, delivery, registration or notarization of
the Transaction Documents, and any other documents related to this Agreement.
(b) The Company shall, upon notice from IFC, reimburse IFC or its
assigns for any such taxes, duties, fees or other charges paid by IFC or its
assigns.
<PAGE> 41
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ARTICLE VIII
EVENTS OF DEFAULT
Section 8.01. Acceleration after Default. If any Event of Default
occurs and is continuing (whether it is voluntary or involuntary, or results
from operation of law or otherwise), IFC may, by notice to the Company, require
the Company to repay the Loan or such part of the Loan as is specified in that
notice. On receipt of any such notice, the Company shall immediately repay the
Loan (or that part of the Loan specified in that notice) and all interest
accrued on it and any other amounts then payable under this Agreement. The
Company waives any right it might have to further notice, presentment, demand or
protest in respect of that demand for immediate payment.
Section 8.02. Events of Default. It shall be an Event of Default if:
(a) the Company fails to pay when due any part of the principal of the
Loan or any interest on the Loan and such failure continues for a period of five
(5) days;
(b) the Company fails to observe or perform any of its obligations
under this Agreement (other than for the payment of the principal of, or
interest on, the Loan), any other Transaction Document or any other agreement
between the Company and IFC, or any other party fails to observe or perform any
of its obligations under any Transaction Document, and any such failure
continues for a period of fifteen (15) days or, in the case of such a failure
with respect to Section 7.01(y) only, thirty (30) days, after IFC notifies the
Company of that failure;
(c) any representation or warranty made in Article V, in connection
with the execution and delivery of this Agreement, or in connection with any
request for Disbursement under this Agreement, or in any other Transaction
Document, is found to be incorrect in any material respect;
(d) any Authority condemns, nationalizes, seizes, or otherwise
expropriates all or any substantial part of the property or other assets of the
Company or of its share capital, or assumes custody or control of such property
or other assets or of the business or operations of the Company or of its share
capital, or takes any action for the dissolution or disestablishment of the
Company or any action that would prevent the Company or its officers from
carrying on all or a substantial part of its business or operations;
(e) a decree or order by a court is entered against the Company:
(i) adjudging the Company bankrupt or insolvent;
(ii) approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of,
or in respect of, the Company under any applicable law;
(iii) appointing a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or
of any substantial part of its property or other assets; or
(iv) ordering the winding up or liquidation of its affairs;
or any petition is filed seeking any of the above and is not
dismissed within thirty (30) days;
(f) the Company:
(i) requests a moratorium or suspension of payment of debts
from any court;
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(ii) institutes proceedings or takes any form of corporate
action to be liquidated, adjudicated bankrupt or insolvent;
(iii) consents to the institution of bankruptcy or insolvency
proceedings against it;
(iv) files a petition or answer or consent seeking
reorganization or relief under any applicable law, consents
to the filing of any such petition or to the appointment of
a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or of any
substantial part of its property;
(v) makes a general assignment for the benefit of creditors; or
(vi) admits in writing its inability to pay its debts generally
as they become due or otherwise becomes insolvent;
(g) an attachment or analogous process is levied or enforced upon or
issued against any of the assets of the Company for an amount in excess of the
equivalent of five hundred thousand Dollars ($500,000) and is not discharged
within thirty (30) days;
(h) any other event occurs which under any applicable law would have an
effect analogous to any of those events listed in subsections (e), (f) and (g)
above;
(i) any of the events specified in subsections (e), (f), (g) and (h)
above occur with respect to any Sponsor so long as the Guaranty is in effect;
(j) the Company fails to pay any of its Debt (other than the Loan)
which is outstanding under, or to perform any of its obligations under, any
agreement pursuant to which there is outstanding any Debt of the Company in an
amount exceeding five hundred thousand Dollars ($500,000), and such failure
continues for more than any applicable period of grace;
(k) any Authorization necessary for the Company to perform and observe
its obligations under any Transaction Document is not obtained when required or
is rescinded, terminated, lapses or otherwise ceases to be in full force and
effect, including in respect of the remittance to IFC or its assigns in Dollars
of any amounts payable under any Transaction Document and is not restored or
reinstated within thirty (30) days of notice by IFC to the Company requiring
that restoration or reinstatement;
(l) any provision of any Security Document is revoked, terminated or
ceases to be in full force and effect or ceases to provide the security
intended, without, in each case, the prior consent of IFC, or performance of the
obligations under any such document becomes unlawful or any such document is
declared to be void or is repudiated or its validity or enforceability at any
time is challenged by any person unless, in the case only of a repudiation or
challenge, such repudiation or challenge is withdrawn within thirty (30) days of
IFC's notice to the Company requiring that withdrawal and pending such
withdrawal such repudiation or challenge has no effect;
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(m) any provision of any Transaction Document (other than a Security
Document) is materially modified, revoked, terminated or ceases to be in full
force and effect without, in each case, the prior consent of IFC, or performance
of the obligations under any such document becomes unlawful or any such document
is declared to be void or is repudiated or its validity or enforceability at any
time is challenged by any person and such provision is not restored or replaced
by a provision acceptable to IFC, or such repudiation or challenge is not
withdrawn within thirty (30) days of IFC's notice to the Company requiring that
restoration, replacement or withdrawal and pending such withdrawal such
repudiation or challenge has no effect;
(n) if, after the Financial Completion Date, the balance in the Debt
Service Reserve Account is lower than the Debt Service Reserve Account
Requirement and is not made up to such amount within any time period agreed
pursuant to the Retention Account Agreement;
Section 8.03. Bankruptcy. If the Company is liquidated or declared
bankrupt, the Loan, all interest accrued on it and any other amounts payable
under this Agreement will become immediately due and payable without any
presentment, demand, protest or notice of any kind, all of which the Company
waives.
Section 8.04. Notice of Events. If any Event of Default or Potential
Event of Default occurs, the Company shall immediately notify IFC by facsimile
or telex specifying the nature of such Event of Default or Potential Event of
Default and any steps the Company is taking to remedy it.
Section 8.05. Disclosure of Information. (a) IFC may disclose to any
person for the purpose of exercising any power, remedy, right, authority, or
discretion under this Agreement or any other Transaction Document in connection
with an Event of Default, any documents or records of, or information about, any
Transaction Document, or the assets, business or affairs of the Company.
(b) The Company acknowledges and agrees that, notwithstanding the terms
of any other agreement between the Company and IFC, a disclosure of information
by IFC in the circumstances contemplated by this Section does not violate any
duty owed to the Company or any agreement between IFC and the Company.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Notices. Any notice, request or other communication to be
given or made under this Agreement shall be in writing. Subject to Sections
6.01(m) and 7.05, the notice, request or other communication may be delivered by
hand, airmail, facsimile, established courier service or telex to the party's
address specified below or at such other address as such party notifies to the
other party from time to time and will be effective upon receipt or, in the case
of delivery by hand or by established courier service, upon refusal to accept
delivery.
For the Company:
<PAGE> 44
- 39 -
Ninotsminda Oil Company
P.O. Box 291
Commerce House, Les Banques
St. Peter Port, Guernsey, GY1 3RR
British Isles
Attention: Chairman
Facsimile: 44-1481-729-982
With a copy sent to:
Ninotsminda Oil Company
Suite 1580, 727 - 7th Avenue S.W.
Calgary, Alberta, Canada
T2P 0Z5
Attention: Finance Director
Facsimile: (403) 777-1578
For IFC:
International Finance Corporation
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
United States of America
Attention: Director, Oil, Gas and Mining Department
Facsimile: (202) 974-4322
With a copy (in the case of notices relating to payments) sent to the
attention of the Manager, Accounting Division, at:
Facsimile: (202) 974-4371
Section 9.02. English Language. All documents to be furnished or
communications to be given or made under this Agreement shall be in the English
language or, if in another language, shall, if IFC so requests, be accompanied
by a translation into English satisfactory to IFC certified by a representative
of the Company, which translation shall be the governing version between the
Company and IFC.
Section 9.03. Expenses. The Company shall pay to IFC or as IFC may
direct:
<PAGE> 45
- 40 -
(a) the fees and expenses of IFC's external counsel in Georgia and New
York incurred in connection with:
(i) the preparation of the investment by IFC provided for under
this Agreement;
(ii) the preparation and/or review, execution and, where
appropriate, registration of the Transaction Documents and
any other documents related to them;
(iii) the giving of any legal opinions required by IFC under any
Transaction Document;
(iv) the administration by IFC of the investment provided for in
this Agreement or otherwise in connection with any
amendment, supplement or modification to, or waiver under,
any of the Transaction Documents;
(v) the registration (where appropriate) and the delivery of
the evidences of indebtedness relating to the Loan and its
disbursement;
(vi) the occurrence of any Event of Default or Potential Event
of Default; and
(b) the costs and expenses incurred by IFC in relation to the
enforcement or protection or attempted enforcement or protection of its rights
under any Transaction Document, or the exercise of its rights or powers
consequent upon or arising out of the occurrence of any Event of Default or
Potential Event of Default, including legal and other professional consultants'
fees on a full indemnity basis.
Section 9.04. Financial Calculations. (a) All financial calculations to
be made under, or for the purposes of, this Agreement shall be determined in
accordance with accounting principles applied on a consistent basis and, except
as otherwise required to conform to the definitions contained in Article I or
any other provisions of this Agreement, shall be calculated from the then most
recently issued quarterly financial statements which the Company is obligated to
furnish to IFC under Section 7.01 (f).
(b) If the relevant quarterly financial statements are in respect of
the last quarter of a Fiscal Year then, at IFC's option, such calculations may
instead be made from the audited financial statements for the relevant Fiscal
Year.
(c) If any material adverse change in the financial condition of the
Company after the end of the period covered by the relevant financial statements
has occurred, such material adverse change shall also be taken into account in
calculating the relevant figures.
Section 9.05. Termination of Agreement. This Agreement shall continue
in force until all monies payable under it have been fully paid in accordance
with its provisions.
Section 9.06. Applicable Law and Jurisdiction (a) This Agreement is
governed by, and shall be construed in accordance with, the laws of the State of
New York, United States of America.
<PAGE> 46
- 41 -
(b) The Company irrevocably agrees that any legal action, suit or
proceeding arising out of or relating to this Agreement or any other Transaction
Document to which it is party may be brought by IFC in the courts of the State
of New York or of the United States of America located in the Southern District
of New York. Final judgment against the Company in any such action, suit or
proceeding shall be conclusive and may be enforced in any other jurisdiction, by
suit on the judgment, a certified or exemplified copy of which shall be
conclusive evidence of the judgment, or in any other manner provided by law.
(c) By the execution and delivery of this Agreement, the Company
irrevocably submits to the non-exclusive jurisdiction of any such court in any
such action, suit or proceeding and designates, appoints and empowers
Corporation Services Company, Two World Trade Center, New York, NY as its
authorized agent to receive for and on its behalf service of any summons,
complaint or other legal process in any such action, suit or proceeding in the
State of New York.
(d) Nothing in this Agreement shall affect the right of IFC to commence
legal proceedings or otherwise sue the Company in any other jurisdiction, or
concurrently in more than one jurisdiction, or to serve process, pleadings and
other legal papers upon the Company in any manner authorized by the laws of any
such jurisdiction.
(e) As long as this Agreement remains in force, the Company shall
maintain a duly appointed agent for the service of summons, complaint and other
legal process in New York, New York, United States of America, for purposes of
any legal action, suit or proceeding IFC may bring in respect of this Agreement
or any other Transaction Document to which it is a party. The Company shall keep
IFC advised of the identity and location of their respective agent.
(f) The Company also irrevocably consents, if for any reason its
authorized agent for service of process of summons, complaint and other legal
process in any such action, suit or proceeding is not present in New York, New
York, to service of such papers being made out of those courts by mailing copies
of the papers by registered United States air mail, postage prepaid, to the
Company's address specified in Section 9.01. In such a case, IFC shall also send
by telex or facsimile, or have sent by telex or facsimile, a copy of the papers
to the Company.
(g) Service in the manner provided in subsection (f) above in any such
action, suit or proceeding will be deemed personal service, will be accepted by
the Company as such and will be valid and binding upon the Company for all
purposes of any such action, suit or proceeding.
(h) The Company irrevocably waives to the fullest extent permitted by
applicable law:
(i) any objection which it may have now or in the future to the
laying of the venue of any such action, suit or proceeding
in any court referred to in this Section;
(ii) any claim that any such action, suit or proceeding has been
brought in an inconvenient forum; and
(iii) its right of removal of any matter commenced by IFC in the
courts of the State of New York to any court of the United
States of America.
(i) To the extent that the Company may be entitled in any jurisdiction
to claim for itself or its assets immunity in respect of its obligations under
this Agreement or any other Transaction Document to which it is party
<PAGE> 47
- 42 -
from any suit, execution, attachment (whether provisional or final, in aid of
execution, before judgment or otherwise) or other legal process or to the extent
that in any jurisdiction such immunity (whether or not claimed) may be
attributed to it or its assets, the Company irrevocably agrees not to claim and
irrevocably waive such immunity to the fullest extent permitted by the laws of
such jurisdiction.
(j) The Company hereby acknowledges that IFC shall be entitled under
applicable law, including the provisions of the International Organizations
Immunities Act, to immunity from a trial by jury in any action, suit or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby or any other Transaction Document to which it is a party,
brought against IFC in any court of the United States of America. The Company
hereby waives any and all rights to demand a trial by jury in any action, suit
or proceeding arising out of or relating to this Agreement or any other
Transaction Document to which it is a party or the transactions contemplated by
this Agreement or such Transaction Documents, brought against IFC in any forum
in which IFC is not entitled to immunity from a trial by jury.
(k) To the extent that the Company may, in any suit, action or
proceeding brought in any of the courts referred to in paragraph (b) above or
elsewhere arising out of or in connection with this Agreement or any other
Transaction Document to which it is party, be entitled to the benefit of any
provision of law requiring IFC in such suit, action or proceeding to post
security for the costs of the Company (cautio judicatum solvi), or to post a
bond or to take similar action, the Company hereby irrevocably waives such
benefit, in each case to the fullest extent now or in the future permitted under
the laws of the jurisdiction in which such court is located.
Section 9.07. Successors and Assigns. This Agreement binds and benefits
the respective successors and assigns of its parties. However the Company may
not assign or delegate any of its rights or obligations under this Agreement
without IFC's consent.
Section 9.08. Amendment. Any amendment of any provision of this
Agreement shall be in writing and signed by the parties.
Section 9.09. Counterparts. This Agreement may be executed in several
counterparts, each of which is an original, but all of which together constitute
one and the same agreement.
Section 9.10. Remedies and Waivers. No failure or delay by IFC in
exercising any power, remedy, discretion, authority or other rights under this
Agreement shall waive or impair that or any other right of IFC. No single or
partial exercise of such a right shall preclude its additional or future
exercise. No such waiver shall waive any other right under this Agreement. All
waivers or consents given under this Agreement shall be in writing.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
in their respective names as of the date first above written.
NINOTSMINDA OIL COMPANY
By: /s/ MICHAEL BINNION
--------------------------------
Authorized Representative
INTERNATIONAL FINANCE CORPORATION
By: /s/ MARIA DA GRACA DOMINGUES
--------------------------------
Authorized Representative
<PAGE> 48
- 43 -
SCHEDULE 1
Page 1 of 3
FORM OF REQUEST FOR DISBURSEMENT [(LOAN)]
(See Sections 3.02 and [6.06)]
[COMPANY LETTERHEAD]
[Date]
International Finance Corporation
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
United States of America
Attention: Director, Oil, Gas and Mining Department
Ladies and Gentlemen:
Investment No. 8138
Request for Loan Disbursement No. [ ]*
1. Please refer to the Convertible Loan Agreement (the "Convertible Loan
Agreement") dated December 17, 1998 between Ninotsminda Oil Company (the
"Company") and International Finance Corporation ("IFC"). Terms defined in the
Convertible Loan Agreement have their defined meanings whenever used in this
request.
2. The Company irrevocably requests the disbursement on ____________, 1998
(or as soon as practicable thereafter) of the amount of ____________
(____________) under the Loan (the "Disbursement") in accordance with the
provisions of Section 3.02 of the Convertible Loan Agreement. You are requested
to pay such amount to the account in [New York] of [Name of Company], Account
No. ____________ at [Name and Address of Bank].
- -------------------------
* To correspond with number of the Disbursement Request. SEC Schedule 1.
<PAGE> 49
- 44 -
SCHEDULE 1
Page 2 of 3
3. There is enclosed a signed[, stamped,] but undated receipt for the
amount of the Disbursement. The Company authorizes IFC to date such receipt with
the date of actual disbursement by IFC.
4. For the purpose of Sections [6.02 and 6.03] of the Convertible Loan
Agreement, the Company further certifies as follows:
(a) no Event of Default and no Potential Event of Default has occurred
and is continuing;
(b) the proceeds of the Disbursement are at the date of this request
needed by the Company for the purpose of the Project, or will be needed for such
purpose within three (3) months of such date;
(c) since the date of the Convertible Loan Agreement nothing has
occurred which might materially and adversely affect the carrying out of the
Project or the Company's business prospects or financial condition, or make it
improbable that the Company will be able to fulfill any of its obligations under
the Convertible Loan Agreement;
(d) since [insert date] [the date of the Convertible Loan Agreement]
the Company has not incurred any material loss or liability (except such
liabilities as may be incurred by the Company in accordance with Section 7.02 of
the Convertible Loan Agreement);
(e) the representations and warranties made in Article VI of the
Convertible Loan Agreement are true on the date of this request and will be true
on the date of Disbursement with the same effect as if such representations and
warranties had been made on and as of each such date;
(f) the proceeds of that Disbursement are not in reimbursement of, or
to be used for, expenditures in the territories of any country which is not a
member of IFC or the World Bank or for goods produced in or services supplied
from any such country;
(g) after giving effect to the Disbursement, the Company will not be in
violation of:
<PAGE> 50
- 45 -
SCHEDULE 1
Page 3 of 3
(i) its [Memorandum and Articles of Association]/[Charter];
(ii) any provision contained in any document to which the
Company is a party (including the Convertible Loan
Agreement) or by which the Company is bound; or
(iii) any law, rule or regulation, directly or indirectly,
limiting or otherwise restricting the Company's borrowing
power or authority or its ability to borrow; and
The above certifications are effective as of the date of this Request
for Disbursement and shall continue to be effective as of the date of the
Disbursement. If any of these certifications is no longer valid as of or prior
to the date of the requested Disbursement, the Company undertakes to immediately
notify IFC.
Yours truly,
NINOTSMINDA OIL COMPANY
By ______________________________
Authorized Representative
Copy to: Manager, Accounting Division
International Finance Corporation
<PAGE> 51
- 46 -
SCHEDULE 2
Page 1 of 1
FORM OF LOAN DISBURSEMENT RECEIPT
(See Section 3.02 of the Convertible Loan Agreement)
[COMPANY LETTERHEAD]
International Finance Corporation
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
United States of America
Attention: Manager, Accounting Division
Ladies and Gentlemen:
Investment No. 8138
Disbursement Receipt No. [ ]* (Loan)
We, Ninotsminda Oil Company, hereby acknowledge receipt on the date hereof, of
the sum of $________ disbursed to us by International Finance Corporation
("IFC") under the Loan of $________ provided for in the Convertible Loan
Agreement dated December 17, 1998 between our company and International Finance
Corporation.
Yours truly,
NINOTSMINDA OIL COMPANY
By _________________________________
Authorized Representative**
- --------------------
** To correspond with number of the Disbursement request. See Schedule
1.
*** As named in the Company's Certificate of Incumbency and Authority
(see Schedule [4]).
<PAGE> 52
- 47 -
SCHEDULE 3
Page 1 of 2
FORM OF CERTIFICATE OF INCUMBENCY AND AUTHORITY
(See Section [5.01(n))
[COMPANY LETTERHEAD]
[Date]
International Finance Corporation
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
United States of America
Attention: Director, Oil, Gas and Mining Department
Ladies and Gentlemen:
Certificate of Incumbency and Authority
With reference to the Convertible Loan Agreement between us, dated
December 17, 1998 (the "Convertible Loan Agreement"), I, the undersigned
[Chairman/Director] of Ninotsminda Oil Company, (the "Company"), duly authorized
to do so, hereby certify that the following are the names, offices and true
specimen signatures of the persons each of whom are, and will continue to be,
authorized:
(a) to sign on behalf of the Company the requests for the disbursement
of funds provided for in Section [3.02] of the Convertible Loan Agreement;
(b) to sign the certifications provided for in Section 6.03 of the
Convertible Loan Agreement; and
(c) to take any other action required or permitted to be taken, done,
signed or executed under the Convertible Loan Agreement or any other agreement
to which IFC and the Company may be parties.
<PAGE> 53
- 48 -
SCHEDULE 3
Page 2 of 2
* Name Office Specimen Signature
______ __________ __________________
______ __________ __________________
______ __________ __________________
You may assume that any such person continues to be so authorized until
you receive authorized written notice from the Company that they, or any of
them, is no longer so authorized.
Yours truly,
NINOTSMINDA OIL COMPANY
By ________________________
[Chairman/Director]
- -------------------------
** Designations may be changed by the Company at any time by issuing a
new certificate of Incumbency and Authority authorized by the Board of
Directors of the Company.
<PAGE> 54
- 49 -
SCHEDULE 4
Page 1 of 2
FORM OF LETTER TO COMPANY'S AUDITORS
[COMPANY LETTERHEAD]
(See Sections [5.01(m)] and [6.01(h)] of
the Convertible Loan Agreement)
[DATE]
[NAME OF AUDITORS]
[ADDRESS]
Ladies and Gentlemen:
We hereby authorize and request you to give to International Finance
Corporation of 2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, United
States of America ("IFC"), all such information as IFC may reasonably request
with regard to the financial statements of the undersigned Company, both audited
and unaudited. We have agreed to supply that information and those statements
under the terms of an Convertible Loan Agreement between the undersigned Company
and IFC dated December 17, 1998 (the "Convertible Loan Agreement"). For your
information we enclose a copy of the Convertible Loan Agreement.
We authorize and request you to send two copies of the audited accounts
of the undersigned Company to IFC to enable us to satisfy our obligation to IFC
under Section [6.01 (e)(i)] of the Convertible Loan Agreement. When submitting
the same to IFC, please also send, at the same time, a copy of your full report
on such accounts in a form reasonably acceptable to IFC.
Please note that under Section [6.01 (e) (ii) and (iii)] of the
Convertible Loan Agreement, we are obliged to provide IFC with:
<PAGE> 55
- 50 -
SCHEDULE 4
Page 2 of 2
(a) a copy of any management letter or other communication from you to
the Company or its management commenting on, among other things, the adequacy of
the Company's financial control procedures and accounting and management
information systems; and
(b) a report by you certifying that, based upon its audited financial
statements, the Company was in compliance with the financial covenants contained
in Section [6.02] of the Convertible Loan Agreement as at the end of the
relevant Fiscal Year or, as the case may be, detailing any non-compliance.
Please also submit each such communication and report to IFC with the
audited accounts.
For our records, please ensure that you send to us a copy of every
letter which you receive from IFC immediately upon receipt and a copy of each
reply made by you immediately upon the issue of that reply.
Yours truly,
NINOTSMINDA OIL COMPANY
By ______________________________
Authorized Representative
Enclosure
cc: Director
[Name of Department]
International Finance Corporation
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
United States of America
<PAGE> 56
- 51 -
SCHEDULE 5
Page 1 of 1
INFORMATION TO BE INCLUDED IN ANNUAL REVIEW OF
OPERATIONS
(See Section 7.01(f)(v) of the Convertible Loan Agreement)
[1) Sponsors and Shareholdings. Information on significant changes in share
ownership of Company, the reasons for such changes, and the identity of
major new shareholders.
2) Country Conditions and Government Policy. Report on any material changes
in local conditions, including government policy changes, that directly
affect the Company (e.g. changes in government economic strategy,
taxation, foreign exchange availability, price controls, and other areas
of regulations.)
3) Management and Technology. Information on significant changes in (i) the
Company's senior management or organizational structure, and (ii)
technology used by the Company, including technical assistance
arrangements.
4) Corporate Strategy. Description of any changes to the Company's
corporate or operational strategy, including changes in products, degree
of integration, and business emphasis.
5) Markets. Brief analysis of changes in Company's market conditions (both
domestic and export), with emphasis on changes in market share and
degree of competition.
6) Operating Performance. Discussion of major factors affecting the year's
financial results (sales by value and volume, operating and financial
costs, profit margins, capacity utilization, capital expenditure, etc.).
7) Financial Condition. Key financial ratios for previous year, compared
with ratios covenanted in the Convertible Loan Agreement.]
<PAGE> 57
- 52 -
[SCHEDULE 6]
Page 1 of 1
INSURANCE REQUIREMENTS
The company shall effect and maintain the following insurance covers at all
times during the period of the Financing Agreements, under forms of policies and
with insurers and reinsurers acceptable to IFC:
1. Property insurance covering all assets at full replacement value during
operations and construction (as applicable).
2. Business Interruption cover with minimum 12 months indemnity period.
3. Liability cover, including products liability and seepage and pollution
for not less than US$ 10 million.
4. Operator's Extra Expenses, including Control of Well, Redrilling, etc.
for not less than US$ 10 million.
5. Transport insurance for import of equipment, oil in transit, etc.
6. All other insurances required by local legislation or by contract.
<PAGE> 58
- 53 -
[SCHEDULE 7]
Page 1 of 2
TERMS OF SUBORDINATED LOANS
Any subordinated loan provided to the Company, (except for the Sponsor
Loan), shall have the following minimum terms:
(a) unsecured;
(b) repayment in approximately equal semi-annual installments over a
period of not less than five (5) years commencing twelve (12) months after the
full disbursement of the relevant Subordinated Loan;
(c) rate of interest not to exceed that of the IFC Loan;
(d) no payment of interest or repayment of principal in respect of the
Subordinated Loan shall be made in any Fiscal Year unless all amounts due and
payable by the Company to IFC in that Fiscal Year have been fully paid;
(e) no payment of interest or repayment of principal in respect of the
Subordinated Loan shall be made if the Company is in arrears in the payment of
interest on, or repayment of principal of, the IFC Loan or any other
indebtedness;
(f) payment of principal and interest shall take place at least fifteen
(15) days after the Interest Payment Dates of the IFC Loan;
(g) upon any distribution of assets in connection with any dissolution,
winding up, liquidation, bankruptcy, reorganization or upon an assignment for
the benefit of creditors of the Company:
(i) no payment in respect of principal, interest or any other
amount in respect of such Subordinated Loans may be made
unless full payment in respect of interest on, and
principal of, the IFC Loan has been made;
<PAGE> 59
- 54 -
SCHEDULE 7
Page 2 of 2
(ii) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities,
to which the lender of the Subordinated Loan would be
entitled in respect of the Subordinated Loan except for
these provisions, must instead be paid by the liquidator or
agent or other person making such payment or distribution,
whether a trustee in bankruptcy, a receiver or liquidating
trustee or other trustee or agent, directly to IFC; and
(h) until all amounts payable in respect of the IFC Loan, or otherwise
under the Convertible Loan Agreement, are paid in full the lenders of the
Subordinated Loan shall not:
(i) exercise or attempt to exercise any right of subrogation
with respect to payments not paid to such lenders as a
result of the operation of the provisions set forth in this
Schedule 1;
(ii) claim or receive the benefit of any document or agreement
of which IFC has the benefit, any monies held by IFC or any
right, power or authority of IFC;
(i) if for any reason whatsoever the lender of such Subordinated Loan
receives any payment or distribution in respect of the Subordinated Loan
contrary to the provisions set out above, that lender shall hold the same in
trust for IFC, promptly notify IFC of the receipt of such payment or
distribution and promptly pay the amount of such payment or distribution to IFC
or, if IFC so elects, to any bank specified by IFC, to hold such amounts for
IFC's account.
<PAGE> 60
- 55 -
SCHEDULE 8
Page 1 of 1
REQUIREMENTS FOR SPONSOR LOAN
The Sponsor Loan will be provided, or caused to be provided, by the Sponsors to
the Company prior to Loan Disbursement. The Sponsor Loan will be in the amount
of US$2 million, and shall be unsecured and subordinated to the Loan. The
Sponsor Loan will be disbursed into the Revenue Account. It will accrue interest
at the Loan Interest Rate until the Physical Completion Date, after which time
no further interest shall accrue. No payments of interest or repayments of
principal shall be made until after the Physical Completion Date, after which
time principal of the Sponsor Loan and accrued interest may be repaid providing
that (i) after giving effect to such repayment the Debt Service Reserve Account
is funded at the Debt Service Reserve Account Requirement and (ii) no Event of
Default or Potential Event of Default has occurred or is continuing.
<PAGE> 61
- 56 -
SCHEDULE 9
Field Development Plan
<PAGE> 62
NINOTSMINDA OIL COMPANY LIMITED
1580, 727 - SEVENTH AVENUE S.W.,
CALGARY, ALBERTA T2P 0Z5
TELEPHONE : (403) 777-1185
FACSIMILE : (403) 777-1578
Updated Field Development Plan
for the Ninotsminda Oil Field
Proposed Plans for 1998 and 1999
&
A General Full Field Development Plan
Prepared By
Irakli Tavdumadze
Alfred Kjemperud
Ingo McGrath
Tbilisi, Georgia
October 1998
<PAGE> 63
Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
Table of Contents
<TABLE>
<S> <C>
1 SUMMARY.............................................................................................4
2 SEISMIC PROGRAM.....................................................................................5
2.1 OLD SEISMIC DATA...............................................................................5
2.2 NEW SEISMIC LINES..............................................................................6
2.3 SUMMARY OF SEISMIC ACTIVITIES..................................................................6
3 DRILLING PROGRAM....................................................................................6
3.1 GENERAL........................................................................................6
3.2 WELL N98.......................................................................................7
3.2.1 N98 FUTURE OPERATIONS:....................................................................7
3.3 WELL N97.......................................................................................8
3.4 WELL N99.......................................................................................8
3.5 WELL N100......................................................................................8
3.6 WELL N105......................................................................................8
3.7 DRILLING SUMMARY...............................................................................9
4 WORKOVER PROGRAM....................................................................................9
5 OTHER REQUIREMENTS.................................................................................11
5.1 BASE EXPANSION:...............................................................................11
5.2 PURCHASE OF ADDITIONAL PRESSURE TRANSIENT EQUIPMENT...........................................11
5.3 PVT TESTING...................................................................................11
5.4 TWO WATER SUPPLY WELLS........................................................................11
5.5 PRODUCTION FACILITY UPGRADES..................................................................11
5.6 ACCOMMODATION.................................................................................11
5.7 TRANSPORTATION................................................................................12
5.8 COMMUNICATION / COMPUTERS.....................................................................12
5.9 EDUCATION.....................................................................................12
6 PAST AND PLANNED EXPENDITURES......................................................................12
7 FULL FIELD DEVELOPMENT; INTO THE NEW MILLENIUM.....................................................12
7.1 RESERVES......................................................................................12
7.2 DRAINAGE AREAS................................................................................12
7.3 DRILLING......................................................................................13
7.4 WORKOVERS.....................................................................................14
7.5 FACILITIES....................................................................................14
7.6 PRODUCTION....................................................................................14
7.7 FULL FIELD DEVELOPMENT SUMMARY................................................................14
8 BRIEFLY ON EXPLORATION POTENTIAL...................................................................15
8.1 MANAVI........................................................................................15
8.2 WEST RUSTAVI AND NINOTSMINDA..................................................................15
9 APPENDIX 1 DETAILED WORKOVER PLAN.................................................................16
</TABLE>
Page 2
<PAGE> 64
Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
<TABLE>
<S> <C>
9.1 N9............................................................................................16
9.2 N21...........................................................................................16
9.3 N22...........................................................................................17
9.4 N30...........................................................................................17
9.5 N32...........................................................................................17
9.6 N49...........................................................................................18
9.7 N53...........................................................................................18
9.8 N59...........................................................................................18
9.9 N96...........................................................................................18
9.10 R16...........................................................................................19
9.11 R51...........................................................................................19
9.12 WORKOVER SUMMARY..............................................................................20
10 APPENDIX 2 PAST AND PLANNED EXPENDITURES 1998 TO 1999...........................................21
</TABLE>
List of Tables
<TABLE>
<S> <C>
TABLE 1 OLD SEISMIC DATA RECOMMENDED FOR REPROCESSING...............................................5
TABLE 2 OLD NON-PROCESSED SEISMIC RECOMMENDED FOR PURCHASE AND PROCESSING...........................5
TABLE 3 SUMMARY OF COST OF SEISMIC ACQUISITION, PROCESSING AND INTERPRETATION.......................6
TABLE 4 NEW WELLS: ESTIMATED RESERVOIR PROPERTIES AND RISKS.........................................7
TABLE 5 DRILLING SUMMARY............................................................................9
TABLE 6 WORKOVER PROPOSAL SUMMARY...................................................................9
TABLE 7 CONSERVATIVE ESTIMATE OF DEC 1999 PRODUCTION VOLUMES.......................................10
TABLE 8 PAST AND PLANNED EXPENDITURES SUMMARY 1998 & 1999..........................................12
TABLE 9 FULL FIELD DEVELOPMENT SUMMARY.............................................................15
TABLE 1-1 WORKOVER SUMMARY...........................................................................20
</TABLE>
List Of Figures
FIGURE 1 LOCATION MAP
FIGURE 2 TOP STRUCTURE MAP SHOWING WELL LOCATIONS
FIGURE 3 GANT DIAGRAM SHOWING THE PLANNED ACTIONS FOR 1998 AND 1999
FIGURE 4 FUTURE DEVELOPMENT
FIGURE 5 WELL BUILD UP SCHEDULE
FIGURE 6 DAILY OIL PRODUCTION TO 2016
FIGURE 7 ANNUAL OIL PRODUCTION TO 2016
FIGURE 8 OIL FIELDS AND PROSPECTS IN THE NINOTSMINDA AREA
FIGURE 9 WEST RUSTAVI, UPPER CRETACEOUS TOP STRUCTURE MAP
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1 SUMMARY
This document is an addendum to the report: "Field Development plan for the
development of the Ninotsminda Oilfield, Republic of Georgia." sent to IFC in
the spring of 1998. The purpose of this document is twofold; first, to present a
summary of Ninotsminda Oil Company's (NOC) 1998 operations to September, 1998
and second, to detail a "Minimum Work Program" for the next 15 months until the
end of 1999.
The work to be performed in Ninotsminda can either be regarded as appraisal,
development or maintenance. All tasks are interrelated when it comes to sharing
of resources, equipment and personnel and all three parts will be covered in
this document without distinctions between them.
The IFC Loan requirements include a "Minimum Work Program" which is estimated to
cost $US 18.9 M. With respect to this requirement, NOC has set a production goal
of 4,500 bopd by December 1999. As per the IFC loan, 1998 sunk costs directly
related to the project will be reviewed and included as part of NOC's capital
cost requirement. Past production, seismic, drilling and workovers will be
presented. Future seismic, drilling, workovers and facility upgrade will be
performed. Generally, future works will include four measures for an estimated
$US 15.4 M. These include:
- - Drilling 5 wells
- - Performing 5 major workovers
- - Doing production maintenance and upgrading facilities
- - Shooting 30 km of new seismic, purchasing old lines, reprocessing all
lines and interpreting all data
Five new wells will be drilled, with the first being a vertical and the second
being horizontal and the remaining three horizontals drilled on a contingent
basis subject to technical and commercial results of the first two. If all five
are drilled, NOC expects an initial production increase of 4,050 bopd for an
estimated cost of $US 12.9 million.
The major workovers include gas and water isolation, reperforating new pay, and
selective treatment of new pay. The 5 major workovers are expected to cost $US
373,000 and result in a production increase of 1,075 bopd.
Workovers, routine de-waxing and oil squeezes were done and will continue to be
performed. Pipelines were replaced, new lines installed, drill pipe and rig
equipment was purchased. Upgrading of facilities and equipment will be
continued. The cost for routine well, facility and equipment maintenance is
estimated to be $US 2.2 mm.
NOC's plan calls for the purchase of 20 km of old seismic lines, reprocessing of
137 km and the shooting of 30 km of new lines for $US 277,000. PVT and Pressure
Transient
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Ninotsminda Oil Company Wednesday, February 10, 1999
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equipment and analysis will complete the reservoir analysis work for $US 50,000.
Better definition of reservoir parameters will be obtained.
An extension to the Minimum Work Program is Future Field Development. Together
the two plans result in 9 more wells to be drilled; one vertical, 4 horizontal
and 15 laterals from the last four wells. The expected cost is $US 35 mm and
will result in a peak production of 17,000 bopd in 2001 and recover 50 mmbo by
the year 2016.
2 SEISMIC PROGRAM
2.1 OLD SEISMIC DATA
There are 73 km of old seismic lines crossing the NOC license that are
recommended for reprocessing. In addition, approximately 20 km of lines was shot
over NOC license area in the late 80s that were never processed. It is
recommended that this data be acquired and added to the database.
Tables 1 & 2 below show the lines recommended for purchase and reprocessing by
NOC.
AREA LINE # LENGTH km.
Ninotsminda 029302 13
Ninotsminda 029304 14
Ninotsminda 029605 8
Manavi 068528 3
Manavi 068527 3
Manavi 068412 3
West Rustavi 118701 11
West Rustavi 118703 18
TOTAL
TABLE 1 OLD SEISMIC DATA RECOMMENDED FOR REPROCESSING
AREA LINE # LENGTH km.
West Rustavi 018901 14
West Rustavi 018906 8
West Rustavi 018908 13
West Rustavi 018903 15
West Rustavi 018803 14
TOTAL * 64
TABLE 2 OLD NON-PROCESSED SEISMIC RECOMMENDED FOR PURCHASE AND PROCESSING
* NOC share is 21 km
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2.2 NEW SEISMIC LINES
10 km of new seismic will cross the Ninotsminda Oil Field. The lines will all
run north to south along the dip of the structure. Another 20 km of seismic will
be shot in the West Rustavi area. It is planned to shoot these lines with a
vibroseis unit.
The cost of the operation allocated to NOC is presented below in Table 3.
2.3 SUMMARY OF SEISMIC ACTIVITIES
The table below shows the activity and cost.
<TABLE>
<CAPTION>
SEISMIC WORKS LENGTH COST TO NOC $US
(NOC LICENSE ONLY) km
- ------------------ --
<S> <C> <C>
MOBILIZATION/DEMOB. 37,400
SEISMIC ACQUISITION @ $US 4942/km 30 148,260
PROCESSING @ $US 600/DAY 10 6,000
PURCHASE OF NON-PROCESSED OLD SEISMIC 21* 10,000
PROCESSING OF NON-PROCESSED OLD DATA @ $US 200/km 21 4,200
REPROCESSING OF EXISTING DATA @ $US 200/km 73 14,600
CREW SUPERVISION, SUPERVISION OF PROCESSING AND REPROCESSING AND 11 6,600
INTERPRETATION @ $US 600/DAY
TOTAL 227,060
CONTINGENCY 49,940
TOTAL 277,000
</TABLE>
TABLE 3 SUMMARY OF COST OF SEISMIC ACQUISITION, PROCESSING AND INTERPRETATION
(* NOC share only (1/3 of total))
3 DRILLING PROGRAM
3.1 GENERAL
Drilling of two wells, N97 and N98 are planned for 1998. Three more contingent
wells N99, N100 and N105 are planned in 1999. Two refurbished Ural Mash 3E rigs
will drill the wells. The schedule for the drilling program is illustrated in
Figure 3.
There are several purposes for these wells:
- - To increase oil production
- - To delineate the reservoir unit to the east,
- - To prove horizontal and lateral well applicability,
- - To increase the proven reserves,
- - To determine reservoir characteristics,
- - To determine production characteristics,
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- - To determine drainage characteristics and
- - To compare results of vertical and horizontal wells.
The expected oil rate for vertical wells is 650 bopd and 850 bopd for horizontal
wells. An upside potential is 750 and 1400 bopd respectively. It is expected
that the wells will produce fairly constantly for 18 months to 2 years and then
decline at 15% per year. Horizontal wells will decline at a lower rate because
the drainage is from a larger area and at less drawdown pressures. Other well
details are given on Table 4, below:
<TABLE>
<CAPTION>
WELL # FRACTURE POSSIBILITY OF RISK FACTOR OF THICKNESS OF EXPECTED UPSIDE CONSTANT RATE
FREQUENCY LAUMONITE PRODUCTION OIL LEG m RATE bopd bopd MONTHS
- --------- --------- --------- ---------- --------- --------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
97 High High low 300 850 1400 18
98 High High low 380 650 750 18
99 High Average medium 300 850 1300 18
100 High Average medium 170 850 1300 18
105 High High low 380 850 1400 18
TOTAL 4,050 6,150
</TABLE>
TABLE 4 NEW WELLS: ESTIMATED RESERVOIR PROPERTIES AND RISKS
3.2 WELL N98
N98 is currently being drilled in the vicinity of wells N22, N49 and N52 in the
east and central part of the field. (Figure 2) N98 was spudded in August 12,
1998, and by Oct 1st had reached 2650m. Planned TD is 3,100m, just below the
prognosed OWC in the Middle Eocene volcanoclastic deposits. The expected initial
production is 650 bopd. The drilling time is estimated to be 85 days and the
cost to 2.5 million $US.
The well has penetrated the following stratigraphic units:
0-280m - Pliocene
280-930m - Upper Sarmatian
930-2335m - Middle Sarmatian
2335-2650m - Upper Eocene
A 339mm conductor was run to 317m. The 317-2650m interval was drilled with 215mm
bit. This is the first time that the Sarmatian and the Upper Eocene were drilled
and cased together in Ninotsminda. This eliminated the need for the 9 5/8"
intermediate string over the Sarmatian interval. This is estimated to have saved
about 0.4 MM $US in drilling costs. Currently the well is cased with 7" casing
near the Middle Eocene top.
3.2.1 N98 FUTURE OPERATIONS:
The Middle Eocene will be drilled with a 151mm bit and cased with a 127mm liner.
Initial production of 650 bopd is expected in November.
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3.3 WELL N97
Rigging up of well #97 is 95% complete. The well is planned to be spudded in
November 1998, south east of N21 (Figure 2). The well will be allowed to drift
naturally to the south while drilling to the top of the Middle Eocene. A 400 m
horizontal section, 40 meters below the GOC in the south west direction is
planned. The well will be completed with a slotted liner, and put on production
in March. Initial production is expected to be 850 bopd.
3.4 WELL N99
N99 is planned to be drilled 1550m east of N52 after the drilling of well N97 is
complete. The well will penetrate the Middle Eocene as a horizontal well. A 300
m oil column is expected and the OWC is expected to be 2000 mss. Expected spud
date is second quarter of 1999. Expected initial production is 850 bopd.
This well is to be drilled as a horizontal well, with the flexibility in the
casing design to allow for lateral extensions.
3.5 WELL N100
N100 is planned to be drilled 2500m east of N52 as a horizontal well to the
Middle Eocene. This well is in the east of the reservoir. A 170 m oil column is
expected and the OWC is expected to be at 2020 mss. This well will be spudded
based on the results of N105 and N99. Expected spud date is the third quarter of
1999, and expected initial production is 850 bopd.
Like N99, this well is to be drilled as a horizontal well, with the flexibility
in the casing design to allow for lateral extensions.
3.6 WELL N105
N105 will be drilled after N98 and from the same location. NOC plans to skid the
drilling unit over 20 m. This will save mobilization time and will utilize
existing infrastructure. The well will be directionally drilled to the north
east from N98 (surface location) and penetrate the top of the Middle Eocene
approximately 300-500 m east of N98 (Middle Eocene top). The horizontal section
will be 500-800 meters long on a 55 degree azimuth. A 400 m oil column is
expected with an OWC estimated to be at 1980 mss. Expected initial production is
850 bopd.
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3.7 DRILLING SUMMARY
<TABLE>
<CAPTION>
WELL NO. SPUD DATE COMPLETION DATE COST $US INITIAL RATE UPSIDE RATE CONSTANT RATE
bopd bopd bopd
<S> <C> <C> <C> <C> <C> <C>
N97 Nov-98 Mar-99 3.0 850 1,400 2
N98 Aug-98 Nov 98 2.5 650 750 2
N99 May-99 Sept-99 2.5 850 1,300 2
N100 Sep-99 Dec-99 2.5 850 1,300 2
N105 Jan-99 May-99 2.5 850 1,400 2
TOTAL 13.0 4,050 6,150
</TABLE>
TABLE 5 DRILLING SUMMARY
4 WORKOVER PROGRAM
There are currently 6 producing wells in Ninotsminda field. For 1998 and 1999, 5
major workover operations as a minimum have been planned which will increase the
number of producing wells from 6 to 11. A major workover is defined to be a
stimulation technique with a minimum AFE amount of $US 50,000 and/or a
recompletion.
<TABLE>
<CAPTION>
WELL NO. TASK 1 TASK 2 EST. COST M CURRENT PROD EST. POST WO RIG bbl/$
$US bopd bopd
<S> <C> <C> <C> <C> <C> <C> <C>
N30 Isolate Gas Perf, Acid & Oil 56 75 350 FTN 4.91
Squeeze *
N96 Isolate Water Add Perfs 60 200 400 A50 3.33
N22 Selective Acid Oil Squeeze 80 150 375 FTN 2.81
N32 Fish Clean out 105 0 225 FTN 2.14
N59 Clean Out 72 0 150 FTN 2.08
TOTAL 373 425 1,500
</TABLE>
TABLE 6 WORKOVER PROPOSAL SUMMARY
*This second operation will be performed if required.
NOC investigated all possible WO's (11) that could be done in Ninotsminda and
Rustavi fields. These workovers ranged from fishing and cleanouts, to isolating
water, perforating, isolating gas, drilling cement, and hydraulic fracturing.
The workovers are all summarized in Appendix One.
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These workovers were then prioritized for operations based on the highest barrel
received for workover $ spent. NOC's aim was to determine which wells should be
worked over to ensure that by the end of 1999, there would be 4,500 bopd of
production. The production from the field and newly drilled wells was estimated
to be 3,600 bopd in Dec 1999. This implies that NOC requires 900 bopd for the
end of 1999 from workover operations.
Table 6 shows the five wells chosen for workovers based on the greatest
barrel/$. The incremental increase in production from these workovers is
estimated to be 1,075 bopd. Taking into account decline and providing a little
insurance resulted in 5 wells chosen for a minimal workover program. The
following Table 7 shows the conservative production estimated for Dec 1999.
<TABLE>
<CAPTION>
NEW WELLS INITIAL BOPD DECLINE % DECLINE bopd bopd DEC 1999
- --------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Current Prod 1,500 25 375 1,125
N98 650 15 98 553
N97 850 10 85 765
N105 850 10 85 765
N99 850 0 850
N100 First oil Jan 2000
SUB TOTAL 4,700 4,058
NEW WORKOVERS
N30 275 30 83 193
N96 200 25 50 150
N22 225 20 45 180
N59 150 20 30 120
N32 225 10 23 203
SUB TOTAL 1,075 845
All Wells
Old and New 4,400 4,058
Workovers 1,075 845
TOTAL DEC 1999 4,903
</TABLE>
TABLE 7 CONSERVATIVE ESTIMATE OF DEC 1999 PRODUCTION VOLUMES
It should be noted that the fishing, drilling of cement, and fracturing would
require a more powerful workover rig than the A50 rig, which is currently being
used. A small portable Fountain drilling rig will be utilized to perform the
heavier operations that require greater pulling and drilling capabilities than
the A50 has. This "Fountain" rig is expected to be in Georgia by the end of
November, be tested in December and operational in January.
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Figure 3 is a Gant diagram detailing the time line for the workovers. Appendix
One contains the details for each proposed workover.
5 OTHER REQUIREMENTS
Due to the expansion of drilling and production activities, the following
additional operations and equipment are required for the Ninotsminda field:
5.1 BASE EXPANSION:
Require facilities to shelter the chemical and mud purchases and store the
casing and tubing. Unloading facilities such as pipe racks are envisioned. NOC
currently does not have enough sheltered facilities to store the chemicals for
one well. The estimated cost for these facilities is $US 50,000.
5.2 PURCHASE OF ADDITIONAL PRESSURE TRANSIENT EQUIPMENT.
Currently NOC hangs the pressure gauges on wireline during the pressure testing.
For the buildup portion of the test the flowlines are shut-in. This results in
wellbore storage effects that mask the data. Attempts at type curve matching the
resulting transient curves have proven less accurate than desired. It is
recommended that 2 "R" nipples and a perforated pup are run in each well, and
that the proper wireline tools to land the pressure gauges and plugs are
purchased. This will allow NOC to land the gauges in the lower "R" nipple for
the flow tests and then set a plug in the upper "R" nipple for the build up
portion of the test. The resulting data will have less storage effects and
therefore more usable data. The cost is estimated to be $US 20,000.
5.3 PVT TESTING
A PVT analysis is required to determine important reservoir fluid properties
used in predicting field performance and to determine if the gas cap is a
primary or secondary gas cap. Cost for this analysis is estimated to be $US
30,000.
5.4 TWO WATER SUPPLY WELLS
Two water supply wells are required to supply the drilling rigs with water
during drilling. GBOC currently pays $US 5,000 per month to deliver water to the
drilling rigs. It is expected that each water supply well will cost $US 5,000
and provide 100 m3/d water to the rigs and save the company $US 50,000.
5.5 PRODUCTION FACILITY UPGRADES
An oil pumping unit is required to pump the production from well N100 to the
Ninotsminda facilities. Storage and flaring facilities will be required in case
of electrical supply failures. Estimated costs are $US 25,000.
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5.6 ACCOMMODATION
Additional facilities for board and lodging are required. Today's capacity is
for one drilling crew, but with the second rig, GBOC will require a second
crew's quarters. Delivery and purchase cost is estimated to be $US 50,000.
5.7 TRANSPORTATION
3 Chevy vehicles coming with the Fountain rigs will be purchased. These are
estimated to cost $US 75,000 and will replace old vehicles.
5.8 COMMUNICATION / COMPUTERS
Additional communications equipment is required. This includes 5 additional
computers, 2 printers, 1 plotter and improved Internet connection (either cable
or wireless). Estimated costs are $US 20,000.
5.9 EDUCATION
Education is required to train accountants in the corporate accounting policy
and engineers in technical courses such as multi lateral and horizontal
drilling. Estimated costs are $US 32,000.
6 PAST AND PLANNED EXPENDITURES
The following Table 8 summarises the expenditures for 1998 and 1999.
<TABLE>
<CAPTION>
ITEM 1998 $US M 1999 $US M TOTAL $US M
---- ---------- ---------- -----------
<S> <C> <C> <C>
Seismic 247 30 277
Major Workovers 257 373 630
Development Wells 5,198 7,700 12,898
Facilities 1,307 312 1,619
SUB-TOTAL 7,009 8,415 15,424
Working Capital and Interest Costs 1,100 500 1,600
Georgian Oil Asset Purchase 348 176 524
IFC Financing Costs 500 500
Contingencies 900 900
TOTAL 8,957 9,991 18,948
</TABLE>
TABLE 8 PAST AND PLANNED EXPENDITURES SUMMARY 1998 & 1999
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7 FULL FIELD DEVELOPMENT; INTO THE NEW MILLENIUM
7.1 RESERVES
According to estimates from AMH, proven plus probable reserves in Ninotsminda
are 52 mmbo. NOC has 52 mmbo as the basis for the following Full Field
Development plan.
7.2 DRAINAGE AREAS
To evaluate a future development plan required an estimate of the drainage areas
and shapes to expect with this project. Drainage shapes will be dependent upon
the macrofracturing experienced in this reservoir. The macrofracturing observed
appears to be in both, a north south and in an east west trend. Production
trends and pressure analysis results indicate that the faults are intersecting.
This implies that the drainage will be in a square shape for a vertical well.
For a horizontal or lateral well, the toe of the wellbore will not have as wide
a width as the heel of the wellbore due to the pressure drop along the wellbore.
A volumetric calculation was done that compared the volume produced to an
equivalent drainage area for each well in the Samgori and Patardzeuli Fields. It
was assumed that these reservoirs were essentially drained. It appears that the
wells were draining squares areas of 600-800 m length in the early stages and
the later infill wells drained areas of around 200 m lengths. Some infill wells
even though drilled on the crest did not produce more that 30,000 m3 because
they were too close to a neighbouring good well. N96 appears to be affected by
the neighbouring wells and the spacing there is 450 m or so. This implies that
we can expect blocks on the order of 500 meters or so.
See Figure 4 for an estimate of the drainage areas for vertical, horizontal and
lateral wells.
7.3 DRILLING
Full field development assumes that horizontal and laterals will be used to
drain the reservoir. Once N97, N105, N99 and N100 are completed, there should be
enough technology and experience to complete the development of the field using
horizontal and lateral well technology. In total, 31 drainage points are needed.
These drainage points will include both old and new wells.
To complete the development of the Ninotsminda Reservoir, 15 additional drainage
points are required. This can be achieved with the drilling of laterals from 4
wells. Figure 5 illustrates the down hole drainage areas. The horizontals will
provide an extended drainage area as compared to the vertical well. A single
lateral is the equivalent of a horizontal. If two or more laterals are drilled
from a single wellbore, then each lateral will drain a smaller area as compared
to a horizontal because of overlap at the heal of the lateral. However for the
purposes of this analysis, it was assumed that the lateral would drain the same
area as the horizontal and have equivalent production rates. Estimated
production rates are 850 bopd.
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Four additional wells over the "Minimum Work Program" will be required. Two of
these wells will be horizontal, and two will be lateral. The plan will utilise
N99 and N100 for lateral wells. Two other locations will also be drilled for
lateral well development, N106 and N107. Together, these four wells will drain a
total of 11 horizontal well equivalents.
Two additional wells, N108 and N109, will be drilled horizontally to drain the
areas east and west of N21.
"Base wells" (the initial wellbore of a multilateral well) are estimated to cost
$US 2.5 mm to drill to the top of the Middle Eocene and then $US 0.3 mm for each
lateral. Since the mobilisation cost is reduced, NOC expects that several
laterals per well will be cheaper than one horizontal extension. The horizontal
extension is expected to cost $US 0.5 mm and the cost for a lateral is $US 0.3
mm. Thus the cost for a three well lateral is estimated to be $US 3.4 mm, for a
four well lateral, $US 3.7 mm and for a horizontal $US 3.0 mm. The drilling is
expected to be done continuously into the year 2001.
7.4 WORKOVERS
As described earlier, there is the potential for a total of 12 workover in the
Ninotsminda operations. These workovers are described in Appendix One. In
addition to the "Minimum Work Program" workovers, there are hydraulic fracture
stimulations (N21 and N53), deepening operations (N9), recompletions (N30 and
N22) and testing in the West Rustavi field (R16 and R51).
The workovers will increase production, and essentially, will maintain field
productivity. These workovers on average will cost $US 120,000 each. See
Appendix One for further workover details.
7.5 FACILITIES
The current facilities in Ninotsminda are capable of handling 17,000 bopd
expected in 2001 and therefore no further facilities are required. Field
headers, additional pumps, test units and storage at satellites are envisioned
and estimated to cost $300,000.
7.6 PRODUCTION
Given the above development scenario, the field will produce at a peak rate of
about 17,000 bopd in 2001 and produce 50 mmbo over the 19 year project life.
Figures 5,6 and 7 illustrate the well build up, daily production and annual
production schedules to the year 2016.
7.7 FULL FIELD DEVELOPMENT SUMMARY
The following table shows the Full Field Development and the Minimum Work
Program costs. Note that the total cost for the Full Field Development includes
the costs associated with the Minimum Work Program.
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<TABLE>
<CAPTION>
MINIMUM WORK PROGRAM CAP See Above for 17.4
COSTS details
- ----- -------
<S> <C> <C> <C>
FULL FIELD DEV. CAPITAL
COSTS
Seismic 30 km 0.28
Wells
Vertical 1 @ $US 2.5 mm 2.50
Horizontal 4 @ $US 3.0 mm 12.00
Base Wells 4 @ $US 2.5 mm 10.00
Laterals 15 @ $US 0.3 mm 4.50
Workovers 12 1.40
Facilities/Equipment 2.09
Studies/training 0.50
Miscellaneous 1.73
TOTAL $US mm * 35.00
</TABLE>
TABLE 9 FULL FIELD DEVELOPMENT SUMMARY
*Full field development will cost $US 35 mm plus working capital.
8 BRIEFLY ON EXPLORATION POTENTIAL
8.1 MANAVI
This Middle Eocene structure (Figure 9) is located on trend with and east of the
Ninotsminda structure. Seismic and geological interpretation indicates 2 domes
in the Middle Eocene. The length of the structure is 13.5 km, the width is 3.3
km and the height is 300m. The depth of the structure is 3,700 to 4,000 m. No
wells have penetrated the structure. Structures on trend have successfully
produced oil from this interval.
Other potential reservoirs include the Upper-Cretaceous Paleocene, Lower Eocene
and Upper Eocene. Gas has been tested in Teleti and Varketili at rates up to
7-10 mmcfd in the Upper-Cretaceous Paleocene interval. The Lower Eocene has
produced gas at 1-3 mmcfd in Samgori and the Upper Eocene has produced oil at
rates of up 160 m3/d in Ninotsminda and Patardzeuli.
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Middle Eocene recoverable reserves have been estimated to be 68-83 mmbo. Upper
Cretaceous Paleocene recoverable gas reserves have been estimated to be 667 BCF.
8.2 WEST RUSTAVI AND NINOTSMINDA
As with Manavi, there is the potential for Upper-Cretaceous Paleocene and Lower
Eocene production (Figure 9).
The Upper Cretaceous Paleocene gas potential is 440 BCF.
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9 APPENDIX 1 DETAILED WORKOVER PLAN
9.1 N9
A cement plug is set at 2564m (1668 mss). The perforated interval is 2564-2536m
(1640-1668 mss). Significant gas flow was obtained from the well. Presumably the
gas was channeling behind the 114mm-liner annulus.
Based on well data (N16) and from log analysis, it appears that the gas cap on
the Ninotsminda field is at 1550-1578 mss. For our calculations we used the
figure 1600 mss. The interval 2693-2640m (1703-1650mss) is perforated in N4, and
the interval 2614-2578m (1681-1647mss) is perforated in N46. Both of these wells
are currently producing pure oil with minor gas.
Since N9 is perforated at the same subsea depth as N4 and N46, it appears then
that N9 is perforated well below the GOC and that the gas seen was channeling
behind a poorly cemented liner.
It should be noted, that N9 upon initial completion produced pure gas from
2754-2800m (1858-1904mss) interval. This is another indication that the annulus
was not cemented properly. After successful isolation of gas zone the well
produced 897,000 bbl of oil.
Workover operations are aimed at isolation of the gas zone and perforation of
new interval. Since the operation will require drilling out of the cement within
the liner, the use of the Fountain rig is required. The costs are estimated to
be $US 130,000. Expected rate is 250 bopd.
9.2 N21
The Middle Eocene is penetrated at 2,740-2,961 mss. The GOC is at 2,732 m.
Cumulative oil production during 1984 to 1998 was 11,000 bbl. The reasons for
low production rate are as follows:
1. The main fractured reservoir unit was damaged by cement and heavy mud
while drilling
2. Technical conditions of the well: the top of the Middle Eocene has two
casings 127mm and 89mm casings.
3. 89mm casing is damaged at 2838m depth and tools can not be run below
that depth
4. An attempted acid treatment was complicated by high treatment pressures
and the large treatment interval. As a result the treatments proved
unsuccessful.
To obtain production, the 73mm and 60mm tubing will be changed to 89mm tubing, a
sand plug will be set over the lower perforations, the remaining perfs are to be
reperforated and then a 7 tonne hydraulic frac stimulation will be performed.
The expected rate is 150 bopd. Estimated costs are $US 260,000.
Page 17
<PAGE> 79
Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
9.3 N22
The following 3 intervals are perforated in the well: 3085-3080m, 2935-2840m and
2840-2798m. According to production tests the majority of the oil is produced
from the old perforated intervals (2925-2920m and 2868-2886m). It appears that
the acid and oil squeeze treatments treated the highly permeable, drained
macro-fractured intervals. In order to operate all perforated intervals, a
selective treatment of the formation is required.
Expected rate is 375 bopd. The estimated cost is $US 80,000.
9.4 N30
A cement plug is set at 2582m (1662mss). The perforated interval is at
2570-2582m (1662-1650mss). In the past, 750 to 1000 bopd and a significant
amount of gas were produced. The well is perforated the same highly productive
intervals and at similar depths when compared to N46 and N4, both of which
produce oil without gas. It appears that the gas is channeling behind the
114mm-liner head.
The isolation of the gas channel by a cement plug or packer is required. It is
proposed to try setting a packer first with the A50 rig. If unsuccessful a
cementing operation and drilling out of the cement with the Fountain rig will be
required. New perforations, from 2582 to 2570 m will be shot, followed by acid
and oil squeezing. The expected cost is $US 56,000 if the Fountain Rig is used.
The expected rate is 350 bopd.
9.5 N32
A cement plug is set at 2724m, and the interval 2724-2658m (1703-1637mss) is
perforated. The well initially produced 65 bopd. Two acid jobs and 4 oil
squeezes without sand were tried to improve well productivity. Production was 35
bopd when one oil squeeze with sand was tried. Sand or formation fines fell on
top of the packer and stuck the packer in the hole. This prevented cleaning the
25m of sand that is over the perfs.
It is required to fish the tubing and packer. This can be done in several
different ways, either by utilizing left hand drill pipe to back off the tubing,
right hand drill pipe with a tool to reverse downhole rotation again to back off
the tubing, back off utilizing strip charges or mechanical cutters. Once the
tubing is removed, the fill can be removed and the packer released. Once the
packer is removed, the fill can be washed out and the oil squeeze with sand can
be evaluated.
An alternative is being considered whereby the sand will be washed out by
utilizing a coiled tubing unit. This means though that the stuck tubing and
packer will still be in the hole.
Once the sand plug is removed, the expected rate is 225 bopd. The estimated cost
to remove the stuck tubing by utilizing the left-hand drill pipe and backoff is
$US 105,000.
Page 18
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Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
9.6 N49
In May 1996, a cement plug was set at 2895m. The well was perforated over the
2870 to 2774m (1749-1653 mss) interval. The well has produced 436 mbbl of oil
since May 1996. Recently, the water cut has increased to 25%, which could be
caused either by deterioration of the cement plug or by water coning.
It is required to check for the cement plug, identify the source of the water
and then isolate the water zone. Once done, the potential exists to add 24 m of
additional pay in this well. Adding additional pay is expected to increase the
current production by 25% from 350 to 450 bopd. The estimated cost to do this is
$US 51,000.
9.7 N53
A cement plug is set at 3013m and the perforations are at 2944-2712m. In spite
of multiple attempts including gas lift, NOC has not achieved a constant oil
flow from the well.
Selective treatment of the oil interval 2850-2910m is required. If the
operations on N21 prove successful a hydraulic fracture stimulation will be
attempted. The expected production is 150 bopd.
The estimated cost is $US 160,000. This cost is less than that of N21 because
the purchase of tubing and reperforating will not be required.
9.8 N59
The well has produced 163,000 bbl oil over the 2691-2675m interval at the
following rates:
5mm choke - 55m(3)/day
6mm choke - 96m(3)/day
10mm choke - 140m(3)/day
The well was put into production in 1986, but a sand plug was formed after one
year and blocked production. The sand plug is estimated to be at 2540m depth.
The tubing is stuck and appears to be damaged at about 1000m.
It is required to clean out the sand plug, pull and replace the damaged tubing
and add new perforations over the intervals 2675-2665m and 2615-2623m. The
expected rate of production is 150 bopd. The estimated cost for this workover is
$72,000.
Potential exists for hydraulic fracture stimulating this interval as well. To
evaluate this potential, a production and build up test will be performed on N2
to determine the extent of damage and the potential for further evaluation.
9.9 N96
N96 was TD'ed in August 1997, at 2731m (1731mss). The following casing is in the
hole:
Page 19
<PAGE> 81
Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
508mm conductor - 209m
340mm tech. casing - 1820m
245mm tech. casing - 1408m
178mm liner - 2307-2647m
Open hole - 2647-2731m
There is a fish (a Geophysica production tool) at 2715m. In December 1997,
during the last attempt at cleaning out the well, the tubing could not be
lowered below 2675m. Hole sloughing was observed then at the 2675-2715m interval
as evidenced by the course rocks that were recovered when attempting to
circulate the well clean.
Cumulative oil production is 156,800 bbl. Production was initially 750 bopd but
has since dropped to 200 bopd with a corresponding increase in water cut from
10% to 40%.
It is required to identify and then isolate the source of the water production.
Water could be coming up through the fill in the wellbore or up through the
natural fracture. A cement plug over the bottom of the wellbore may be required
to isolate the water production.
There is the potential to add 51 meters of additional pay over the interval
2647-2698m. If done the expected rate is 400 bopd. The expected cost to log the
well, set a plug and add perforations is $60,000.
An alternative to using the A50 is being evaluated. The coiled tubing unit could
set the cement more accurately than the aggregates and reduce the risk of the
cement being displaced into the natural fracture.
9.10 R16
In December 1997, a cement plug was set at 2184m. Perforations were shot over
the interval 2181-2114m. Oil and water flow from the well is 100 bpd. The
current water cut is 75%.
The source of the water must be determined and then isolated by a cement plug.
As with N96 logs thermodebitometer and temperature logs will need to be run to
identify the water zone. A cement plug will then be set to isolate the water
production. The expected oil rate is 80 bopd and is expected to cost $US 30,000.
9.11 R51
178mm production casing is run to 2055m and the well is perforated over the
interval 2047-2018m. The well produces oil periodically in the past but is now
shut in. This well is updip of well R16 and will be required to increase our
understanding of the West Rustavi field for future development.
The well will be perforated over the interval 2018-1970m. 75 bopd is expected
from this operation. The estimated cost is $US 70,000.
Page 20
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Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
9.12 WORKOVER SUMMARY
<TABLE>
<CAPTION>
WELL NO. TASK 1 TASK 2 EST. COST m CURRENT PROD EST. POST WO RIG bbl/$
$US bopd bopd
<S> <C> <C> <C> <C> <C> <C> <C>
N9 Isolate Gas New Perfs 130 0 250 FTN 1.92
N21 Hydraulic Frac 260 0 150 A50 0.58
N22 Selective Acid Oil Squeeze 80 150 375 FTN 2.81
N30 Isolate Gas Perf, Acid & Oil 56 75 350 FTN 4.91
Squeeze *
N32 Fish Clean out 105 0 225 FTN 2.14
N49 Isolate Water 51 350 450 A50 1.96
N53 Hydraulic Frac 160 1 150 A50 0.94
N59 Clean Out 72 0 150 FTN 2.08
N96 Isolate Water Add Perfs 60 200 400 A50 3.33
R16 Clean Out Add Perfs 30 25 80 A50 1.83
R51 Clean Out Add Perfs 70 0 75 A50 1.07
TOTAL 1,074 801 3,055
</TABLE>
TABLE 1-1 WORKOVER SUMMARY
Page 21
<PAGE> 83
Ninotsminda Oil Company Wednesday, February 10, 1999
Updated Field Development Plan
10 APPENDIX 2 PAST AND PLANNED EXPENDITURES 1998 TO 1999
Page 22
<PAGE> 84
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SCHEDULE 10
Minimum Work Program
<PAGE> 85
NINOTSMINDA OIL COMPANY LIMITED
1580, 727 - SEVENTH AVENUE S.W.,
CALGARY, ALBERTA T2P 0Z5
TELEPHONE : (403) 777-1185
FACSIMILE : (403) 777-1578
October, 1998
MINIMUM WORK PROGRAM
The Minimum Work Program is a program of work commencing on January 1, 1998. The
Minimum Work Program will consist of and will be satisfied upon completion of
the milestones defined below. The performance of the Minimum Work Program will
be guided in principle by good oilfield, engineering practices and the Updated
Field Development Plan submitted separately to the IFC. The Updated Field
Development Plan includes the proposed plans for 1998/1999 and will serve as the
template to meet the IFC requirements. The Updated Field Development Plan will
be revised from time to time based on results and good engineering practices.
1) Drill and test five wells, in the Ninotsminda field, for hydrocarbon
potential.
2) Perform a minimum of eight major workovers on existing wells in the
Ninotsminda/West Rustavi fields. A major workover is defined to be a
stimulation technique with a minimum AFE amount of $50,000 and/or
recompletion.
3) On a continuous basis, perform minor workovers and other field maintenance
activities designed to maintain field production levels as required by good
oilfield practice.
4) Acquire and process approximately 30 km of seismic in the Ninotsminda and
West Rustavi fields. Re-process such additional readily available seismic
data that is considered useful on the Ninotsminda and West Rustavi fields.
Perform interpretation of available data with the objective of refining and
improving the proposed plans of the Updated Field Development Plan.
5) Purchase, upgrade and maintain field facilities and equipment as required
to support the development, production and sale of oil from the Ninotsminda
and West Rustavi fields under the Minimum Work Program. Equipment and
facilities will be upgraded and maintained with the objective of meeting
safe operating conditions and the company's environmental policy.
<PAGE> 1
EXHIBIT 10(19)
CONFORMED COPY
INVESTMENT NUMBER 8138
================================================================================
PUT OPTION AGREEMENT
BETWEEN
CANARGO ENERGY CORPORATION
AND
JKX OIL & GAS PLC.
AND
INTERNATIONAL FINANCE CORPORATION
DATED DECEMBER 17, 1998
================================================================================
<PAGE> 2
- 1 -
PUT OPTION AGREEMENT
AGREEMENT dated December 17, 1998, between CanArgo Energy Corporation,
a Delaware corporation ("CanArgo"), JKX Oil & Gas plc., a company registered in
England ("JKX") and International Finance Corporation, an international
organization established by Articles of Agreement among its member countries
(hereinafter called "IFC").
WHEREAS:
(A) By a convertible loan agreement (the "Convertible Loan
Agreement") dated as of even date herewith between IFC and
Ninotsminda Oil Company (the "Company"), IFC has agreed to
extend to the Company a convertible loan (the "Loan") in the
principal amount of six million Dollars ($6,000,000), on the
terms and subject to the conditions set forth in the
Convertible Loan Agreement.
(B) By virtue of Section 6.01 (d) of the Convertible Loan
Agreement, it is a condition of the initial disbursement of
the Loan that CanArgo and JKX enter into a Put Option
Agreement with IFC pursuant to which IFC shall have the right
following conversion of the Loan, to put any of its shares in
the Company to CanArgo and JKX, on several basis as more fully
set forth below.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Wherever used in this Agreement, unless the context
otherwise requires or unless otherwise defined herein, terms defined in the
Convertible Loan Agreement have the same meanings herein.
Section 1.02. Wherever used in this Agreement, unless the context
otherwise requires, the following terms shall have the following meanings:
"Compounded Dollar Cost" the aggregate amount of Dollars at any time
or from time to time disbursed by IFC for the
purpose of paying for IFC Shares plus the
Dollar equivalent value of any
<PAGE> 3
- 2 -
taxes, fees or other charges in connection
with the purchase or subscription of IFC
Shares, compounded semi-annually at the rate
of twelve percent (12%) per annum from the
Conversion Settlement Date to the relevant
Put Settlement Date (provided that such
compounding rate shall, for any period less
than six months, be prorated on the basis of
a 360-day year and the actual number of days
elapsed).
"Compounded Dollar
Dividends" the amount of Dollars (if any) at any time or
from time to time received by IFC in
immediately available funds in New York City,
New York, United States of America, as the
proceeds of conversion of cash dividends paid
on or with respect to the IFC Shares,
compounded semi-annually at the rate of
twelve percent (12%) per annum from the date
or dates of receipt by IFC to the relevant
Put Settlement Date (provided that such
compounding rate shall, for any period less
than six months, be prorated on the basis of
a 360-day year and the actual number of days
elapsed).
"Compounded Dollar Sales
Proceeds" the aggregate of (i) in the case of any sale
of IFC Shares pursuant to this Agreement, the
actual amount of Dollars received by IFC in
immediately available funds in New York City,
New York, United States of America, as the
proceeds of such sale; and (ii) in the case
of any other sale of IFC Shares, the amount
of Dollars that IFC would have received in
immediately available funds in New York City,
New York, United States of America, as the
proceeds of such sale (or the proceeds of
conversion into Dollars of the sale proceeds
if such other sale was denominated in other
currencies), on the same date or dates as
Dollars were received under such other sale,
if such other sale had instead been made by
IFC to CanArgo and JKX pursuant to the
provisions of this Agreement, such amounts in
each case compounded semi-annually at the
rate of twelve percent (12%) per annum from
the date or dates of receipt by IFC to the
relevant Put Settlement Date (provided that
such compounding rate shall, for any period
less than six months, be prorated on the
basis of a 360-day year and the actual number
of days elapsed).
"Net Asset Value" the net present value of future Net Cash
Flows to NOC, discounted at the Discount
Rate, of all probable reserves (risked at
50%) and all proven reserves, plus current
assets, plus non Exploration and Production
Fixed Assets, less liabilities excluding
related party debt (other than amounts paid
in accordance with section 7.02(x) and (y) of
the Convertible Loan Agreement), the
calculation of Net Cash Flows being based on
the latest valuation submitted to a
recognized securities exchange, or an
equivalent independent valuation to be
obtained at IFC's option.
"Net Asset Value per Share" Net Asset Value divided by the sum of the
total number of authorized and outstanding
shares of the Company plus all shares the
subject of outstanding options or warrants;
<PAGE> 4
- 3 -
"Net Cash Flow" for any period, Operating Cash Flow less
NOC's proportionate share of Project capital
development expenses.
"Operating Cash Flow" means, for any period, the sum of all
proceeds from the sale of NOC's share of oil
and gas, less NOC's proportionate share of
operating costs, operating overheads,
royalties, transportation costs and taxes.
"Option Period" the period commencing on the second
anniversary of the Conversion Settlement Date
and ending upon the first to occur of: (i)
the date on which the Company's shares are
accepted for listing on a stock exchange
acceptable to IFC (which acceptance shall not
be unreasonably withheld) or (ii) December
31, 2007;
"Option Price" the greater of (i) (x) the amount (but not
less than zero) obtained by subtracting from
the Compounded Dollar Cost the sum of (A) the
Compounded Dollar Dividends and (B) the
Compounded Dollar Sales Proceeds, multiplied
by (y) the Put Ratio or (ii) the Net Asset
Value per Share multiplied by the number of
Option Shares the subject of the Put Notice;
"Option Shares" the aggregate of:
(i) all shares of the Company purchased
by IFC pursuant to the Conversion
Option;
(ii) all shares of the Company subscribed
or acquired by IFC pursuant to the
exercise of preemptive rights,
options or warrants accruing to IFC
in relation to any Option Shares;
(iii) all shares of the Company received
by IFC as a result of stock splits
or stock bonuses or stock dividends
on any Option Shares; and
(iv) all shares (of any company) received
by IFC in exchange, replacement or
substitution of any Option Shares;
"Pro-Rata Share" means a percentage of the Option Price based
on the pro-rata ownership interest in the
Company of each of CanArgo Limited, in the
case of CanArgo, and JKX Nederlands B.V., in
the case of JKX;
"Put Notice" the notice given by IFC to CanArgo and JKX
pursuant to Section 2.02, which shall set
forth:
(i) the number of Option Shares which
are the subject of the Put Notice;
(ii) the Option Price and the basis for
its determination;
<PAGE> 5
- 4 -
(iii) the Put Settlement Date, such date
to be not less than thirty (30) days
nor more than sixty (60) days after
the date of the Put Notice; and
(iv) the Settlement Place;
"Put Option" the option, hereby granted, of IFC to sell to
CanArgo and/or JKX on a several basis, at the
Option Price all or part of the Option
Shares;
"Put Ratio" the ratio obtained by dividing (i) the number
of Option Shares the subject of the Put
Notice, by (ii) the total number of Option
Shares;
"Put Settlement Date" the date specified in the Put Notice for
making payment for the Option Shares; and
"Settlement Place" the place for any payments to be made under
this Agreement, which shall be made for the
account of IFC at Northern Trust
International Banking Corporation, New York,
New York (IFC's Account No. 10215220300 CHIPS
ID 142255) or at such other bank and account
as IFC shall notify the parties.
ARTICLE II
THE PUT OPTION
Section 2.01. IFC shall have the option to sell to CanArgo and JKX, on
a several basis, any or all of its Option Shares by exercising its Put Option in
accordance with Section 2.02 below, and, upon the exercise by IFC of such Put
Option, CanArgo and JKX shall be obligated to pay (subject to Section 2.07
hereof) at the Option Price on the Put Settlement Date at the Settlement Place,
for all the Option Shares so sold by IFC.
Section 2.02. The Put Option may be exercised by IFC from time to time
during the Option Period (subject to the provision of the preceding Section
2.01) in respect of all or part of the Option Shares, by delivery of a Put
Notice within the Option Period.
Section 2.03. Upon receipt of a Put Notice, CanArgo and JKX shall, on
the Put Settlement Date and at the Settlement Place, acquire the Option Shares
which are the subject of the Put Notice and (subject to Section 2.07 hereof) pay
therefor the Option Price.
Section 2.04. Payment for the Option Shares referred to in the Put
Notice at the Option Price, shall be made in Dollars in New York, New York in
immediately available funds, without deduction whatsoever for any fees, taxes,
duties or other charges howsoever called, all of which shall be borne by CanArgo
and JKX as applicable.
<PAGE> 6
- 5 -
Section 2.05. Without prejudice to the remedies available to IFC under
this Agreement or otherwise, if CanArgo and JKX shall fail to make payment on or
before the Put Settlement Date as specified pursuant to this Agreement, CanArgo
and JKX shall pay in Dollars, in respect of such payment due and unpaid, a late
payment charge calculated from the Put Settlement Date until all amounts due are
paid at the rate of three percent (3%) per annum above the rate which appears
on the Dow Jones Markets, Inc. Page in the column headed "USD" as of 11:00 a.m.,
London time, on the Put Settlement Date for whichever period is closest to the
duration of such period; such late payment charge shall accrue from day to day
and be prorated on the basis of a 360-day year for the actual number of days in
the above mentioned relevant period.
Section 2.06. Without prejudice to any remedies available to IFC under
this Agreement or otherwise, and notwithstanding any other provision of this
Agreement, in the event that, after IFC shall have delivered a Put Notice during
the Option Period to CanArgo and JKX, CanArgo and JKX shall fail to pay in full,
as herein provided, for all of the Option Shares included in such Put Notice,
IFC, at its sole discretion, shall be free to sell, transfer or otherwise
dispose of any or all of such Option Shares, provided, however, that (a) if IFC
shall sell or otherwise dispose of all of such Option Shares, CanArgo and JKX
shall remain severally obligated to pay to IFC, as an indemnity, the difference
between the Option Price, plus any late payment charge due pursuant to Section
2.05, minus an amount equal to the proceeds, if any, from such sale, transfer or
disposition by IFC, and (b) if IFC shall sell only a portion of such Option
Shares, CanArgo and/or JKX shall remain severally obligated to pay to IFC for
the Option Shares included in the Put Notice but which were not sold or
otherwise disposed of by IFC and, in addition, CanArgo and JKX shall remain
severally obligated to pay to IFC, as an indemnity, the difference between the
Option Price, plus any late payment charge due pursuant to Section 2.05, minus
an amount equal to the proceeds, if any, from the sale, transfer or disposition
by IFC.
Section 2.07. Notwithstanding any other provision of this Agreement to
the contrary, the obligations of CanArgo and JKX to purchase the Option Shares
from IFC and to pay to IFC the Option Price therefor (or to indemnify IFC under
Section 2.06 in respect of any deficiency between the Option Price and amounts
received by IFC following any sale, transfer or disposition in accordance with
said Section 2.06) shall be several and not joint, and shall be further limited
up to the Pro-Rata Share of each of CanArgo and JKX.
ARTICLE III
SALE TO THIRD PARTIES
Section 3.01. Notwithstanding the provisions of Article II hereof, but
subject to Section 3.02 below, nothing in this Agreement shall be deemed to
restrict or otherwise affect IFC's right to sell, transfer, assign or otherwise
dispose of all or any portion of the Option Shares in its sole discretion.
Section 3.02. If at any time IFC receives from any person or persons an
offer to purchase all or any portion of the Option Shares, and if such offer is
acceptable to IFC, then IFC shall notify CanArgo and JKX of the terms thereof
and each of CanArgo and JKX may (no later than 30 days after receipt of IFC's
notice) give IFC an
<PAGE> 7
- 6 -
irrevocable notice of its election to purchase, on identical terms and
conditions, all or such portion of the Option Shares as IFC may wish to sell.
Section 3.03. If at any time CanArgo decides to sell all or a
percentage of the shares of the Company held by it (the "CanArgo Shares"), it
shall, if IFC so requests, only sell all or some of the CanArgo Shares if the
sale also comprises all or the same percentage of IFC's Option Shares, if
necessary by reducing the number of CanArgo Shares to be able to sell the
required number of Option Shares. CanArgo shall notify IFC of the terms and
conditions on which it has decided to sell CanArgo Shares, and IFC shall have
sixty (60) days to decide whether it wants to sell any or all of its Option
Shares as herein provided.
<PAGE> 8
- 7 -
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Each of CanArgo and JKX hereby separately represents and
warrants as to itself only:
(a) that it has the full power, authority and legal right to incur the
obligations provided for in this Agreement, to execute and deliver this
Agreement, and to perform and observe the terms and provisions hereof;
(b) this Agreement constitutes its legal, valid and binding obligation,
enforceable against it in accordance with the terms thereof;
(c) the execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on its part;
(d) the execution, delivery and performance of this Agreement does not
violate or exceed its powers or contravene (i) any provision of any applicable
law, regulation, decree or order to which it is subject, (ii) any provision of
its charter documents, or (iii) any provision of any mortgage, deed, contract,
agreement or other instrument to which it is a party, or which is binding upon
it or any of its assets; and
(e) all authorizations, consents, approvals and licenses required for
the execution, delivery and performance of this Agreement have been duly
obtained or granted and are in full force and effect.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. IFC shall, on the Put Settlement Date or as soon as
practicable thereafter but only after receipt of the Option Price, transfer to
CanArgo and JKX as applicable, the certificates representing the Option Shares,
free and clear of liens, charges and encumbrances, together with such
instruments of transfer, if any, as shall be required by applicable law to
effect the transfer.
Section 5.02. CanArgo and JKX shall pay all taxes (including stamp
taxes), duties, fees, funds, or other charges levied or imposed by any
jurisdiction as may be payable on or in connection with, the execution, issue,
delivery, registration, or notarization of this Agreement, and the sale,
transfer or delivery of the Options Shares and any documents related thereto,
and shall reimburse IFC for any such taxes, duties, fees, funds, or other
charges paid by IFC thereon.
<PAGE> 9
- 8 -
Section 5.03. CanArgo and/or JKX shall pay to IFC, or as IFC may
direct, the fees and expenses of IFC's counsel incurred in connection with the
exercise by IFC of its rights under the Put Option.
Section 5.04. CanArgo and JKX, in their capacity as the sole owners of
the Immediate Shareholders of the Company, undertake to take such action as is
necessary so as to prevent any amendment of the charter documents of the Company
otherwise than in accordance with the provisions of the Convertible Loan
Agreement and the taking of any action by the Company the effect of which would
be to restrict or prevent the sale, transfer or disposition of any Option Shares
pursuant to this Agreement.
Section 5.05. Any notice or request required or permitted to be given
or made hereunder shall be in writing. Such notice or request shall be deemed to
have been duly given or made when it shall be delivered by hand, airmail,
facsimile or telex to the party to which it is required or permitted to be given
or made at such party's address specified below, or such other address as such
party shall have designated by notice to the party giving such notice or making
such request. Any communication to be delivered to any party under this
Agreement which is sent by cable, facsimile or telex will constitute written
legal evidence between the parties.
For CanArgo:
CanArgo Energy Corporation
P.O. Box 291
Commerce House, Les Banques
St. Peter Port, Guernsey, GY1 3RR
British Isles
Attention: Chairman
Facsimile: 44-1481-729-982
<PAGE> 10
- 9 -
With a copy sent to:
CanArgo Energy Corporation
Suite 1580, 727 - 7th Avenue S.W.
Calgary, Alberta, Canada
T2P 0Z5
Attention: President
Facsimile: (403) 777-1578
For JKX:
JKX Oil and Gas plc
6 Cavendish Square, London
W1M 9HA, England
United Kingdom
Attention: Chief Executive Officer
Facsimile: 44-171-323-5258
With a copy sent to:
JKX Oil and Gas plc
JKX House, Eastgate Court
High Street, Guildford
Surrey GU1 3DF
England, United Kingdom
Attention: Secretary
Facsimile: 44-1483-242 479
For IFC:
International Finance Corporation
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
United States of America
<PAGE> 11
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Facsimile: 202-974-4322
Section 5.06. Successors. This Agreement shall bind and inure to the
benefit of the respective successors of the parties hereto. Neither CanArgo nor
JKX shall assign, delegate or transfer any of their obligations hereunder
without the prior written consent of IFC. Any purported assignment in violation
of this Section shall be void.
Section 5.07. Jurisdiction and Enforcement. (a) This Agreement is
governed by, and shall be construed in accordance with, the laws of the State of
New York, United States of America.
(b) Each of CanArgo and JKX irrevocably agrees that any legal action,
suit or proceeding arising out of or relating to this Agreement or any other
Transaction Document to which they are party may be brought by IFC in the courts
of the State of New York or of the United States of America located in the
Southern District of New York. Final judgment against CanArgo and JKX in any
such action, suit or proceeding shall be conclusive and may be enforced in any
other jurisdiction, by suit on the judgment, a certified or exemplified copy of
which shall be conclusive evidence of the judgment, or in any other manner
provided by law.
(c) By the execution and delivery of this Agreement, CanArgo and JKX
irrevocably submit to the non-exclusive jurisdiction of any such court in any
such action, suit or proceeding and designate, appoint and empower Corporation
Services Company, Two World Trade Center, New York, NY as their authorized agent
to receive for and on their behalf service of any summons, complaint or other
legal process in any such action, suit or proceeding in the State of New York.
(d) Nothing in this Agreement shall affect the right of IFC to commence
legal proceedings or otherwise sue CanArgo and JKX in any other jurisdiction, or
concurrently in more than one jurisdiction, or to serve process, pleadings and
other legal papers upon CanArgo and JKX in any manner authorized by the laws of
any such jurisdiction.
(e) As long as this Agreement remains in force, each of CanArgo and JKX
shall maintain a duly appointed agent for the service of summons, complaint and
other legal process in New York, New York, United States of America, for
purposes of any legal action, suit or proceeding IFC may bring in respect of
this Agreement or any other Transaction Document to which they are party.
CanArgo and JKX shall keep IFC advised of the identity and location of their
respective agent.
(f) Each of CanArgo and JKX also irrevocably consent, if for any reason
their authorized agent for service of process of summons, complaint and other
legal process in any such action, suit or proceeding is not present in New York,
New York, to service of such papers being made out of those courts by mailing
copies of the papers by registered United States air mail, postage prepaid, to
CanArgo's and JKX's address specified in Section 5.05. In such a case, IFC shall
also send by telex or facsimile, or have sent by telex or facsimile, a copy of
the papers to CanArgo and JKX.
<PAGE> 12
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(g) Service in the manner provided in subsection (f) above in any such
action, suit or proceeding will be deemed personal service, will be accepted by
CanArgo and JKX as such and will be valid and binding upon CanArgo and JKX for
all purposes of any such action, suit or proceeding.
(h) Each of CanArgo and JKX irrevocably waives to the fullest extent
permitted by applicable law:
(i) any objection which they may have now or in the future to
the laying of the venue of any such action, suit or proceeding in
any court referred to in this Section;
(ii) any claim that any such action, suit or proceeding has
been brought in an inconvenient forum; and
(iii) their right of removal of any matter commenced by IFC in
the courts of the State of New York to any court of the United
States of America.
(i) To the extent that either CanArgo or JKX may be entitled in any
jurisdiction to claim for themselves or their assets immunity in respect of
their obligations under this Agreement or any other Transaction Document to
which they are party from any suit, execution, attachment (whether provisional
or final, in aid of execution, before judgment or otherwise) or other legal
process or to the extent that in any jurisdiction such immunity (whether or not
claimed) may be attributed to it or its assets, each of CanArgo and JKX
irrevocably agrees not to claim and irrevocably waive such immunity to the
fullest extent permitted by the laws of such jurisdiction.
(j) Each of CanArgo and JKX hereby acknowledges that IFC shall be
entitled under applicable law, including the provisions of the International
Organizations Immunities Act, to immunity from a trial by jury in any action,
suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby or any other Transaction Document to which they
are party, brought against IFC in any court of the United States of America.
CanArgo and JKX hereby waive any and all rights to demand a trial by jury in any
action, suit or proceeding arising out of or relating to this Agreement or any
other Transaction Document to which they are party or the transactions
contemplated by this Agreement or such Transaction Documents, brought against
IFC in any forum in which IFC is not entitled to immunity from a trial by jury.
(k) To the extent that CanArgo and JKX may, in any suit, action or
proceeding brought in any of the courts referred to in paragraph (b) above or
elsewhere arising out of or in connection with this Agreement or any other
Transaction Document to which they are party, be entitled to the benefit of any
provision of law requiring IFC in such suit, action or proceeding to post
security for the costs of CanArgo and JKX (cautio judicatum solvi), or to post a
bond or to take similar action, CanArgo and JKX hereby irrevocably waive such
benefit, in each case to the fullest extent now or in the future permitted under
the laws of the jurisdiction in which such court is located.
Section 5.08. English Language. All documents to be furnished or
communications to be given or made under this Agreement shall be in the English
language or, if in another language, shall be accompanied by a translation into
English certified by a representative of CanArgo and JKX, which translation
shall be the governing version between CanArgo, JKX and IFC.
<PAGE> 13
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Section 5.09. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto, acting through their duly
authorized representatives, have caused this Agreement to be signed as of the
date first above written.
CANARGO ENERGY CORPORATION
By: /s/ Michael Binnion
Authorized Representative
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JKX OIL & GAS PLC.
By: /s/ Bruce Burrows
Authorized Representative
INTERNATIONAL FINANCE CORPORATION
By: /s/ Maria da Graca Domingues
Authorized Representative
<PAGE> 1
EXHIBIT 10(20)
CONFORMED COPY
INVESTMENT NUMBER 8138
================================================================================
GUARANTEE AGREEMENT
BETWEEN
CANARGO ENERGY CORPORATION
and
INTERNATIONAL FINANCE CORPORATION
DATED DECEMBER 17, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article of
Section Page No.
------- --------
<S> <C>
ARTICLE I ......................................................................................2
DEFINITIONS AND INTERPRETATION..................................................................2
SECTION 1.01. DEFINED TERMS................................................................2
SECTION 1.02. GUARANTEED OBLIGATIONS.......................................................2
SECTION 1.03. INTERPRETATION..............................................................2
ARTICLE II......................................................................................3
GUARANTEE.......................................................................................3
SECTION 2.01. GUARANTEE....................................................................3
SECTION 2.02. CONTINUING GUARANTEE.........................................................4
SECTION 2.03. NO SET-OFF...................................................................4
SECTION 2.04. TAXES........................................................................4
SECTION 2.05. CERTIFICATE CONCLUSIVE.......................................................5
SECTION 2.06. APPLICATION OF PAYMENTS......................................................5
SECTION 2.07. ALLOCATION...................................................................6
ARTICLE III.....................................................................................6
SAVING PROVISIONS...............................................................................6
SECTION 3.01. INCREASE IN GUARANTEED OBLIGATIONS...........................................6
SECTION 3.02. WAIVER OF DEFENSES...........................................................6
SECTION 3.03. IMMEDIATE RECOURSE...........................................................7
SECTION 3.04. SUBROGATION..................................................................7
SECTION 3.05. BANKRUPTCY OR LIQUIDATION OF COMPANY.........................................8
SECTION 3.06. APPROPRIATION OF MONEYS......................................................8
SECTION 3.07. RESTRUCTURING................................................................9
SECTION 3.08. ADDITIONAL SECURITY..........................................................9
ARTICLE IV......................................................................................9
INDEMNITY.......................................................................................9
SECTION 4.01. INDEMNITY....................................................................9
</TABLE>
<PAGE> 3
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<TABLE>
<CAPTION>
ARTICLE OR
SECTION PAGE NO.
------- --------
<S> <C>
ARTICLE V......................................................................................10
REPRESENTATIONS AND WARRANTIES.................................................................10
SECTION 5.01. REPRESENTATIONS AND WARRANTIES..............................................10
SECTION 5.02. IFC RELIANCE................................................................11
SECTION 5.03. RIGHTS AND REMEDIES NOT LIMITED.............................................11
ARTICLE VI.....................................................................................13
COVENANTS......................................................................................13
SECTION 6.01. GUARANTOR'S COVENANTS.......................................................13
ARTICLE VII....................................................................................14
MISCELLANEOUS..................................................................................14
SECTION 7.01. NOTICES.....................................................................14
SECTION 7.02. ENGLISH LANGUAGE............................................................16
SECTION 7.03. EXPENSES....................................................................16
SECTION 7.04. REMEDIES AND WAIVERS........................................................16
SECTION 7.05. JURISDICTION AND ENFORCEMENT................................................16
SECTION 7.06. CONFIDENTIAL INFORMATION....................................................19
SECTION 7.07. SUCCESSORS AND ASSIGNS......................................................19
SECTION 7.08. AMENDMENT...................................................................19
SECTION 7.09. COUNTERPARTS................................................................20
</TABLE>
<PAGE> 4
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GUARANTEE AGREEMENT
GUARANTEE AGREEMENT DATED DECEMBER 17, 1998, BETWEEN CANARGO ENERGY
CORPORATION (THE "GUARANTOR") AND INTERNATIONAL FINANCE CORPORATION ("IFC").
WHEREAS:
(A) BY A CONVERTIBLE LOAN AGREEMENT (THE "CONVERTIBLE
LOAN AGREEMENT") DATED AS OF THE DATE HEREOF, BETWEEN IFC AND
NINOTSMINDA OIL COMPANY (THE "COMPANY"), IFC HAS AGREED TO
EXTEND TO THE COMPANY A CONVERTIBLE LOAN (THE "LOAN") IN THE
PRINCIPAL AMOUNT OF SIX MILLION DOLLARS ($6,000,000), ON THE
TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THE
CONVERTIBLE LOAN AGREEMENT.
(B) THE GUARANTOR HAS BEEN PROVIDED WITH, AND HEREBY
ACKNOWLEDGES RECEIPT OF, A CONFORMED COPY OF THE CONVERTIBLE
LOAN AGREEMENT.
(C) BY VIRTUE OF SECTION 6.01(D) OF THE CONVERTIBLE
LOAN AGREEMENT, IT IS A CONDITION OF THE INITIAL DISBURSEMENT
OF THE LOAN THAT THE GUARANTOR HAS GUARANTEED THE OBLIGATIONS
OF THE COMPANY IN RESPECT OF THE LOAN ON TERMS AND CONDITIONS
SATISFACTORY TO IFC.
(D) THE GUARANTOR WILL OBTAIN BENEFITS AS A RESULT OF
THE LOAN MADE TO THE COMPANY UNDER THE CONVERTIBLE LOAN
AGREEMENT AND, ACCORDINGLY, DESIRES TO EXECUTE AND DELIVER
THIS GUARANTEE IN ORDER TO SATISFY THE CONDITION DESCRIBED IN
THE PRECEDING PARAGRAPH.
(E) THE GUARANTOR, TO INDUCE IFC TO MAKE THE LOAN
AND, IN PARTICULAR, THE FIRST DISBURSEMENT OF THE LOAN, HAS
AGREED TO GUARANTEE SUCH OBLIGATIONS OF THE COMPANY.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
<PAGE> 5
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ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.01. DEFINED TERMS. TERMS DEFINED IN THE CONVERTIBLE
LOAN AGREEMENT HAVE THE SAME MEANINGS WHEN USED IN THIS GUARANTEE,
UNLESS THE CONTEXT OTHERWISE REQUIRES.
SECTION 1.02. GUARANTEED OBLIGATIONS. IN THIS GUARANTEE:
(A) THE TERM "GUARANTEED OBLIGATIONS" MEANS ALL DEBTS AND MONETARY
LIABILITIES OF THE COMPANY TO IFC UNDER OR IN RELATION TO THE CONVERTIBLE LOAN
AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT AND IN ANY CAPACITY IRRESPECTIVE OF
WHETHER THE DEBTS OR LIABILITIES:
(I) ARE PRESENT OR FUTURE;
(II) ARE ACTUAL, PROSPECTIVE, CONTINGENT OR OTHERWISE;
(III) ARE AT ANY TIME ASCERTAINED OR UNASCERTAINED;
(IV) ARE OWED OR INCURRED AS PRINCIPAL, INTEREST, FEES,
CHARGES, TAXES, DUTIES OR OTHER IMPOSTS, DAMAGES (WHETHER FOR BREACH
OF CONTRACT OR TORT OR INCURRED ON ANY OTHER GROUND), LOSSES, COSTS
OR EXPENSES, OR ON ANY OTHER ACCOUNT;
(V) ARE OWED AT STATED MATURITY, UPON PREPAYMENT, FOLLOWING
ACCELERATION, OR OTHERWISE, OR
(VI) COMPRISE ANY COMBINATION OF THE ABOVE; AND
(B) THE TERM "THIS GUARANTEE" INCLUDES THE INDEMNITY SET FORTH IN
ARTICLE IV.
(C) THE TERM "PRO-RATA SHARE" MEANS A PERCENTAGE OF THE GUARANTEED
OBLIGATIONS BASED ON THE GUARANTOR'S PRO-RATA OWNERSHIP INTEREST IN THE COMPANY.
SECTION 1.03. INTERPRETATION IN THIS AGREEMENT, UNLESS THE CONTEXT
OTHERWISE REQUIRES:
(A) HEADINGS ARE FOR CONVENIENCE ONLY AND DO NOT AFFECT THE
INTERPRETATION OF THIS AGREEMENT;
(B) WORDS IMPORTING THE SINGULAR INCLUDE THE PLURAL AND VICE VERSA;
<PAGE> 6
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(C) AN EXPRESSION IMPORTING A NATURAL PERSON INCLUDES ANY COMPANY,
PARTNERSHIP, TRUST, JOINT VENTURE, ASSOCIATION, CORPORATION OR OTHER BODY
CORPORATE AND ANY GOVERNMENTAL OR SEMI GOVERNMENTAL AUTHORITY OR AGENCY,
(D) A REFERENCE TO A SECTION, ARTICLE, PARAGRAPH, PARTY, ANNEX,
EXHIBIT, OR SCHEDULE IS A REFERENCE TO A SECTION, ARTICLE AND PARAGRAPH OF, AND
A PARTY, ANNEX, EXHIBIT AND SCHEDULE TO, THIS AGREEMENT;
(E) A REFERENCE TO A DOCUMENT INCLUDES AN AMENDMENT OR SUPPLEMENT TO,
OR REPLACEMENT OR NOVATION OF, THAT DOCUMENT BUT DISREGARDING ANY AMENDMENT,
SUPPLEMENT, REPLACEMENT OR NOVATION MADE IN BREACH OF THIS AGREEMENT; AND
(F) A REFERENCE TO A PARTY TO ANY DOCUMENT INCLUDES THAT PARTY'S
SUCCESSORS AND PERMITTED ASSIGNS.
ARTICLE II
GUARANTEE
SECTION 2.01. GUARANTEE. THE GUARANTOR IRREVOCABLY, ABSOLUTELY AND
UNCONDITIONALLY:
(A) AS PRIMARY OBLIGOR AND NOT MERELY AS SURETY, GUARANTEES TO IFC THE
DUE AND PUNCTUAL PAYMENT OF THE GUARANTEED OBLIGATIONS, WHETHER AT STATED
MATURITY, UPON PREPAYMENT, FOLLOWING ACCELERATION OR OTHERWISE, AND AGREES TO
PAY ANY AND ALL EXPENSES (INCLUDING COUNSEL FEES AND EXPENSES) INCURRED BY IFC
IN ENFORCING ANY RIGHTS UNDER THIS GUARANTEE, UP TO AN AMOUNT EQUAL TO ITS
PRO-RATA SHARE; AND
(B) UNDERTAKES WITH IFC THAT WHENEVER THE COMPANY DOES NOT PAY ANY
AMOUNT OF THE GUARANTEED OBLIGATIONS WHEN DUE THE GUARANTOR WILL, IMMEDIATELY,
AND IN ANY EVENT FORTHWITH UPON DEMAND BY IFC, PAY SUCH AMOUNT, UP TO ITS
PRO-RATA SHARE, TO IFC, IN THE CURRENCY PRESCRIBED IN THE CONVERTIBLE LOAN
AGREEMENT OR THE RELEVANT TRANSACTION DOCUMENT, AND OTHERWISE IN THE SAME MANNER
IN ALL RESPECTS AS THE GUARANTEED OBLIGATIONS ARE REQUIRED TO BE PAID BY THE
COMPANY.
SECTION 2.02. CONTINUING GUARANTEE. (A) THE GUARANTEE AND THE
INDEMNITY CONTAINED IN THIS GUARANTEE IS EACH A CONTINUING OBLIGATION OF
THE GUARANTOR, AND SHALL REMAIN IN FULL FORCE AND EFFECT UNTIL THE
EARLIER OF:
<PAGE> 7
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(I) THE GUARANTEED OBLIGATIONS HAVE BEEN FULLY PAID STRICTLY
IN ACCORDANCE WITH THE PROVISIONS OF THE CONVERTIBLE LOAN AGREEMENT
AND THE TRANSACTION DOCUMENTS; OR
(II) THE FINANCIAL COMPLETION DATE.
(B) THE GUARANTEE AND THE INDEMNITY CONTAINED IN THIS GUARANTEE SHALL
BE ADDITIONAL, SEPARATE AND INDEPENDENT OBLIGATIONS OF THE GUARANTOR.
(C) THE GUARANTEE AND THE INDEMNITY CONTAINED IN THIS GUARANTEE SHALL
SURVIVE THE TERMINATION OF ANY TRANSACTION DOCUMENT.
(D) THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTEE CAN BE DISCHARGED
ONLY BY PERFORMANCE AND THEN ONLY TO THE EXTENT OF SUCH PERFORMANCE. THE
GUARANTOR'S OBLIGATIONS ARE NOT SUBJECT TO, AND THE GUARANTOR HEREBY WAIVES THE
REQUIREMENT FOR, ANY PRIOR NOTICE TO, PROTEST, DEMAND UPON OR ACTION AGAINST THE
COMPANY, OR ANY PRIOR NOTICE TO THE GUARANTOR WITH REGARD TO ANY DEFAULT BY THE
COMPANY.
(E) THIS GUARANTEE SHALL CONTINUE TO BE EFFECTIVE, OR BE REINSTATED, AS
THE CASE MAY BE, IF AT ANY TIME ANY PAYMENT OF A GUARANTEED OBLIGATION IS
RESCINDED OR MUST OTHERWISE BE RETURNED BY IFC OR ANY OTHER PERSON AS A RESULT
OF A COURT ORDER OR OTHERWISE UPON THE INSOLVENCY, BANKRUPTCY OR REORGANIZATION
OF ANY PERSON, AS THOUGH SUCH PAYMENT HAD NOT BEEN MADE.
SECTION 2.03. NO SET-OFF. ALL PAYMENTS WHICH THE GUARANTOR IS
REQUIRED TO MAKE UNDER THIS GUARANTEE SHALL BE WITHOUT ANY SET-OFF,
COUNTERCLAIM OR CONDITION.
SECTION 2.04. TAXES. (A) THE GUARANTOR SHALL PAY OR CAUSE TO BE PAID
ALL PRESENT AND FUTURE TAXES, DUTIES, FEES AND OTHER CHARGES OF WHATSOEVER
NATURE, IF ANY, NOW OR IN THE FUTURE LEVIED OR IMPOSED BY CANADA OR GEORGIA OR
BY ANY AUTHORITY OF EITHER OF THE FOREGOING, OR BY ANY ORGANIZATION OF WHICH
EITHER OF THE FOREGOING IS A MEMBER OR ANY JURISDICTION THROUGH OR OUT OF WHICH
A PAYMENT IS MADE ON OR IN CONNECTION WITH THE PAYMENT OF ANY AND ALL AMOUNTS
DUE UNDER THIS GUARANTEE.
(B) ALL PAYMENTS DUE UNDER THIS GUARANTEE SHALL BE MADE WITHOUT
DEDUCTION FOR OR ON ACCOUNT OF ANY SUCH TAXES, DUTIES, FEES OR OTHER CHARGES.
(C) IF THE GUARANTOR IS PREVENTED BY OPERATION OF LAW OR OTHERWISE FROM
MAKING OR CAUSING TO BE MADE SUCH PAYMENTS WITHOUT DEDUCTION, THE AMOUNTS DUE
UNDER THIS GUARANTEE SHALL BE INCREASED, AND THE GUARANTOR SHALL PAY, SUCH
AMOUNT AS MAY BE NECESSARY SO THAT IFC RECEIVES THE FULL AMOUNT IT WOULD HAVE
RECEIVED (TAKING INTO ACCOUNT ANY SUCH TAXES, DUTIES, FEES OR OTHER CHARGES
PAYABLE ON AMOUNTS PAYABLE BY THE GUARANTOR UNDER THIS SUBSECTION) HAD SUCH
PAYMENTS BEEN MADE WITHOUT SUCH DEDUCTION.
<PAGE> 8
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(D) IF SUBSECTION (C) ABOVE APPLIES AND IFC SO REQUIRES, THE GUARANTOR
SHALL DELIVER TO IFC OFFICIAL TAX RECEIPTS EVIDENCING PAYMENT (OR CERTIFIED
COPIES OF THEM) WITHIN THIRTY (30) DAYS OF THE DATE OF PAYMENT.
SECTION 2.05. CERTIFICATE CONCLUSIVE. A CERTIFICATE OF IFC STATING:
(A) THE AMOUNT OF THE GUARANTEED OBLIGATIONS DUE AND PAYABLE; OR
(B) ANY AMOUNT DUE AND PAYABLE BY THE GUARANTOR UNDER THIS GUARANTEE;
OR
(C) THE AMOUNT OF THE GUARANTEED OBLIGATIONS, WHETHER CURRENTLY DUE AND
PAYABLE OR NOT,
SHALL BE CONCLUSIVE IN THE ABSENCE OF MANIFEST ERROR.
SECTION 2.06. APPLICATION OF PAYMENTS. IFC MAY APPLY ANY AMOUNTS
RECEIVED BY IT OR RECOVERED UNDER:
(A) ANY IFC SECURITY; AND
(B) ANY OTHER DOCUMENT OR AGREEMENT WHICH IS A SECURITY FOR ANY OF THE
GUARANTEED OBLIGATIONS AND ANY OTHER MONEYS, IN SUCH MANNER AS IT DETERMINES IN
ITS ABSOLUTE DISCRETION.
SECTION 2.07. ALLOCATION. IF THE GUARANTOR AT ANY TIME PAYS TO IFC AN
AMOUNT LESS THAN THE FULL AMOUNT THEN DUE AND PAYABLE TO IFC UNDER THIS
GUARANTEE, IFC MAY ALLOCATE AND APPLY SUCH PAYMENT IN ANY WAY OR MANNER AND FOR
SUCH PURPOSE OR PURPOSES AS IFC IN ITS SOLE DISCRETION DETERMINES,
NOTWITHSTANDING ANY INSTRUCTION THAT THE GUARANTOR MIGHT GIVE TO THE CONTRARY.
ARTICLE III
SAVING PROVISIONS
SECTION 3.01. INCREASE IN GUARANTEED OBLIGATIONS. THE OBLIGATIONS OF
THE GUARANTOR UNDER THIS GUARANTEE SHALL EXTEND TO ANY INCREASE IN THE
GUARANTEED OBLIGATIONS AS A RESULT OF:
(A) ANY AMENDMENT, SUPPLEMENT, RENEWAL OR REPLACEMENT OF ANY
TRANSACTION DOCUMENT; OR
(B) THE OCCURRENCE OF ANY OTHER THING; AND
<PAGE> 9
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(C) REGARDLESS OF WHETHER THE GUARANTOR IS AWARE OF, CONSENTED TO OR IS
GIVEN NOTICE OF ANY ALTERATION, VARIATION, AMENDMENT, SUPPLEMENT, RENEWAL OR
REPLACEMENT OF ANY TRANSACTION DOCUMENT OR THE OCCURRENCE OF SUCH OTHER THING.
SECTION 3.02. WAIVER OF DEFENSES. THE GUARANTOR'S OBLIGATIONS UNDER
THIS GUARANTEE SHALL BE IRREVOCABLE, ABSOLUTE AND UNCONDITIONAL, IRRESPECTIVE
OF, AND SHALL NOT BE AFFECTED OR IMPAIRED BY, ANY ACT, OMISSION, CIRCUMSTANCE
(OTHER THAN COMPLETE PAYMENT OF THE GUARANTEED OBLIGATIONS), MATTER OR THING
WHICH, BUT FOR THIS PROVISION, WOULD REDUCE, RELEASE OR PREJUDICE ANY OF ITS
OBLIGATIONS UNDER THIS GUARANTEE OR WHICH MIGHT OTHERWISE CONSTITUTE A LEGAL OR
EQUITABLE DISCHARGE OR DEFENSE OF A SURETY OR A GUARANTOR, INCLUDING (WHETHER OR
NOT KNOWN TO THE GUARANTOR OR TO IFC):
(A) ANY TIME, WAIVER, COMPOSITION, FORBEARANCE OR CONCESSION GIVEN TO
THE COMPANY OR ANY OTHER PERSON;
(B) ANY ASSERTION OF, OR FAILURE TO ASSERT, OR DELAY IN ASSERTING, ANY
RIGHT, POWER OR REMEDY AGAINST THE COMPANY OR ANY OTHER PERSON, OR IN RESPECT OF
ANY SECURITY FOR THE LOAN;
(C) ANY TAKING, EXCHANGE, RELEASE OR NON-PERFECTION OF THE IFC
SECURITY, OR ANY TAKING, RELEASE OR AMENDMENT OR WAIVER OF OR CONSENT TO
DEPARTURE FROM ANY OTHER GUARANTY, FOR ALL OR ANY OF THE GUARANTEED OBLIGATIONS;
(D) ANY MANNER OF APPLICATION OF THE IFC SECURITY, OR PROCEEDS THEREOF,
TO ALL OR ANY OF THE GUARANTEED OBLIGATIONS, OR ANY MANNER OF SALE OR OTHER
DISPOSITION OF ANY COLLATERAL FOR ALL OR ANY OF THE GUARANTEED OBLIGATIONS UNDER
THE TRANSACTION DOCUMENTS;
(E) ANY AMPLIFICATION, AMENDMENT (HOWEVER FUNDAMENTAL), VARIATION OR
REPLACEMENT OF THE PROVISIONS OF ANY TRANSACTION DOCUMENT OR OF ANY OTHER
AGREEMENT OR SECURITY BETWEEN IFC AND THE COMPANY;
(F) ANY FAILURE OF THE COMPANY OR THE GUARANTOR TO COMPLY WITH ANY
REQUIREMENT OF ANY LAW, REGULATION OR ORDER;
(G) ANY CHANGE, RESTRUCTURING, REORGANIZATION OR TERMINATION OF THE
LEGAL STATUS OR STRUCTURE OF THE COMPANY OR THE GUARANTOR;
(H) THE OCCURRENCE AND/OR CONTINUANCE OF ANY BANKRUPTCY,
REORGANIZATION, ARRANGEMENT, ADJUSTMENT OF DEBT, RELIEF OF DEBTORS, DISSOLUTION,
INSOLVENCY, LIQUIDATION OR SIMILAR PROCEEDINGS WITH RESPECT TO THE COMPANY OR
THE GUARANTOR;
(I) ANY PURPORTED OR ACTUAL ASSIGNMENT OF THE LOAN BY IFC TO ANY OTHER
PARTY; OR
<PAGE> 10
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(J) THE CONVERTIBLE LOAN AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT
BEING IN WHOLE OR IN PART ILLEGAL, VOID, VOIDABLE, AVOIDED, INVALID,
UNENFORCEABLE OR OTHERWISE OF LIMITED FORCE AND EFFECT.
SECTION 3.03. IMMEDIATE RECOURSE. THE GUARANTOR WAIVES ANY RIGHT IT MAY
HAVE OF FIRST REQUIRING IFC (OR ANY TRUSTEE, AGENT OR OTHER PERSON ACTING ON ITS
BEHALF) TO PROCEED AGAINST OR ENFORCE ANY OTHER RIGHTS OR SECURITY OR CLAIM
PAYMENT FROM ANY PERSON BEFORE CLAIMING FROM THE GUARANTOR UNDER THIS GUARANTEE.
SECTION 3.04. SUBROGATION. IF ANY AMOUNTS HAVE BECOME PAYABLE OR HAVE
BEEN PAID BY THE GUARANTOR UNDER THIS GUARANTEE, THE GUARANTOR SHALL NOT, IN
RESPECT OF SUCH MONIES, SEEK TO ENFORCE REPAYMENT, OBTAIN THE BENEFIT OF ANY
SECURITY OR EXERCISE ANY OTHER RIGHTS OR LEGAL REMEDIES OF ANY KIND WHICH MAY
ACCRUE TO THE GUARANTOR AGAINST THE COMPANY, WHETHER BY WAY OF SUBROGATION,
OFFSET, COUNTERCLAIM OR OTHERWISE, WHETHER OR NOT SUCH RIGHTS OR LEGAL REMEDY
ARISE IN EQUITY OR UNDER CONTRACT, STATUTE OR COMMON LAW, IN RESPECT OF THE
AMOUNT SO PAYABLE OR SO PAID (OR IN RESPECT OF ANY OTHER MONIES FOR THE TIME
BEING DUE TO THE GUARANTOR FROM THE COMPANY) IF AND FOR SO LONG AS (I) ANY
MONIES WHICH HAVE BECOME PAYABLE TO IFC UNDER THE CONVERTIBLE LOAN AGREEMENT OR
ANY OTHER TRANSACTION DOCUMENT REMAIN UNPAID, OR (II) ANY OTHER EVENT OF DEFAULT
(OR EVENT WHICH WITH NOTICE, LAPSE OF TIME OR BOTH WOULD BECOME AN EVENT OF
DEFAULT) IS IN EXISTENCE. THE GUARANTOR SHALL HOLD IN TRUST FOR, AND FORTHWITH
PAY OR TRANSFER TO, IFC ANY PAYMENT OR DISTRIBUTION OR BENEFIT OF SECURITY
RECEIVED BY IT CONTRARY TO THIS SECTION 3.04.
SECTION 3.05. BANKRUPTCY OR LIQUIDATION OF COMPANY. IF THE COMPANY
BECOMES BANKRUPT, ENTERS INTO A COMPOSITION OR MAKES ANY ARRANGEMENT WITH ITS
CREDITORS, OR IS DISSOLVED, LIQUIDATED OR WOUND UP, THE GUARANTOR SHALL NOT
CLAIM, RANK, PROVE OR VOTE AS A CREDITOR OF THE COMPANY OR ITS ESTATE IN
COMPETITION WITH IFC IN RESPECT OF ANY AMOUNTS OWING TO THE GUARANTOR BY THE
COMPANY ON ANY ACCOUNT WHATSOEVER, BUT INSTEAD SHALL GIVE IFC THE BENEFIT OF ANY
SUCH PROOF AND OF ALL AMOUNTS TO BE RECEIVED IN RESPECT OF THAT PROOF UNTIL ALL
GUARANTEED OBLIGATIONS HAVE BEEN FULLY PAID. THE GUARANTOR SHALL HOLD IN TRUST
FOR, AND FORTHWITH PAY OR TRANSFER TO, IFC ANY PAYMENT OR DISTRIBUTION OR
BENEFIT OF SECURITY RECEIVED BY IT CONTRARY TO THIS SECTION 3.05.
SECTION 3.06. APPROPRIATION OF MONEYS. UNTIL ALL OF THE GUARANTEED
OBLIGATIONS HAVE BEEN IRREVOCABLY PAID IN FULL, IFC (OR ANY TRUSTEE, AGENT OR
OTHER PERSON ACTING ON ITS BEHALF) MAY:
(A) REFRAIN FROM APPLYING OR ENFORCING ANY OTHER MONEYS, SECURITY OR
RIGHTS HELD OR RECEIVED BY IFC (OR SUCH TRUSTEE, AGENT OR OTHER PERSON) IN
RESPECT OF THE GUARANTEED OBLIGATIONS, OR APPLY AND ENFORCE THE SAME IN SUCH
MANNER AND ORDER AS IT SEES FIT (WHETHER AGAINST THE GUARANTEED OBLIGATIONS OR
OTHERWISE) AND THE GUARANTOR SHALL NOT BE ENTITLED TO THE BENEFIT OF THE SAME;
AND
<PAGE> 11
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(B) HOLD AND KEEP FOR SUCH TIME AS IT THINKS PRUDENT ANY MONIES
RECEIVED, RECOVERED OR REALIZED UNDER THIS GUARANTEE, TO THE CREDIT EITHER OF
THE GUARANTOR OR SUCH OTHER PERSON OR PERSONS AS IT THINKS FIT.
SECTION 3.07. RESTRUCTURING. (A) IFC SHALL, WITHOUT THE CONSENT OF THE
GUARANTOR, BE ENTITLED TO RESCHEDULE OR RESTRUCTURE PRINCIPAL, INTEREST AND
OTHER AMOUNTS PAYABLE UNDER THE CONVERTIBLE LOAN AGREEMENT, TO RELEASE THE
COMPANY FROM ITS OBLIGATIONS THEREUNDER AND/OR TO ACCEPT A NEW DEBTOR. THE
GUARANTOR'S LIABILITY UNDER THIS GUARANTY SHALL NOT BE AFFECTED BY SUCH
MEASURES, AND THE GUARANTOR UNDERTAKES TO PAY IFC IN ACCORDANCE WITH THE TERMS
HEREOF, ALL SUCH AMOUNTS IN FULL WHEN DUE.
(B) IFC (OR ANY TRUSTEE, AGENT OR OTHER PERSON ACTING ON ITS BEHALF)
MAY CONCEDE OR COMPROMISE ANY CLAIM THAT ANY PAYMENT, SECURITY OR OTHER
DISPOSITION IS LIABLE TO AVOIDANCE OR RESTORATION.
SECTION 3.08. ADDITIONAL SECURITY. THIS GUARANTEE IS IN ADDITION TO AND
IS NOT IN ANY WAY PREJUDICED BY ANY OTHER COMPONENT OF THE IFC SECURITY, OR ANY
COLLATERAL OR OTHER SECURITY NOW OR HEREAFTER HELD BY IFC, NOR SHALL SUCH
COLLATERAL OR OTHER SECURITY HELD BY IFC OR THE LIABILITY OF ANY PERSON FOR ALL
OR ANY PART OF THE GUARANTEED OBLIGATIONS BE IN ANY MANNER PREJUDICED OR
AFFECTED BY THIS GUARANTEE.
ARTICLE IV
INDEMNITY
SECTION 4.01. INDEMNITY. (A) IF ANY OF THE GUARANTEED OBLIGATIONS
ARE IRRECOVERABLE FROM THE COMPANY, OR NOT RECOVERABLE BY IFC FROM
THE GUARANTOR ON THE BASIS OF A GUARANTEE, THEN THE GUARANTOR:
(I) SHALL PAY TO IFC AN AMOUNT EQUAL TO THE GUARANTEED
OBLIGATIONS UP TO ITS PRO-RATA SHARE; AND
(II) SHALL INDEMNIFY IFC AGAINST ANY CLAIM, ACTION, DAMAGE,
LOSS, LIABILITY, COST, CHARGE AND EXPENSE, OUTGOING OR PAYMENT
SUFFERED, PAID OR INCURRED BY IFC IN RELATION TO THE NON-PAYMENT OF
THE GUARANTEED OBLIGATIONS UP TO ITS PRO-RATA SHARE.
(B) PARAGRAPH (A) ABOVE APPLIES TO ANY GUARANTEED OBLIGATIONS WHICH ARE
OR MAY BE IRRECOVERABLE IRRESPECTIVE OF WHETHER:
<PAGE> 12
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(I) THEY ARE OR MAY BE IRRECOVERABLE BY REASON OF ANY EVENT
DESCRIBED IN SECTION 4.01; OR
(II) THE TRANSACTIONS OR ANY OF THEM RELATING TO THOSE MONEYS
ARE VOID OR ILLEGAL OR AVOIDED OR OTHERWISE UNENFORCEABLE; OR
(III) THEY ARE OR MAY BE IRRECOVERABLE BY REASON OF ANY OTHER
FACT OR CIRCUMSTANCE WHATSOEVER; OR
(IV) ANY OTHER MATTERS RELATING TO THE GUARANTEED OBLIGATIONS
ARE OR SHOULD HAVE BEEN WITHIN THE KNOWLEDGE OF IFC.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. REPRESENTATIONS AND WARRANTIES. THE GUARANTOR REPRESENTS
AND WARRANTS THAT AS OF THE DATE OF THIS GUARANTEE:
(A) IT IS A COMPANY DULY ORGANIZED, VALIDLY EXISTING, AND IN GOOD
STANDING UNDER THE LAWS OF ITS JURISDICTION OF INCORPORATION, AND HAS THE
CORPORATE POWER TO ENTER INTO AND DELIVER AND TO PERFORM ITS OBLIGATIONS UNDER
THIS GUARANTEE;
(B) THE EXECUTION AND DELIVERY BY IT OF THIS GUARANTEE AND THE
PERFORMANCE BY IT OF ITS OBLIGATIONS HEREUNDER HAVE BEEN DULY AUTHORIZED;
(C) THIS GUARANTEE HAS BEEN DULY EXECUTED BY IT AND CONSTITUTES ITS
VALID AND LEGALLY BINDING OBLIGATIONS ENFORCEABLE IN ACCORDANCE WITH ITS TERMS
AND WOULD BE SO TREATED IN THE COURTS OF ITS PLACE OF INCORPORATION AND ANY
OTHER JURISDICTION TO WHICH THE GUARANTOR HAS AGREED TO SUBMIT IN THIS
GUARANTEE;
(D) NEITHER THE EXECUTION AND DELIVERY BY IT OF THIS GUARANTEE NOR THE
PERFORMANCE BY IT OF ITS OBLIGATIONS UNDER THIS GUARANTEE CONFLICTS OR WILL
CONFLICT WITH OR RESULT IN ANY BREACH OF ANY OF THE TERMS, CONDITIONS OR
PROVISIONS OF, OR VIOLATE OR CONSTITUTE A DEFAULT OR REQUIRE ANY CONSENT UNDER:
(I) ANY INDENTURE, MORTGAGE, CONTRACT, AGREEMENT OR OTHER
INSTRUMENT OR ARRANGEMENT TO WHICH IT IS A PARTY OR WHICH PURPORTS
TO BE BINDING UPON IT OR ANY OF ITS PROPERTY OR ASSETS, AND WILL NOT
RESULT IN THE IMPOSITION OR CREATION OF ANY LIEN, CHARGE, OR
ENCUMBRANCE ON, OR SECURITY
<PAGE> 13
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INTEREST IN, ANY PART THEREOF PURSUANT TO THE PROVISIONS OF ANY SUCH
AGREEMENT, INSTRUMENT OR ARRANGEMENT; OR
(II) ANY OF THE TERMS OR PROVISIONS OF ITS MEMORANDUM AND
ARTICLES OF ASSOCIATION; OR
(III) ANY STATUTE, RULE OR REGULATION OR ANY JUDGEMENT, DECREE
OR ORDER OF ANY COURT, GOVERNMENTAL AUTHORITY, BUREAU OR AGENCY
BINDING ON OR APPLICABLE TO IT; AND
(E) ALL AUTHORIZATIONS REQUIRED FOR THE EXECUTION AND DELIVERY OF THIS
GUARANTEE BY IT AND THE PERFORMANCE BY IT OF ITS OBLIGATIONS HEREUNDER, HAVE
BEEN DULY OBTAINED OR GRANTED AND ARE IN FULL FORCE AND EFFECT.
SECTION 5.02. IFC RELIANCE. (A) THE GUARANTOR ACKNOWLEDGES THAT IT
MAKES THE REPRESENTATIONS IN SECTION 5.01 WITH THE INTENTION OF INDUCING IFC TO
ENTER INTO THIS AGREEMENT AND THE CONVERTIBLE LOAN AGREEMENT AND THAT IFC ENTERS
INTO THIS AGREEMENT AND THE CONVERTIBLE LOAN AGREEMENT ON THE BASIS OF, AND IN
FULL RELIANCE ON, EACH OF SUCH REPRESENTATIONS.
(B) THE GUARANTOR WARRANTS TO IFC THAT EACH OF SUCH REPRESENTATIONS IS
TRUE AND CORRECT IN ALL MATERIAL RESPECTS AS OF THE DATE OF THIS AGREEMENT AND
THAT NONE OF THEM OMITS OR MISSTATES ANY MATTER THE OMISSION OR MISSTATEMENT OF
WHICH MAKES ANY OF SUCH REPRESENTATIONS MISLEADING.
SECTION 5.03. RIGHTS AND REMEDIES NOT LIMITED. IFC'S RIGHTS AND
REMEDIES IN RELATION TO ANY MISREPRESENTATION OR BREACH OF WARRANTY ON
THE PART OF THE GUARANTOR ARE NOT PREJUDICED:
(A) BY ANY INVESTIGATION BY OR ON BEHALF OF IFC INTO THE AFFAIRS OF THE
GUARANTOR;
(B) BY THE EXECUTION OR THE PERFORMANCE OF THIS AGREEMENT; OR
(C) BY ANY OTHER ACT OR THING WHICH MAY BE DONE BY OR ON BEHALF OF IFC
IN CONNECTION WITH THIS AGREEMENT AND WHICH MIGHT, APART FROM THIS SECTION,
PREJUDICE SUCH RIGHTS OR REMEDIES.
<PAGE> 14
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ARTICLE VI
COVENANTS
SECTION 6.01. GUARANTOR'S COVENANTS. THE GUARANTOR SHALL:
(A) WHEN REQUESTED BY IFC, DO OR CAUSE TO BE DONE ANYTHING WHICH AIDS
THE EXERCISE OF ANY POWER, RIGHT OR REMEDY OF IFC UNDER THIS GUARANTEE
INCLUDING, BUT NOT LIMITED TO, THE EXECUTION OF ANY DOCUMENT OR AGREEMENT;
(B) OBTAIN, MAINTAIN AND RENEW WHEN NECESSARY ALL AUTHORIZATIONS
REQUIRED UNDER ANY LAW OR DOCUMENT OR AGREEMENT:
(I) TO ENABLE IT TO PERFORM ITS OBLIGATIONS UNDER THIS
GUARANTEE; OR
(II) FOR THE VALIDITY OR ENFORCEABILITY OF THE GUARANTEE;
(C) COMPLY IN ALL RESPECTS WITH THE TERMS OF THE AUTHORIZATIONS
REFERRED TO IN PARAGRAPH (B) ABOVE;
(D) AS SOON AS AVAILABLE, BUT, IN ANY EVENT, WITHIN FORTY FIVE (45)
DAYS AFTER THE END OF EACH QUARTER OF EACH FISCAL YEAR, FURNISH TO IFC:
(I) TWO (2) COPIES OF ITS FINANCIAL STATEMENTS FOR SUCH PERIOD
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND CONSISTENTLY APPLIED; AND
(II) A REPORT ON ANY FACTORS MATERIALLY AND ADVERSELY
AFFECTING OR WHICH ARE LIKELY TO MATERIALLY AND ADVERSELY AFFECT ITS
BUSINESS AND OPERATIONS OR FINANCIAL CONDITION; AND
(E) AS SOON AS AVAILABLE, BUT, IN ANY EVENT, WITHIN ONE HUNDRED AND
TWENTY (120) DAYS AFTER THE END OF EACH FISCAL YEAR, FURNISH TO IFC:
(I) TWO (2) COPIES OF THE ITS FINANCIAL STATEMENTS FOR SUCH
FISCAL YEAR (WHICH ARE IN AGREEMENT WITH ITS BOOKS OF ACCOUNT AND
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED), TOGETHER WITH AN AUDIT
REPORT ON THEM, ALL IN FORM SATISFACTORY TO IFC; AND
<PAGE> 15
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(II) A REPORT ON ANY FACTORS MATERIALLY AND ADVERSELY
AFFECTING OR WHICH ARE LIKELY TO MATERIALLY AND ADVERSELY AFFECT ITS
BUSINESS AND OPERATIONS OR FINANCIAL CONDITION.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. NOTICES. ANY NOTICE, REQUEST OR OTHER COMMUNICATION TO BE
GIVEN OR MADE UNDER THIS GUARANTEE SHALL BE IN WRITING. THE NOTICE, REQUEST OR
OTHER COMMUNICATION MAY BE DELIVERED BY HAND, AIRMAIL, FACSIMILE, OR TELEX TO
THE PARTY'S ADDRESS SPECIFIED BELOW OR AT SUCH OTHER ADDRESS AS SUCH PARTY
NOTIFIES TO THE OTHER PARTY FROM TIME TO TIME AND WILL BE EFFECTIVE UPON
RECEIPT.
FOR THE GUARANTOR:
CANARGO ENERGY CORPORATION
P.O. BOX 291
COMMERCE HOUSE, LES BANQUES
ST. PETER PORT, GUERNSEY, GY1 3RR
BRITISH ISLES
ATTENTION: CHAIRMAN
FACSIMILE: 44-1481-729-982
WITH A COPY SENT TO:
CANARGO ENERGY CORPORATION
SUITE 1580, 727 - 7TH AVENUE S.W.
CALGARY, ALBERTA, CANADA
T2P 0Z5
ATTENTION: PRESIDENT
FACSIMILE: (403) 777-1578
<PAGE> 16
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FOR IFC:
INTERNATIONAL FINANCE CORPORATION
2121 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20433
UNITED STATES OF AMERICA
ATTENTION: DIRECTOR, OIL, GAS AND MINING DEPARTMENT
FACSIMILE: (202) 974-4322
WITH A COPY (IN THE CASE OF NOTICES RELATING TO PAYMENTS) TO:
MANAGER, ACCOUNTING DIVISION
FACSIMILE: (202) 974-4371
SECTION 7.02. ENGLISH LANGUAGE. ALL DOCUMENTS TO BE FURNISHED OR
COMMUNICATIONS TO BE GIVEN OR MADE UNDER THIS GUARANTEE SHALL BE IN THE ENGLISH
LANGUAGE OR, IF IN ANOTHER LANGUAGE, SHALL BE ACCOMPANIED BY A TRANSLATION INTO
ENGLISH SATISFACTORY TO IFC CERTIFIED BY A REPRESENTATIVE OF THE GUARANTOR,
WHICH TRANSLATION SHALL BE THE GOVERNING VERSION BETWEEN THE GUARANTOR AND IFC.
SECTION 7.03. EXPENSES. THE GUARANTOR SHALL PAY TO IFC OR AS IFC MAY
DIRECT THE COSTS AND EXPENSES INCURRED BY IFC IN RELATION TO THE ENFORCEMENT OR
PROTECTION OR ATTEMPTED ENFORCEMENT OR PROTECTION OF ITS RIGHTS UNDER THIS
GUARANTEE, INCLUDING LEGAL AND OTHER PROFESSIONAL CONSULTANTS' FEES AND EXPENSES
ON A FULL INDEMNITY BASIS.
SECTION 7.04. REMEDIES AND WAIVERS. NO FAILURE OR DELAY BY IFC IN
EXERCISING ANY POWER, REMEDY, DISCRETION, AUTHORITY OR OTHER RIGHTS UNDER THIS
GUARANTEE SHALL WAIVE OR IMPAIR THAT OR ANY OTHER RIGHT OF IFC. NO SINGLE OR
PARTIAL EXERCISE OF SUCH A RIGHT SHALL PRECLUDE ITS ADDITIONAL OR FUTURE
EXERCISE. NO SUCH WAIVER SHALL WAIVE ANY OTHER RIGHT UNDER THIS GUARANTEE. ALL
WAIVERS OR CONSENTS GIVEN UNDER THIS GUARANTEE SHALL BE IN WRITING.
SECTION 7.05. JURISDICTION AND ENFORCEMENT. (A) THIS AGREEMENT IS
GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK, UNITED STATES OF AMERICA.
(B) THE GUARANTOR IRREVOCABLY AGREES THAT ANY LEGAL ACTION, SUIT OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION
DOCUMENT TO WHICH IT IS A PARTY MAY BE BROUGHT BY IFC IN THE COURTS OF THE STATE
OF NEW YORK OR OF THE UNITED STATES OF AMERICA LOCATED IN THE SOUTHERN DISTRICT
OF NEW YORK. FINAL JUDGMENT AGAINST THE GUARANTOR IN ANY SUCH
<PAGE> 17
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ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER
JURISDICTION, BY SUIT ON THE JUDGMENT, A CERTIFIED OR EXEMPLIFIED COPY OF WHICH
SHALL BE CONCLUSIVE EVIDENCE OF THE JUDGMENT, OR IN ANY OTHER MANNER PROVIDED BY
LAW.
(C) BY THE EXECUTION AND DELIVERY OF THIS AGREEMENT, THE GUARANTOR
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY SUCH COURT IN ANY
SUCH ACTION, SUIT OR PROCEEDING AND DESIGNATES, APPOINTS AND EMPOWERS AS ITS
AUTHORIZED AGENT TO RECEIVE FOR AND ON ITS BEHALF SERVICE OF ANY SUMMONS,
COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE
STATE OF NEW YORK.
(D) NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF IFC TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE SUE THE GUARANTOR IN ANY JURISDICTION, OR
CONCURRENTLY IN MORE THAN ONE JURISDICTION, OR TO SERVE PROCESS, PLEADINGS AND
OTHER LEGAL PAPERS UPON THE GUARANTOR IN ANY MANNER AUTHORIZED BY THE LAWS OF
ANY SUCH JURISDICTION.
(E) AS LONG AS THIS AGREEMENT REMAINS IN FORCE, THE GUARANTOR SHALL
MAINTAIN A DULY APPOINTED AGENT FOR THE SERVICE OF SUMMONS, COMPLAINT AND OTHER
LEGAL PROCESS IN NEW YORK, NEW YORK, UNITED STATES OF AMERICA, FOR PURPOSES OF
ANY LEGAL ACTION, SUIT OR PROCEEDING IFC MAY BRING IN RESPECT OF THIS AGREEMENT
OR ANY OTHER TRANSACTION DOCUMENT TO WHICH THE GUARANTOR IS A PARTY. THE
GUARANTOR SHALL KEEP IFC ADVISED OF THE IDENTITY AND LOCATION OF SUCH AGENT.
(F) THE GUARANTOR ALSO IRREVOCABLY CONSENTS, IF FOR ANY REASON THE
GUARANTOR'S AUTHORIZED AGENT FOR SERVICE OF PROCESS OF SUMMONS, COMPLAINT AND
OTHER LEGAL PROCESS IN ANY SUCH ACTION, SUIT OR PROCEEDING IS NOT PRESENT IN NEW
YORK, NEW YORK, TO SERVICE OF SUCH PAPERS BEING MADE OUT OF THOSE COURTS BY
MAILING COPIES OF THE PAPERS BY REGISTERED UNITED STATES AIR MAIL, POSTAGE
PREPAID, TO THE GUARANTOR AT ITS ADDRESS SPECIFIED IN SECTION 7.01. IN SUCH A
CASE, IFC SHALL ALSO SEND BY TELEX OR FACSIMILE, OR HAVE SENT BY TELEX OR
FACSIMILE, A COPY OF THE PAPERS TO THE GUARANTOR.
(G) SERVICE IN THE MANNER PROVIDED IN SUBSECTION (F) ABOVE IN ANY SUCH
ACTION, SUIT OR PROCEEDING WILL BE DEEMED PERSONAL SERVICE, WILL BE ACCEPTED BY
THE GUARANTOR AS SUCH AND WILL BE VALID AND BINDING UPON THE GUARANTOR FOR ALL
PURPOSES OF ANY SUCH ACTION, SUIT OR PROCEEDING.
(H) THE GUARANTOR IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW:
(I) ANY OBJECTION WHICH IT MAY HAVE NOW OR IN THE FUTURE TO
THE LAYING OF THE VENUE OF ANY SUCH ACTION, SUIT OR PROCEEDING IN
ANY COURT REFERRED TO IN THIS SECTION;
(II) ANY CLAIM THAT ANY SUCH ACTION, SUIT OR PROCEEDING HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM; AND
<PAGE> 18
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(III) ITS RIGHT OF REMOVAL OF ANY MATTER COMMENCED BY IFC IN
THE COURTS OF THE STATE OF NEW YORK TO ANY COURT OF THE UNITED
STATES OF AMERICA.
(I) TO THE EXTENT THAT THE GUARANTOR MAY BE ENTITLED IN ANY
JURISDICTION TO CLAIM FOR ITSELF OR ITS ASSETS IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT TO WHICH THE
GUARANTOR IS A PARTY FROM ANY SUIT, EXECUTION, ATTACHMENT (WHETHER PROVISIONAL
OR FINAL, IN AID OF EXECUTION, BEFORE JUDGMENT OR OTHERWISE) OR OTHER LEGAL
PROCESS OR TO THE EXTENT THAT IN ANY JURISDICTION SUCH IMMUNITY (WHETHER OR NOT
CLAIMED) MAY BE ATTRIBUTED TO IT OR ITS ASSETS, THE GUARANTOR IRREVOCABLY AGREES
NOT TO CLAIM AND IRREVOCABLY WAIVES SUCH IMMUNITY TO THE FULLEST EXTENT
PERMITTED BY THE LAWS OF SUCH JURISDICTION.
(J) THE GUARANTOR HEREBY ACKNOWLEDGES THAT IFC SHALL BE ENTITLED UNDER
APPLICABLE LAW, INCLUDING THE PROVISIONS OF THE INTERNATIONAL ORGANIZATIONS
IMMUNITIES ACT, TO IMMUNITY FROM A TRIAL BY JURY IN ANY ACTION, SUIT OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR ANY OTHER TRANSACTION DOCUMENT TO WHICH THE GUARANTOR IS
A PARTY, BROUGHT AGAINST IFC IN ANY COURT OF THE UNITED STATES OF AMERICA. THE
COMPANY HEREBY WAIVES ANY AND ALL RIGHTS TO DEMAND A TRIAL BY JURY IN ANY
ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
OTHER TRANSACTION DOCUMENT TO WHICH THE GUARANTOR IS A PARTY OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR SUCH TRANSACTION DOCUMENTS, BROUGHT AGAINST
IFC IN ANY FORUM IN WHICH IFC IS NOT ENTITLED TO IMMUNITY FROM A TRIAL BY JURY.
(K) TO THE EXTENT THAT THE GUARANTOR MAY, IN ANY SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY OF THE COURTS REFERRED TO IN PARAGRAPH (B) ABOVE OR
ELSEWHERE ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER
TRANSACTION DOCUMENT TO WHICH THE GUARANTOR IS A PARTY, BE ENTITLED TO THE
BENEFIT OF ANY PROVISION OF LAW REQUIRING IFC IN SUCH SUIT, ACTION OR PROCEEDING
TO POST SECURITY FOR THE COSTS OF THE GUARANTOR (CAUTIO JUDICATUM SOLVI), OR TO
POST A BOND OR TO TAKE SIMILAR ACTION, THE GUARANTOR HEREBY IRREVOCABLY WAIVES
SUCH BENEFIT, IN EACH CASE TO THE FULLEST EXTENT NOW OR IN THE FUTURE PERMITTED
UNDER THE LAWS OF THE JURISDICTION IN WHICH SUCH COURT IS LOCATED.
SECTION 7.06. CONFIDENTIAL INFORMATION. (A) IFC MAY DISCLOSE TO ANY
PERSON FOR THE PURPOSE OF EXERCISING ANY POWER, REMEDY, RIGHT, AUTHORITY, OR
DISCRETION UNDER THIS GUARANTEE OR ANY OTHER TRANSACTION DOCUMENT IN CONNECTION
WITH AN EVENT OF DEFAULT, ANY DOCUMENTS OR RECORDS OF, OR INFORMATION ABOUT,
THIS GUARANTEE OR THE ASSETS, BUSINESS OR AFFAIRS OF THE GUARANTOR.
(B) THE GUARANTOR ACKNOWLEDGES AND AGREES THAT, NOTWITHSTANDING THE
TERMS OF ANY OTHER AGREEMENT BETWEEN THE GUARANTOR AND IFC, A DISCLOSURE OF
INFORMATION BY IFC IN THE CIRCUMSTANCES CONTEMPLATED BY THIS SECTION DOES NOT
VIOLATE ANY DUTY OWED TO THE GUARANTOR OR AGREEMENT BETWEEN IFC AND THE
GUARANTOR.
<PAGE> 19
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SECTION 7.07. SUCCESSORS AND ASSIGNS. THIS GUARANTEE BINDS AND INURES
TO THE BENEFIT OF THE RESPECTIVE SUCCESSORS AND ASSIGNS OF THE PARTIES, EXCEPT
THAT THE GUARANTOR MAY NOT ASSIGN OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS
RIGHTS OR OBLIGATIONS UNDER THIS GUARANTEE WITHOUT THE PRIOR WRITTEN CONSENT OF
IFC. THE BENEFIT OF THIS GUARANTEE MAY BE FREELY AND UNCONDITIONALLY ASSIGNED,
TRANSFERRED OR OTHERWISE DISPOSED OF, IN WHOLE OR IN PART, BY IFC TO ANY OTHER
PERSON, CORPORATE OR OTHERWISE.
SECTION 7.08. AMENDMENT. ANY AMENDMENT OF ANY PROVISION OF THIS
GUARANTEE SHALL BE IN WRITING AND SIGNED BY THE PARTIES.
SECTION 7.09. COUNTERPARTS. THIS GUARANTEE MAY BE EXECUTED IN
SEVERAL COUNTERPARTS, EACH OF WHICH IS AN ORIGINAL, BUT ALL OF WHICH
TOGETHER CONSTITUTE ONE AND THE SAME AGREEMENT.
<PAGE> 20
- 17 -
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS GUARANTEE AS OF THE
DATE FIRST ABOVE WRITTEN.
CANARGO ENERGY CORPORATION
BY: /S/ MICHAEL BINNION
NAME:
TITLE: AUTHORIZED REPRESENTATIVE
INTERNATIONAL FINANCE CORPORATION
BY: /S/ MARIA DA GRACA DOMINGUES
NAME:
TITLE: AUTHORIZED REPRESENTATIVE
<PAGE> 1
EXHIBIT 10(21)
AGREEMENT IN PRINCIPLE
CONCERNING PARTICIPATION BY
CANARGO
IN THE
GEORGIAN AMERICAN OIL REFINERY
This Agreement in Principle ("AIP") is by and between CanArgo Petroleum Products
Limited ("CanArgo") a legal entity registered in Guernsey, British Isles, the
Georgian American Oil Refinery ("GAOR"), a legal entity registered in the
Republic of Georgia, State Company Georgian Oil ("Georgian Oil") a legal entity
registered in the Republic of Georgia, Georgian British Oil Service Company
("GBOSC") a legal entity registered in the Republic of Georgia, and Argonaut Oil
& Gas Ltd ("Argonaut") a legal entity registered in Cyprus (CanArgo, GAOR,
Georgian Oil, GBOSC and Argonaut are hereinafter referred to as the "Parties" or
"Party") concerns participation by CanArgo in GAOR, and in the refinery in
Sartichala, Georgia.
WHEREAS,
A. GAOR was created and founded by Georgian Oil (34% ownership) GBOSC (33%
ownership) and Argonaut (33% ownership) in September 1997, with a current
Charter Capital of $30,000 and,
B. GAOR is the owner of an oil refinery located in Sartichala, Republic of
Georgia (the "Refinery"), and,
C. CanArgo sister companies are involved in exploration & production of oil
and gas in the Republic of Georgia through Ninotsminda Oil Company and
CanArgo (Nazvrevi) Ltd, and,
D. CanArgo and GAOR wish to conclude an agreement through which CanArgo
becomes a shareholder of GAOR and participates in the Refinery and the
current shareholders of GAOR, namely Georgian Oil, GBOSC and Argonaut Oil
wish to invite CanArgo to become a shareholder in GAOR to develop the
operation of the Refinery, according to priorities given below:
The First Phase of GAOR operation The Refinery is located in Sartichala,
Georgia. Capacity of the Refinery is 2,000 barrels per day.
The Refinery is designed to process locally produced crude oil and imported oil.
Phase I represents the market entry position for GAOR.
Products produced are:
1. Naphtha (for gasoline blending)
2. Diesel (For vehicles)
3. Mazut
<PAGE> 2
The local market in Georgia will consume all the products produced in GAOR Phase
I. After a three to six month market entry posture, the GAOR is projected to
make an annual profit of $2,624,000. After Profit Tax and taking into
consideration depreciation fund annual cash flow of GAOR, which will be split
between share holders, is estimated to generate annually $2,496,000.
The Second Phase of GAOR operation includes expansion, the doubling in size of
the crude oil fractionation process to 4,000 barrels per day.
Phase II products produced by GAOR upon completion will be:
1. Naphtha
2. Jet Fuel
3. Diesel
4. Mazut
After completion of Phase II GAOR is projected to make annual balance profit of
$6,194,000. After Profit Tax and considering depreciation fund GAOR annual cash
flow, which will be split between the share holders are estimated to make
$5,611,000. This Phase is scheduled for commencement no later than end of the
second quarter of 1999. Future expansion plans will be formulated based on the
market conditions in Georgia, income generated by GAOR and amount of crude oil.
Long term plans for GAOR are as follows:
1. Increase of its market share
2. Installation of a catalytic reformer or cracker to produce high octane
gasoline
3. Increase of Refinery capacity and optimization of its profitability
4. Establishment of brand recognition
5. Distributor base development
6. Determination of retail outlets
7. Development of export markets
At August 31, 1998 GAOR has no debts other than $2,470,653 to Argonaut and
GBOSC.
WHEREAS CanArgo has been familiarised with the main priorities of the Refinery
development, agrees with them and is willing to become one of the owners and
investors of the Refinery,
NOW HEREBY THE PARTIES AGREE AS FOLLOWS:
1) It is agreed that Argonaut and GBOSC (the "Primary Financiers")
have provided finance to the sum of $2,342,653 to GAOR
($1,661,653 from Argonaut and $681,000 from GBOSC), and that this
funding is to be recovered from 50% of the after tax net profit
of GAOR as detailed in Article 6.1 of the GAOR Foundation
Agreement. This financing is on an
2
<PAGE> 3
interest free basis. Although the Primary Financiers will begin
obtaining repayment of this finance from the profits made in the
First Phase it is unlikely that all of this finance will have
been recovered by the time the Second Phase becomes operational.
In this event there would be "Primary Financier Unrecovered
Investments".
2) The approximate cost of second 2,000 barrel per day capacity
equipment purchase, transportation, installation of additional
tanks and creation of infrastructure connected with it ("Second
Equipment) is $1,860,000. The mentioned investment shall be made
by CanArgo in order to become 24% owner of the Refinery.
3) CanArgo will commence recovering the investments from the moment
that the Second Equipment becomes operational, or at the latest
30th June 1999, according to the following principle: 50% of
GAOR's after tax net profit will go to recovering the investments
in proportion to the unrecovered investment provided by each
financier. For example: if the total unrecovered investment is
$3,500,000 (i.e. Primary Financier Unrecovered Investments plus
CanArgo unrecovered investments) and CanArgo's unrecoverable
investments are $1,860,000 then CanArgo's share from total
recoverable amount will be 1,860,000/3,500,000 = 53.1%, this
being 53.1% of 50% of GAOR's after tax net profit.
4) The remaining 50% of after tax net profits of GAOR will be
dividended out to the shareholders in proportion to their
ownership in GAOR at that time. This principle will apply to
CanArgo will from the moment that the Second Equipment becomes
operational, or at the latest 30th June 1999.
5) CanArgo shall gain it's ownership in the following manner:
a) On or before 12th September 1998 CanArgo shall make its
First Contribution and transfer $500,000 as investment to
GAOR's account, and the Charter Capital of GAOR shall be
increased by $2,069 to $32,069 with CanArgo paying $2,069
into the Charter Capital. For this contribution CanArgo
shall gain a 6.4516% interest and ownership in GAOR and
GAOR's Charter Capital at the moment the First Contribution
is received in GAOR's account. GAOR, GBOSC, Georgian Oil and
Argonaut undertake to register CanArgo's interest in GAOR
within two weeks of receiving the Contribution, and the GAOR
Foundation Agreements will be modified to incorporate
CanArgo and the principles of this AIP.
b) On or before 19th October 1998 CanArgo shall make its Second
Contribution and transfer a further $500,000 as investment
to GAOR's account, and the Charter Capital of GAOR shall be
3
<PAGE> 4
increased by $2,376 to $34,444 with CanArgo paying $2,376
into the Charter Capital. For this contribution CanArgo
shall gain a further 6.4516% interest (total interest
12.9032%) and ownership in GAOR and GAOR's Charter Capital
at the moment the Second Contribution is received in GAOR's
account. GAOR, GBOSC, Georgian Oil and Argonaut undertake to
register CanArgo's increased interest in GAOR within two
weeks of receiving the Contribution.
c) On or before 31st December 1998 CanArgo shall make its Third
Contribution and transfer a third sum of $500,000 as
investment to GAOR's account, and the Charter Capital of
GAOR shall be increased by $2,756 to $37,200 with CanArgo
paying $2,756 into the Charter Capital. For this
contribution CanArgo shall gain a further 6.4516% interest
(total interest 19.3548%) interest and ownership in GAOR and
GAOR's Charter Capital at the moment the Third Contribution
is received in GAOR's account. GAOR, GBOSC, Georgian Oil and
Argonaut undertake to register CanArgo's increased interest
in GAOR within two weeks of receiving the Contribution.
d) On or before 31st January 1999 CanArgo shall make its Fourth
and final Contribution and transfer the sum of $360,000 as
investment to GAOR's account, and the Charter Capital of
GAOR shall be increased by $2,273 to $39,474 with CanArgo
paying $2,273 into the Charter Capital. For this
contribution CanArgo shall gain a further 4.6451% interest
(total interest 24%) interest and ownership in GAOR and
GAOR's Charter Capital at the moment the Fourth Contribution
is received in GAOR's account, and the Charter Capital shall
be $39,474. GAOR, GBOSC, Georgian Oil and Argonaut undertake
to register CanArgo's increased interest in GAOR within two
weeks of receiving the Contribution.
6) Each owner of GAOR shall transfer 8% for CanArgo benefit, i.e.
total CanArgo interest in GAOR will be 24%. The final ownership
will than be Georgian Oil - 26%, GBOSC - 25%, CanArgo - 24% and
Argonaut - 25%.
7) Georgian Oil, GBOSC, Argonaut and GAOR agree not to change the
Charter Capital of GAOR without the written consent of CanArgo.
8) According to the Foundation Agreement the Board of Directors (the
"Board") of GAOR currently consists of nine members. After
CanArgo has made its First Contribution the Board of Directors of
GAOR (the "Board") will be increased to ten members with the
addition of one member from CanArgo, after CanArgo has made it's
Second Contribution
4
<PAGE> 5
the Board shall be increased to eleven members with the addition
of a further member from CanArgo (and in addition all decisions
of the Board will require the concurring vote of at least nine
members) and after CanArgo has made it's Fourth Contribution the
Board shall be increased to twelve members with the addition of a
further member from CanArgo, and after CanArgo has made it's
Fourth Contribution the board shall be increased to twelve
members with the addition of a further member from CanArgo. By
mutual consent the number of board members may be reduced, but
with the intention being that Georgian Oil, GBOSC, Argonaut and
CanArgo are equally represented.
9) In the event that CanArgo does not meet a Contribution on or
before the due date, CanArgo shall loose its rights to gain
further interest in GAOR, but will retain the interest that it
has already paid for.
10) The investment from CanArgo will be used exclusively for the
purchase and installation of the Second Equipment, in the event
that the purchase and installation and successful commissioning
of the Second Equipment is achieved for a price less than
$1,860,000 ("Total Contribution") then any remainder will be used
for the development of the Refinery or with the unanimous
agreement Georgian Oil, GBOSC and Argonaut the excess may be
split between Georgian Oil, GBOSC and Argonaut in proportion to
their shares in GAOR as of the date of this AIP.
11) In the event that the cost of the purchase and installation of
the Second Equipment exceeds $1,860,000 then any additional
finance requirement will be met by bank loans or sale of equity
or by the shareholders in proportion to their equity ownership of
GAOR at that time.
12) CanArgo accepts that it may be in the interests of GAOR for
CanArgo's sister oil producing companies in Georgia to sell oil
to GAOR. Within any restrictions or requirements imposed by other
stakeholders in its sister companies, CanArgo will make efforts
to do this, with the price being based on the market price and
according to mutually acceptable formula accepted for price
calculation.
13) In the event of any dispute arising out of this AIP, the Parties
shall use their best endeavours to settle such disputes, but in
the event that such disputes cannot be resolved in this manner,
then the issue shall be referred to arbitration, this to be held
in English under UNCITRAL rules, and take place in Stockholm,
Sweden.
14) This AIP is subject to CanArgo being satisfied with its legal
opinions on the GAOR foundation documents, licences and any
shareholder agreements, loan agreements or similar.
5
<PAGE> 6
15) GAOR will provide a monthly financial statement to the
shareholders showing a balance sheet, income statement and a
sources and application of funds statement.
16) Any shareholder or his agent will be given access to all books
and records of GAOR upon request.
17) GAOR will have an annual audit.
18) CanArgo's obligations under this AIP are subject to CanArgo being
satisfied with and its legal opinions on the GAOR foundation
documents, licences and any shareholder agreements, loan
agreements or similar and the August 31, 1998 financial
statement. The provision of the first advance does not signify
that CanArgo is or is not satisfied with these opinions. CanArgo
will perform its due diligence by __October 31, 1998__ .
Signed, this the 26th day of August 1998
For Argonaut Oil & Gas For Georgian Oil
/s/Eugene Kozlowski /s/Revaz Tevzadze
President Chairman
For GBOSC For GAOR
/s/Shalva Bakhtadze /s/Givi Assatiani
General Director General Director
For CanArgo Petroleum Products
/s/Michael Binnion
Director
6
<PAGE> 7
[LETTERHEAD OF GAOR]
FAX
To: Mr David Robson Chairman & CEO CanArgo From: Mr Givi Asatiani GAOR
Fax: 44 1481729982 Pages: 2
Phone: 44 1481729980 Date: 10 February, 1998
Re: Extension of Payment. CC: Mr M. Binnion
- - Comments:
Dear Mr Robson,
Further to your letter of 14/12/98 regarding the extension of payment term to
GAOR, I would like to inform you on the following.
Under the Agreement concerning the Participation by CanArgo in the Georgian
American Oil Refinery, CanArgo will gain 24% interest and ownership, if it makes
the payment of $1,860,000 according to the following fixed schedule:
12.09.98 $500,000
19.10.98 $500,000
31.12.98 $500,000
31.01.99 $360,000
As of today CanArgo's payment mounts to $1 M, accordingly CanArgo has gained
12,9032% interest and ownership.
Further to the GAOR founders' agreement, I would like to inform you that GAOR
gives its consent to extend the payment term until 30th April 1999. Therefore,
CanArgo keeps its right of 24% interest and ownership in GAOR during that
period.
We believe that the participation of CanArgo will be a step forward in the
successful development of GAOR project.
Best regards,
/s/Givi Asatiani
General Director
Georgian American Oil Refinery
Tel/fax: (99532) 920507
Gardabani, Sartitchala - Georgia
7
<PAGE> 1
EXHIBIT 10(22)
TERRENEX ACQUISITION CORPORATION OPTION REGARDING CANARGO (NAZVREVI) LIMITED
[Letterhead of Terrenex Acquisition Corporation]
May 7, 1998
David Robson
Chairman
CanArgo Energy Inc.
St. Peter Port, Guernsey
Dear Dr. Robson:
This letter confirms the terms and conditions under which Terrenex is prepared
to advance up to $1,000,000 US to CanArgo.
Use of proceeds To participate in the May 10, 1998 tender for oil and
gas licenses in Dagestan, cash calls for operations
in Georgia and working capital.
Funds availability May 1, 1998
Repayment date August 31, 1998
Draw down fee 5% of funds drawn (netted from the advance)
Commitment fee 1% ($10,000 payable from the first advance)
Interest rate 1/2% per month payable in arrears
Bonus Terrenex will have the sole option upon 30 days
notice any time before December 31, 1998 to
participate in 12 1/2% of the Block XIII/Nazvrevi
license and/or 15% of the CanArgo position in any
licenses (direct or indirect) in Dagestan received on
the May 10, 1998 tender. Should Terrenex exercise
this option it will have the obligation to pay its
share of any past or future third party verifiable
costs relating to the acquisition or development of
the licenses on an unpromoted basis and before
management fees.
Overdue amounts Interest will accrue at the rate of 2% per month on
any overdue amounts.
<PAGE> 2
If you are in agreement with the above please sign where indicated below and we
will ensure that funds are available.
Yours truly,
/s/M.R. Binnion, President
We agree with the above terms and request an immediate advance of $250,000 US.
/s/Dr. David Robson
2
<PAGE> 3
[Letterhead of Terrenex Acquisition Corporation]
TO: David Robson
FROM: Michael Binnion
SUBJECT: Options
DATE: December 17, 1998
Dear David:
As you know Terrenex Acquisition Corp. is working to form a syndicate to provide
a letter of credit as support to the CanArgo IFC loan. I have made you
personally aware of the efforts of Terrenex Acquisition Corp. in this regard.
The board of Terrenex Acquisition Corp. has requested that in consideration of
the efforts currently being made by us that CanArgo grant a three month
extension on our options over the Dagestan and Nazvrevi projects. As you know
Terrenex Acquisition Corp. has been consistently a strong supporter of CanArgo
and I hope you will be able to grant this extension.
Best regards,
/s/M.R. Binnion
CanArgo hereby agrees to a three month extension to March 31, 1999 of the
Terrenex Acquisition Corp. options over the Dagestan and Nazvrevi projects.
/s/David Robson, Chairman & CEO
3
<PAGE> 1
EXHIBIT 21
CANARGO ENERGY CORPORATION
LIST OF SUBSIDIARIES
As of December 31, 1998
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
CanArgo Oil & Gas, Inc. Alberta, Canada
Electromagnetic Oil Recovery International, Inc. Alberta, Canada
Focan Ltd. Alberta, Canada
Fountain Oil Adygea Incorporated Delaware
Fountain Oil Boryslaw Incorporated Delaware
Fountain Oil Boryslaw Limited Cyprus
Fountain Oil Norway AS Norway
Fountain Oil Production Incorporated Delaware
Fountain Oil Services Ltd. Bermuda
Fountain Oil Ukraine Ltd. Alberta, Canada
Fountain Oil U.S., Inc. Oklahoma
Gastron International Ltd. British Virgin Islands
Uentech Corporation Oklahoma
UK-RAN Oil Corporation Alberta, Canada
</TABLE>
<PAGE> 1
EXHIBIT 23(1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of CanArgo
Energy Corporation on Form S-1, of our report which includes a paragraph
regarding the ability of Fountain Oil Incorporated to continue as a going
concern, dated March 9, 1998 (except for the sixth paragraph of Note 6, as to
which the date is June 8, 1998, and for the first paragraph of Note 1, as to
which the date is February 11, 1999) on our audit of the consolidated financial
statements of Fountain Oil Incorporated as of December 31, 1997, December 31,
1996 and August 31, 1996, and for the year ended December 31, 1997, the
four-month period ended December 31, 1996, and the years ended August 31, 1996
and 1995. We also consent to the reference to our firm under the caption
"Experts."
/s/PricewaterhouseCoopers L.L.P.
PricewaterhouseCoopers L.L.P.
Houston, Texas
February 11, 1999
<PAGE> 1
EXHIBIT 23(2)
[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 CanArgo Oil and Gas Inc. (formerly "CanArgo Energy
Inc.") included in the Registration Statement (Form S-1) and related prospectus
of CanArgo Energy Corporation for the registration of up to 21,264,643 shares of
its common stock.
/s/Ernst & Young LLP
Chartered Accountants
Calgary, Canada
February 12, 1999
<PAGE> 1
EXHIBIT 23(3)
[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 financial
statements of Ninotsminda Oil Company Limited (formerly "JKX (Ninotsminda)
Limited") included in the Registration Statements (Form S-1) and related
prospectus of CanArgo Energy Corporation for the registration of up to
21,264,643 shares of its common stock.
/s/Ernst & Young
Ernst & Young
Chartered Accountants
Limassol, Cyprus
February 12, 1999
<PAGE> 1
EXHIBIT 23(4)
[LETTERHEAD OF AMH GROUP LTD.]
CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS
With respect to our report dated February 9, 1999 entitled "Evaluation of the
Ninotsminda Oil Interests Owned By CanArgo Energy Corporation", we hereby
consent to the use of our name under the caption "Experts" and references to
experts from the aforementioned document to be included in or made part of the
Form S-1 registration statement filed by CanArgo Energy Corporation.
AMH Group Ltd.
/s/Robin C. Mann
Robin C. Mann
Executive Vice President
Calgary, Alberta, Canada
February 11, 1999
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