<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO _______________
COMMISSION FILE NUMBER 0-9147
------
CANARGO ENERGY CORPORATION
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- -------------------------------------
Delaware 91-0881481
- --------------------------------------- -------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1580, 727 - 7th Avenue SW
Calgary, Alberta, Canada T2P 0Z5
- --------------------------------------- -------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
403-777-1185
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
The number of shares of registrant's common stock outstanding on November 1,
1999 was 32,348,963. An additional 1,068,959 shares of common stock are issuable
at any time without additional consideration upon exercise of CanArgo Oil & Gas
Inc. Exchangeable Shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
-------------------------------
SEPTEMBER 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents 2,889,268 $ 1,924,908
Accounts receivable 416,271 424,367
Advances to operator -- 376,890
Inventory 28,000 170,405
Other current assets 103,127 453,476
------------ ------------
Total current assets 3,436,666 $ 3,350,046
Property and equipment, net 6,461,905 6,201,936
Oil and gas properties, net, full cost method
(including unevaluated amounts of $13,205,657
and $13,266,368 respectively) 30,132,949 30,137,573
Investments in and advances to oil and gas and other
ventures - net 1,880,242 6,877,974
------------ ------------
TOTAL ASSETS 41,911,762 $ 46,567,529
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,437,889 $ 821,761
Accrued liabilities 398,391 1,162,050
------------ ------------
Total current liabilities $ 1,836,280 $ 1,983,811
Provision for future site restoration 9,200 --
Minority interest in subsidiaries 4,425,389 4,552,285
Stockholders' equity:
Preferred stock, par value $0.10 per share -- --
Common stock, par value $0.10 per share 3,341,792 2,101,464
Capital in excess of par value 103,429,499 101,545,941
Accumulated deficit (71,130,398) (63,615,972)
------------ ------------
Total stockholders' equity $ 35,640,893 $ 40,031,433
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,911,762 $ 46,567,529
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
--------------------------------------- -----------------------------------------
Three Months Ended Nine Months Ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
1999 1998 1999 1998
--------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and gas sales $ 1,156,652 $ 375,502 $ 2,061,114 $ 508,018
Other -- (28) -- 11,972
--------------- --------------- ---------------- ------------------
1,156,652 375,474 2,061,114 519,990
--------------- --------------- ---------------- ------------------
Operating Expenses:
Lease operating expense 351,229 299,636 851,279 477,263
Direct project costs 326,823 227,961 730,360 1,012,445
General and administrative 446,069 517,069 1,550,453 2,731,823
Depreciation, depletion and
amortization 428,900 100,949 827,200 261,420
Equity loss from investments
in unconsolidated subsidiaries 10,000 16,848 51,581 152,225
Impairment of oil and gas
properties -- -- -- 900,000
Impairment of oil and gas ventures 5,459,793 -- 5,459,793 --
--------------- --------------- ---------------- ------------------
7,022,814 1,162,463 9,470,666 5,535,176
--------------- --------------- ---------------- ------------------
OPERATING LOSS 5,866,162 786,989 7,409,552 5,015,186
--------------- --------------- ---------------- ------------------
Other Income (Expense):
Interest, net (17,946) (1,590) (168,566) 241,209
Other income (expense) (65,482) (46,232) (73,715) (42,232)
Gain (loss) on disposition
of equipment 40,314 -- 10,511 (27,698)
--------------- --------------- ---------------- ------------------
TOTAL OTHER INCOME (EXPENSE) (43,114) (47,822) (231,770) 171,279
--------------- --------------- ---------------- ------------------
Minority interest in loss of
consolidated subsidiary (29,593) 53,426 126,896 53,426
--------------- --------------- ---------------- ------------------
NET LOSS AND COMPREHENSIVE LOSS $ 5,938,869 $ 781,385 $ 7,514,426 $ 4,790,481
=============== =============== ================ ==================
Weighted average number of
common shares outstanding 23,751,802 19,677,333 23,660,246 14,072,572
--------------- --------------- ---------------- ------------------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.25) $ (0.04) $ (0.32) $ (0.34)
=============== =============== ================ ==================
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
--------------------------------------------
Nine Months Ended
SEPTEMBER 30, September 30,
1999 1998
----------------- ----------------
<S> <C> <C>
Operating activities:
Net loss $ (7,514,426) $ (4,790,481)
Depreciation, depletion and amortization 827,200 261,420
Impairment of oil and gas properties -- 900,000
Impairment of oil and gas ventures 5,459,793 --
Equity loss from investments in unconsolidated subsidiaries 51,581 152,225
Loss (gain) on disposition of equipment (10,511) 27,698
Minority interest in loss of consolidated subsidiary (126,896) (53,426)
Changes in assets and liabilities:
Accounts receivable 8,096 423,048
Advances to operator 376,890 (523,610)
Inventory 142,405 (150,000)
Other current assets 350,349 440,881
Accounts payable 616,128 (1,915,108)
Accrued liabilities (763,659) (9,018,421)
----------------- ----------------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (583,050) (14,245,774)
----------------- ----------------
Investing activities:
Restricted cash -- 9,700,000
Deferred acquisition costs -- (1,214,948)
Investments in oil and gas properties (1,446,876) (1,224,145)
Purchase of property and equipment (374,458) (1,896,493)
Proceeds from disposition of assets 868,000 --
Investments in and advances to oil and gas and other ventures
(513,642) (127,049)
----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (1,466,976) 5,237,365
----------------- ----------------
Financing activities:
Issue of common shares 3,670,303 --
Share issue costs (655,917) --
Cash acquired -- 935,448
----------------- ----------------
3,014,386 935,448
----------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 964,360 (8,072,961)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,924,908 14,164,177
----------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,889,268 $ 6,091,216
================= ================
Non cash investing and financing activities:
Issuance of common stock in connection with acquisition of
oil and gas properties $ 109,500 $ --
Common stock issuable in connection with
acquisition of subsidiary -- 19,700,000
----------------- ----------------
$ 109,500 $ 19,700,000
================= ================
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE> 5
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
(1) Basis of Presentation - The interim consolidated condensed financial
statements and notes thereto of CanArgo Energy Corporation and its
subsidiaries (collectively, CanArgo) 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
CanArgo's Annual Report on Form 10-K for the year ended December 31,
1998 filed with the Securities and Exchange Commission.
On July 15, 1998, CanArgo 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 CanArgo's common stock (the "Reverse
Split") and to change CanArgo'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 - CanArgo 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 full cost 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, CanArgo completed the acquisition of all of the
common stock of CanArgo Oil & Gas Inc. ("CAOG") for common stock
consideration valued at $19,362,500. CAOG 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, CAOG became a subsidiary of CanArgo, and each previously
outstanding share of CAOG common stock was converted into the right to
receive 0.8 shares of CanArgo's common stock, giving the former
shareholders of CAOG the right to receive approximately 47% of
CanArgo's common stock immediately after the acquisition. In addition,
the former management of CAOG now holds a majority of CanArgo's senior
management positions. The transaction was accounted for as a purchase.
Under purchase accounting, CAOG's results have been included in
CanArgo's consolidated financial statements since the date of
acquisition.
The business combination will result in the issuance of 9,790,900
shares of CanArgo's common stock without receipt of additional
consideration by CanArgo. At September 30, 1999, 8,721,941 of these
shares
5
<PAGE> 6
had been issued. Giving effect to the full issuance of such shares, the
number of shares of CanArgo's common stock outstanding as at September
30, 1999 would be 33,417,922.
(3) Need for Significant Additional Capital, Possible Impairment of Assets
As described in notes 4, 5 and 6 to the condensed consolidated
financial statements, CanArgo has oil and gas related assets totaling
$38,074,227. In order to recover the carrying value of the proved
properties (principally the Ninotsminda field), CanArgo will be
required among other things to raise significant additional capital to
develop the proved properties in order to increase production to a
level that provides positive cash flow and to recover the proved
reserves associated with those properties. If CanArgo cannot
successfully raise the required funds to develop the Ninotsminda field,
it may not be able to recover its carrying value.
In addition to the funds needed to develop the Ninotsminda field,
significant additional capital will be required to explore and, if
appropriate, develop CanArgo's unproved properties. This requirement
could be met by raising additional capital, partnering with other
industry participants who would fund all or part of the exploration or
development activities in exchange for an interest in the properties or
interests or outright sale of the properties or interests. CanArgo is
actively seeking industry partners in connection with its interests in
the Stynawske field as well as its other unproved properties in Eastern
Europe. CanArgo has transported oil and gas related equipment to
Georgia initially for use in the development of the Ninotsminda field
and ultimately for the exploration and development of certain other
unproved properties in Eastern Europe. If the Ninotsminda field and
certain unproved properties are not successfully developed, CanArgo may
not recover the remaining carrying value of this equipment.
CanArgo's investments in Georgian American Oil Refinery and Sagarego
Power Corporation are part of the Company's strategy to develop the
Ninotsminda field and accordingly, the ultimate realization of those
investments is tied to the successful development and operation of that
field.
The consolidated financial statements of CanArgo do not give effect to
any additional impairment in the value of CanArgo'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. CanArgo'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.
(4) Property and Equipment, Net
Property and equipment, net of accumulated depreciation and impairment
at September 30, 1999 and December 31, 1998 included the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------------------------- -----------------
ACCUMULATED
DEPRECIATION AND
COST IMPAIRMENT NET NET
---------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
Electrically enhanced oil
recovery ("EEOR")
equipment $ -- $ -- $ -- $ 272,098
Oil and gas related
equipment 8,936,337 (2,875,261) 6,061,076 5,653,481
Office furniture, fixtures
and equipment and other 1,169,587 (768,758) 400,829 276,357
----------- ----------- ---------- ----------
PROPERTY AND EQUIPMENT $10,105,924 $(3,644,019) $6,461,905 $6,201,936
=========== =========== ========== ==========
</TABLE>
6
<PAGE> 7
Oil and gas related equipment includes new or refurbished drilling rigs
and related equipment, substantially all of which has been transported
to the Republic of Georgia for use by CanArgo in the development of the
Ninotsminda field. The EEOR property and equipment is held by a
subsidiary that became an unconsolidated subsidiary.
(5) Oil and Gas Properties, Net
CanArgo has acquired interests in oil and gas properties through share
ownership, joint ventures and joint operating arrangements. A summary
of CanArgo's oil and gas properties at September 30, 1999 and December
31, 1998 is set out below:
<TABLE>
<CAPTION>
December 31,
SEPTEMBER 30, 1999 1998
------------------------------------------------------------- -----------
REPUBLIC OF
GEORGIA CANADA USA OTHER TOTAL TOTAL
----------- ------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Proved properties $17,887,614 $ -- $ 1,174,734 $ -- $19,062,348 $19,530,858
Unproved properties 12,958,368 13,333 -- 233,956 13,205,657 13,266,368
Less: accumulated
depletion and
impairment (960,322) -- (1,174,734) -- (2,135,056) (2,659,653)
----------- ------- ----------- -------- ----------- -----------
TOTAL OIL AND GAS
PROPERTIES, NET $29,885,660 $13,333 $ -- $233,956 $30,132,949 $30,137,573
=========== ======= =========== ======== =========== ===========
</TABLE>
Oil and gas properties obtained in connection with the acquisition of
CAOG includes $15,120,000 of properties in the full cost pool and
$10,550,500 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 Ninotsminda
Oil Company Limited ("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 other exploration areas referred to as the Nazvrevi
block and Block XIII operated under the terms of a PSC between
CanArgo's wholly owned subsidiary, CanArgo Nazvrevi Limited, and the
Republic of Georgia.
During the first quarter of 1997, CanArgo purchased a 60% interest in a
heavy oil property in the Sylvan Lake area in Alberta, Canada for
approximately $1,009,000. During the nine months ended September 30,
1998, CanArgo recognized impairments aggregating $900,000 on its proved
oil and gas properties in the Sylvan Lake project as a result of a
decline of heavy oil prices and the quarterly application of the full
cost ceiling limitation. Effective September 1, 1999, CanArgo sold its
interest in the Sylvan Lake project for gross proceeds of $800,000.
Unproved properties and associated costs not currently being amortized
and included in oil and gas properties were $13,205,657 and $13,266,368
at September 30, 1999 and December 31, 1998 respectively. Unproved oil
and gas properties at September 30, 1999 include costs of $13,192,324
(December 31, 1998 - $12,941,868) with respect to properties in Eastern
Europe. These properties are expected to be evaluated over the next
five years. Remaining costs of $13,333 relate to the minor property
interests in Western Canada which are expected to be evaluated over the
next 36 months. If no proved reserves are added, these properties could
experience additional impairment.
7
<PAGE> 8
(6) Investments in and Advances to Oil and Gas and Other Ventures
CanArgo has acquired interests in oil and gas and other ventures
through less than majority interests in corporate and corporate-like
entities. A summary of CanArgo's net investment in and advances to oil
and gas ventures as of September 30, 1999 and December 31, 1998 is set
out below:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 1999 1998
- ------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company $ 6,086,254 $ 5,980,613
Republic of Georgia - Sartichala
Through 12.9% ownership of Georgian American Oil Refinery 1,008,845 1,004,445
Republic of Georgia - Ninostminda
Through an effective 42.5% ownership Sagarego Power Corporation 567,164 467,796
Uentech International Corporation
Through an effective 45% voting interest 304,233 --
Ukraine - Lelyaki Field, Pryluki Region
Through an effective 40.5% ownership of Kashtan Petroleum Ltd. 2,435,725 2,435,725
Adygea, Russian Federation - Maykop Field
Through 37% ownership in Intergas JSC 6,710,874 6,710,874
Albania - Gorisht-Kocul Field
Through 50% ownership of the joint venture 2,202,922 2,202,922
------------ ------------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS AND OTHER VENTURES $ 19,316,017 $ 18,802,375
============ ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES 1999 1998
- --------------------------------------------------------- -------------- -------------
<S> <C> <C>
Ukraine - Stynawske Field, Boryslaw $ (626,461) $ (574,880)
Ukraine - Lelyaki Field, Pryluki Region (2,435,725) (2,435,725)
Adygea, Russian Federation - Maykop Field (1,452,510) (1,452,510)
Albania - Gorisht-Kocul Field (833,191) (833,191)
------------ ------------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES $ (5,347,887) $ (5,296,306)
------------ ------------
Impairment - Stynawske Field $ (5,459,793) $ --
Impairment - Maykop Field (5,258,364) (5,258,364)
Impairment - Gorisht-Kocul Field (1,369,731) (1,369,731)
------------ ------------
TOTAL IMPAIRMENT $(12,087,888) $ (6,628,095)
------------ ------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND
OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 1,880,242 $ 6,877,974
============ ============
</TABLE>
CanArgo's investment in and advances to Boryslaw Oil Company are
essentially unevaluated properties. At September 30, 1999 and December
31, 1998, there were no material operations or assets (other than
8
<PAGE> 9
unevaluated properties) of entities being accounted for using the
equity method. Accordingly, no other separate financial information has
been presented.
Under the terms of the license Boryslaw Oil Company holds in the
Stynawske field, field operations were to be transferred to Boryslaw
Oil Company effective January 1, 1999. While negotiations continue on
the transfer of the field, the length and difficulty of the
negotiations have created significant uncertainty as to CanArgo's
ability to raise funds for the project or enter into a satisfactory
farm-out agreement on a timely basis. Accordingly, CanArgo cannot be
reasonably assured that development of the Stynawske project will
proceed. As such, CanArgo recorded in the three months ended September
30, 1999 an impairment charge of $5,459,793 against its investment in
and advances to Boryslaw Oil Company.
(7) Accrued Liabilities
Accrued liabilities at September 30, 1999 and December 31, 1998
included the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Professional fees $189,748 $ 280,000
Seismic acquisition -- 771,207
Taxes payable 61,000 61,000
Other 147,643 49,843
-------- ----------
$398,391 $1,162,050
======== ==========
</TABLE>
(8) 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, 1998 15,157,868 $1,515,786 $ 90,549,249 $(63,615,972) $28,449,063
Issuance of common stock upon
exchange of CanArgo Oil & Gas Inc.
Exchangeable Shares 4,787,816 478,782 8,989,613 -- 9,468,395
Issuance of common stock in
connection with acquisition of oil
and gas properties 250,000 25,000 84,500 -- 109,500
Issuance of common stock for
services 302,917 30,292 84,902 -- 115,194
Issuance of common stock pursuant
to registration statement 11,850,362 1,185,036 2,370,073 -- 3,555,109
Share issue costs (655,917) -- (655,917)
Net loss -- -- -- (7,514,426) (7,514,426)
---------- ---------- ------------ ------------ -----------
32,348,963 3,234,896 101,422,420 (71,130,398) 33,526,918
Shares issuable upon exchange of
CanArgo Oil & Gas Inc. Exchangeable
Shares without payment of
additional consideration
1,068,959 106,896 2,007,079 -- 2,113,975
---------- ---------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1999 33,417,922 $3,341,792 $103,429,499 $(71,130,398) $35,640,893
========== ========== ============ ============ ===========
</TABLE>
9
<PAGE> 10
At the annual meeting of stockholders held on June 16, 1999,
stockholders approved an amendment to CanArgo's Certificate of
Incorporation to effect a 1-for-25 reverse stock split of the
outstanding common stock, subject to implementation at the discretion
of the Board of Directors. At September 30, 1999, the reverse stock
split had not been effected and on October 18, 1999, CanArgo announced
that the Board of Directors had decided not to proceed with the
1-for-25 reverse split.
(9) Net Loss Per Common Share
Effective December 31, 1997, CanArgo adopted SFAS No. 128 Earnings Per
Share. Basic and diluted net loss per common share for the periods
ended September 30, 1999 and 1998 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,
1999 and 1998 are 23,660,246 and 14,072,572 respectively. The weighted
average number of shares outstanding at September 30, 1999 excludes
5,033,253 shares issuable upon exercise of options and warrants because
they are anti-dilutive.
(10) Commitments and Contingencies
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional
obligations, absolute and contingent, with respect to acquiring and
developing oil and gas properties and ventures. At September 30, 1999,
CanArgo 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. CanArgo believes that it has no further
obligation to fund operations of Kashtan Petroleum Ltd. or Intergas
JSC.
POTENTIAL CLAIMS RELATING TO PREVIOUSLY IMPAIRED PROJECTS
As a result of CanArgo's decision to cease active development of the
Lelyaki, Maykop and Gorisht-Kocul projects, CanArgo 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. CanArgo 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. CanArgo is unable to estimate the range that such
claims, if made, might total. However, if one or more such claims were
asserted and determined to be valid, they could have a material adverse
effect on CanArgo's financial position, results of operations, cash
flows and prospects. Such claims may be adjudicated in the host country
forum under host country laws.
(11) Segment Information
For the nine month periods ended September 30, 1999 and 1998, CanArgo
operated through one business segment, oil and gas exploration and
production.
10
<PAGE> 11
Operating revenues for the nine month periods ended September 30, 1999
and 1998 by geographical area were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30,
1999 1998
--------------- -------------
<S> <C> <C>
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe $ 1,817,347 $ 331,400
Canada 243,767 176,618
------------- ---------------
TOTAL $ 2,061,114 $ 508,018
=============== =============
</TABLE>
Net earnings (loss) for the nine month periods ended September 30,
1999 and 1998 by geographical area were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30,
1999 1998
--------------- -------------
<S> <C> <C>
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe $ (5,912,671) $ (879,772)
Canada 62,590 (1,198,430)
------------- ---------------
TOTAL $ (5,850,081) $ (2,078,202)
CORPORATE EXPENSES $ (1,664,345) $ (2,712,279)
------------- ---------------
TOTAL $ (7,514,426) $ (4,790,481)
============= ==============
</TABLE>
Identifiable assets as of September 30, 1999 and December 31, 1998 by
business segment and geographical area were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30,
1999 1998
--------------- -------------
<S> <C> <C>
CORPORATE
United States $ -- $ 3,319
Canada 3,324,974 2,304,690
Western Europe 36,756 196,304
-------------- -------------
TOTAL $ 3,361,730 $ 2,504,313
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ 36,656,457 $ 41,644,701
Canada 13,333 1,001,733
Western Europe -- 13,769
-------------- -------------
TOTAL $ 36,669,790 $ 42,660,203
OTHER ENERGY PROJECTS
Eastern Europe $ 1,576,009 $ 1,403,013
Canada 304,233 --
-------------- -------------
TOTAL 1,880,242 1,403,013
-------------- -------------
IDENTIFIABLE ASSETS - TOTAL $ 41,911,762 $ 46,567,529
============== =============
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward looking statements. Such forward
looking statements are based upon the current expectations of CanArgo and speak
only as of the date made. These forward looking statements involve risks,
uncertainties and other factors. The factors discussed below under "Forward
Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q are
among those factors that in some cases have affected CanArgo's historic results
and could cause actual results in the future to differ significantly from the
results anticipated in forward looking statements made in this Quarterly Report
on Form 10-Q, future filings by CanArgo with the Securities and Exchange
Commission, in CanArgo's press releases and in oral statements made by
authorized officers of CanArgo. When used in this Quarterly Report on Form 10-Q,
the words "estimate," "project," "anticipate," "expect," "intend," "believe,"
"hope," "may" and similar expressions, as well as "will," "shall" and other
indications of future tense, are intended to identify forward looking
statements.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
On August 6, 1999, CanArgo closed its registered public offering,
resulting in the issuance of 11,850,362 shares at $0.30 per share for gross
proceeds of $3,555,109. CanArgo's management believes that net proceeds from the
offering, augmented by cash generated from operations, proceeds of approximately
$875,000 from the disposition of assets not central to its operations and a $6
million loan from the International Finance Corporation ("IFC") should be
sufficient to cover operating needs during the next twelve month period.
However, no assurances can be given that:
o CanArgo will be able to complete any asset sales;
o the proceeds from any such asset sales will be as great as CanArgo
anticipates;
o CanArgo's operations will generate positive cash flow;
o CanArgo will satisfy the conditions to the disbursement of the IFC
loan; or
o The funds provided by the sources noted above or from other sources
will be sufficient to satisfy CanArgo's operating needs during the
next twelve months.
In addition, on November 5, 1999, the other shareholder of Ninotsminda
Oil Company advised IFC that a guarantee and pledge it had previously provided
IFC under the loan agreement would not apply to any advances made by IFC to
Ninotsminda Oil Company. As a result, the IFC has advised both the other
shareholder and CanArgo that should the other shareholder fail to retract its
notice to IFC, it will not be prepared to disburse under the loan agreement. In
preliminary discussions between CanArgo and the other shareholder, the other
shareholder has indicated that it may be prepared, under certain circumstances,
to retract the notice, however discussions are ongoing. Should the matter not be
resolved to the satisfaction of CanArgo or IFC, CanArgo may be required to
either reduce its development plans for the Ninotsminda field or seek
alternative financing.
Pending satisfactory resolution of the above, CanArgo intends to use $2
million of the net proceeds from the public offering as a capital contribution
to Ninotsminda Oil Company so that Ninotsminda Oil Company could receive funding
of a $6 million loan from the IFC. Current development plans for the Ninotsminda
field includes the drilling of a minimum of three development wells plus five
major rehabilitations of existing wells, with a view towards increasing oil
production. The total budgeted cost of the current development plan is
$9,500,000. The development plan is scheduled to be implemented in 1999 and the
first half of 2000. CanArgo believes that the $6 million loan from the IFC and
the $2 million capital contribution from CanArgo to Ninotsminda Oil Company will
provide most of the funds required to complete the current development program.
12
<PAGE> 13
On September 22, 1999, CanArgo repaid in full a $500,000 working capital
loan from Terrenex Acquisition Corporation, CanArgo's largest stockholder.
Compound interest was paid at a rate of 1% per calendar month. CanArgo also paid
Terrenex a financing fee of 50,000 shares, or about 4% of the outstanding
shares, of Uentech International Corporation, an investment of CanArgo which
holds the rights to CanArgo's electrically enhanced oil recovery ("EEOR")
technology.
Pursuant to the loan agreement between Ninotsminda Oil Company and the
IFC, the IFC has the right, upon notice to CanArgo, to terminate its loan
commitment if, among other things, the first disbursement under the loan
agreement is not made by June 30, 1999, or such other date as IFC and CanArgo
agree. IFC has no obligation to disburse funds after June 30, 2000. In addition
to the provision of a $2 million capital contribution to Ninotsminda Oil
Company, both the initial and each subsequent disbursement are also subject to a
large number of conditions including:
o performance by Ninotsminda Oil Company and its shareholders of
their respective obligations under the loan agreement;
o the maintenance of specified financial ratios;
o the absence of any material adverse changes in Ninotsminda Oil
Company's financial position or business prospects;
o evidence that Ninotsminda Oil Company has received at least $10
million from its shareholders since the beginning of 1998 in
the form of equity contributions, which either has been
expended on the Ninotsminda field current development program
or is held in a cash account. CanArgo believes that the other
shareholder of Ninotsminda Oil Company will not participate in
the equity contribution and that CanArgo will be required to
fund the entire $2,000,000 in order for Ninotsminda Oil Company
to have access to the IFC funding;
o the grant by CanArgo to IFC of a first ranking security
interest over one of the drilling rigs currently in Georgia;
and
o receipt by the IFC of favourable legal opinions on a variety of
matters related to the loan.
After the initial disbursement, subsequent disbursement will only be
made by IFC if, in addition to all other conditions of disbursement:
o Well N97 has been completed and is producing to IFC's
satisfaction;
o Total production of the Ninotsminda field has averaged at least
2,500 barrels of oil per day for at least 30 days immediately
prior to the date of any subsequent disbursement;
o IFC is satisfied that the Ninotsminda field has adequate
supplies of electrical power to carry out its operations
without material delays or interruptions; and
o IFC has approved NOC's arrangements for the sale of crude oil
and natural gas.
No assurance can be given that the conditions to disbursement will be
satisfied or, if not satisfied, waived, or that the IFC will fund all or any
part of the $6 million loan.
As a considerable amount of infrastructure for the Ninotsminda field has
been put in place by Georgian Oil, increases in oil production are not expected
to increase infrastructure costs substantially. No assurance can be given,
however, that funding of the Ninotsminda field current development plan will be
timely, that the development plan will be successfully completed, that it will
increase production, or that the Ninotsminda field operating revenues after
completion of the development plan will exceed operating costs.
13
<PAGE> 14
The extent, cost and timing of a full Ninotsminda field development
plan are highly speculative and will depend significantly upon the results of
the current development program. CanArgo currently projects that the full field
development plan for oil would involve the drilling of nine additional wells,
would cost an additional $16 million, and would require two to three years to
complete. Should Ninotsminda Oil Company attempt to implement such a plan
immediately following completion of the current development plan in
approximately mid-2000, it could require substantial additional funding. It is
unlikely CanArgo could provide such funding unless CanArgo itself obtained
substantial additional funding.
In addition to the development plan for oil, CanArgo has recently
completed testing the second well of a four well testing program on the
Ninotsminda field to establish the feasibility of commercial gas production in
conjunction with the optimization of oil production. Further analysis of the
test results are being carried out to establish long term deliverability.
CanArgo is also currently in discussions regarding the sale of this gas
production.
Depending upon the amount of revenue generated by operations and
partial funding of CanArgo projects by third-party participants, CanArgo
believes that it may be required to obtain additional debt or equity financing
by the second half of 2000. No assurances can be given that CanArgo will be able
to obtain such financing or that the financing that is available will be offered
on terms that are attractive or even acceptable to CanArgo. Potential sources of
funds include additional equity, project financing, debt financing and the
participation of other oil and gas entities in CanArgo's projects. Based on
continuing discussions including those with major stockholders, investment
bankers and other oil companies, CanArgo 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.
On March 29, 1999, CanArgo was advised that its common stock had been
delisted from The Nasdaq Market System effective at the close of business on
March 29, 1999. On March 30, 1999, CanArgo's common stock commenced trading on
the OTC Bulletin Board. At the annual meeting of stockholders held on June 16,
1999, stockholders approved an amendment to CanArgo's Certificate of
Incorporation to effect a 1-for-25 reverse stock split of the outstanding common
stock, subject to implementation at the discretion of the Board of Directors.
The purpose of the reverse split was to attempt to establish a common stock
structure that might achieve a bid price in excess of $5.00 per share so that
CanArgo can seek readmission to the Nasdaq National Market System. Recent
developments, including a growing shareholder base and active market for its
shares in Norway, resulted in CanArgo being able to seek a primary listing on
the Oslo Stock Exchange. As a result, CanArgo has decided not to re-apply for a
National Market listing, and accordingly, has chosen not to effect the 1-for-25
reverse split. The decision to not proceed with the reverse split resulted in
CanArgo not maintaining a minimum bid price that would allow it to meet the
requirements of a National Market or Small Cap Market Listing. On October 13,
1999, CanArgo received formal notification from the NASDAQ Listing and Hearing
Review Council that its appeal has been rejected.
As of September 30, 1999, CanArgo had working capital of $1,600,000,
compared to working capital of $1,366,000 as of December 31, 1998. The $234,000
increase in working capital from December 31, 1998 to September 30, 1999
principally reflects the closing of CanArgo's registered public offering in
August 1999, resulting in the issuance of 11,850,362 shares at $0.30 per share
for gross proceeds of $3,555,109 less expenditures on operating and investing
activities.
Cash and cash equivalents increased to $2,889,000 during the nine
months ended September 30, 1999 from $1,925,000 at December 31, 1998 primarily
as a result of the closing of the offering less expenditures on operating
activities and investing activities. Cash and cash equivalents at September 30,
1999 included $66,000 held by Ninotsminda Oil Company, a 68.5% owned subsidiary
of CanArgo which is developing the Ninotsminda field, to which CanArgo has
limited access.
Advances to operator decreased from $377,000 at December 31, 1998 to
nil at September 30, 1999 as a result of expenditures by the entity performing
the operations at the Ninotsminda field on behalf and at the direction of
CanArgo.
14
<PAGE> 15
At September 30, 1999, 9,800 barrels of oil were held in storage for
sale in the Georgian domestic and regional market or in the international
market. Depending on the demand and price for oil in the Georgian domestic and
regional market CanArgo may decide to place, as a strategic initiative,
additional production in storage.
Other current assets decreased from $453,000 at December 31, 1998 to
$103,000 at September 30, 1999, primarily as a result of the amortization of
prepaid expenses.
Property and equipment, net, increased from $6,202,000 at December 31,
1998 to $6,462,000 at September 30, 1999, primarily as a result of capitalized
costs associated with moving two drilling rigs and related equipment to the
Republic of Georgia from Cyprus and testing of one of the rigs.
Oil and gas properties, net decreased from $30,138,000 at December 31,
1998 to $30,133,000 at September 30, 1999, as a result of the sale effective
September 1, 1999 of CanArgo's interest in the Sylvan Lake project and depletion
expense of $762,000. Largely offsetting the decrease was costs related to the
evaluation of seismic data and workover costs with respect to the Ninotsminda
and Nazvrevi fields for $645,000, capitalization of $745,000 of Ninotsminda Oil
Company general and administrative expenses related to exploration and
development activities and acquisition of certain interests with respect to the
Ninotsminda field for $110,000.
Investments in and advances to oil and gas and other ventures, net
decreased from $6,878,000 at December 31, 1998 to $1,880,000 at September 30,
1999. The decrease reflects principally an impairment charge of $5,460,000
against CanArgo's investment in and advances to Boryslaw Oil Company. Under the
terms of the license Boryslaw Oil Company holds in the Stynawske field, field
operations were to be transferred to Boryslaw Oil Company effective January 1,
1999. While negotiations continue on the transfer of the field, the length and
difficulty of the negotiations have created significant uncertainty as to
CanArgo's ability to raise funds for the project or enter into a satisfactory
farm-out agreement on a timely basis. Accordingly, CanArgo cannot be reasonably
assured that development of the Stynawske project will proceed and as such,
CanArgo recorded in the three months ended September 30, 1999 an impairment
charge of $5,460,000 against its investment and advances.
Partially offsetting the decrease in investments in and advances to oil
and gas and other ventures is a restructuring by CanArgo of its EEOR assets
whereby CanArgo placed its EEOR assets into Uentech International Corporation, a
Canadian controlled private corporation, with the objective of Uentech
International Corporation raising additional third party capital specifically
for development of the EEOR technology. To September 30, 1999 Uentech
International Corporation has raised third party capital of $150,000 via private
placement. Following the restructuring CanArgo held at September 30, 1999, 45%
of the voting common shares of Uentech International Corporation and 75% of the
total common shares outstanding.
As a result of CanArgo's suspension of activities relating to the
Lelyaki, Maykop and Gorisht-Kocul field projects, CanArgo may be subject to
contingent liabilities in the form of claims from the ventures developing those
projects and other participants therein. CanArgo was advised during the first
quarter of 1998 that the corporate entity developing the Maykop field project
and a shareholder in that entity were considering such claims, but no such
claims have yet been asserted. CanArgo 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 CanArgo's
financial position, result of operations and cash flows. Any such claims may be
adjudicated in host country forums under host country law.
CanArgo has in the past been involved and in the future could be
involved in lawsuits and could incur significant costs in defending such
lawsuits the loss of which could have a material adverse effect on the financial
condition, results of operations, cash flows and prospects of CanArgo.
CanArgo 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 CanArgo to expend funds and to issue shares of its
common stock. CanArgo believes that it has no further obligation to fund any
operations relating to the Lelyaki and Maykop field projects. At September 30,
1999, CanArgo had a contingent obligation to issue 187,500 shares of common
stock to a third party upon satisfaction of
15
<PAGE> 16
conditions relating to the achievement of specified Stynawske field project
performance standards. As CanArgo develops current projects and undertakes other
projects, it could incur significant additional obligations.
Development of the oil and gas properties and ventures in which CanArgo
has interests involves multi-year efforts and substantial cash expenditures.
Full development of CanArgo's oil and gas properties and ventures will require
the availability of substantial additional financing from external sources.
CanArgo intends where opportunities exist to transfer portions of its interests
in oil and gas properties and ventures to entities in exchange for such
financing. CanArgo 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 CanArgo 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 CanArgo. There can also be no assurance
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 CanArgo, such entities
and their respective stockholders or participants.
Ultimate realization of the carrying value of CanArgo'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 CanArgo. Establishment of successful oil and gas
operations is dependent upon, among other factors, the following:
o mobilization of equipment and personnel to implement
effectively drilling, completion and production activities;
o achieving significant production at costs that provide
acceptable margins;
o reasonable levels of taxation, or economic arrangements in
lieu of taxation, in host countries; and
o the ability to market the oil and gas produced at or near
world prices.
CanArgo has plans to mobilize resources and achieve levels of
production and profits sufficient to recover the carrying value of its oil and
gas properties and ventures. However, if one or more of the above factors, or
other factors, are different than anticipated, these plans may not be realized,
and CanArgo may not recover the carrying value of its oil and gas properties and
ventures. CanArgo 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. Until the IFC loan is repaid
by Ninotsminda Oil Company, CanArgo will have only limited ability to transfer
funds from Ninotsminda Oil Company to CanArgo.
Accounts payable increased from $822,000 at December 31, 1998 to
$1,438,000 at September 30, 1999 as seismic acquisition costs previously
included in accrued liabilities were reclassified to accounts payable.
Minority interest in subsidiaries at September 30, 1999 of $4,425,000
relates to the 31.5% interest of the non-controlling shareholder in Ninotsminda
Oil Company.
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 produce erroneous
results. CanArgo has completed a review of its existing information technology
and non-information technology systems and has upgraded its accounting
information systems to software that the developer represents to be Year 2000
compliant. Except for a limited number of desktop computers utilized by CanArgo
which CanArgo intends to replace, CanArgo believes that the software and
hardware currently used by CanArgo including oilfield production equipment is
Year 2000 compliant. The cost of replacing the desktop computers is expected not
to exceed $25,000. Although CanArgo does not expect to incur significant
additional expenditures to address Year 2000 issues, there can be no assurance
that this will be the case.
16
<PAGE> 17
CanArgo has identified several significant suppliers of goods and
services, primarily in the banking, transportation, refining, utility and
communication sectors, whose inability or failure to become Year 2000 compliant
in a timely manner could have a material adverse effect on CanArgo's business,
financial condition, results of operations or cash flows. CanArgo has reviewed
information from these suppliers, where available, with respect to their Year
2000 compliance and status and continues to monitor their progress. While
disruptions to the local power grid as a result of the Year 2000 problem and
other problems could interfere with CanArgo's ability to produce oil and
continue development activities at the Ninostsminda field, CanArgo anticipates
that the planned addition later this year of independent power generation
capability at the Ninostsminda field, if accomplished, will substantially
mitigate that risk and enable CanArgo to at least produce and store oil. Because
of uncertainties, however, the actual effects of the Year 2000 problem on
CanArgo may be different from CanArgo's current assessment. Should remedial
efforts be required, the inability of CanArgo or its principal suppliers to
become Year 2000 compliant in a timely manner could impact CanArgo's ability to
produce, sell and receive payment for its crude oil on a timely basis and could
have a material adverse effect on CanArgo's business, financial condition,
results of operations or cash flows.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, and SFAS
No. 131, Disclosure about Segments of an Enterprise and Related Information both
of which were adopted in 1998 without having any material effect on CanArgo's
financial statements. In 1998, FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which will be adopted in the 1999
third quarter financial statements and based on present circumstances would not
have any material effect on CanArgo's financial statements.
RESULTS OF OPERATIONS
Nine Month Periods Ended September 30, 1999 and 1998
CanArgo recorded operating revenue of $2,061,000 during the nine month
period ended September 30, 1999 compared with $508,000 for the nine month period
ended September 30, 1998. Ninotsminda Oil Company generated $1,817,000 of
revenue in the nine month period ended September 30, 1999 compared to $331,000
of revenue for the nine and three month period ended September 30, 1998
following the acquisition on July 15, 1998 of CanArgo Oil & Gas Inc. and its
subsidiary Ninotsminda Oil Company. Its net share of the 302,400 barrels of
gross production from the Ninotsminda field in the nine month period ended
September 30, 1999 amounted to 102,400 barrels. During the nine month period
ended September 30, 1999, 50,000 barrels of oil were removed from storage and
sold. Net sale prices for Ninotsminda oil sold during the nine months ended
September 30, 1999 averaged $11.92 per barrel. Oil production from the Sylvan
Lake property in Alberta, Canada accounted for $244,000 of revenue in the nine
month period ended September 30, 1999 and $177,000 of revenue for the nine month
period ended September 30, 1998.
The operating loss for the nine month period ended September 30, 1999
amounted to $7,410,000 compared with $5,015,000 for the corresponding period in
1998. The increase in the operating loss is attributable to the impairment of
CanArgo's investment in and advances to Boryslaw Oil Company of $5,460,000 in
the nine month period ended September 30, 1999. The increase caused by the
impairment is partially offset by 1998 costs associated with CanArgo's
involvement in some Eastern European oil and gas ventures which involvement
CanArgo has effectively terminated, 1998 costs associated with CanArgo's
business combination with CanArgo Oil & Gas Inc., and the impairment of oil and
gas properties which amounted to $900,000 in the 1998 period.
Lease operating expenses increased to $851,000 for the nine month
period ended September 30, 1999, as compared to $477,000 for the nine month
period ended September 30, 1998. The increase is primarily as a result of the
inclusion of an additional six months of Ninotsminda field operating expenses in
the 1999 period.
Direct project costs decreased to $730,000 for the nine month period
ended September 30, 1999, from $1,012,000 for the nine month period ended
September 30, 1998, reflecting 1998 costs associated with CanArgo's involvement
in some Eastern European oil and gas ventures which involvement CanArgo has
effectively terminated, partially offset by activity related to the Ninotsminda
field.
17
<PAGE> 18
General and administrative costs decreased to $1,550,000 for the nine
month period ended September 30, 1999, from $2,732,000 for the nine month period
ended September 30, 1998. The decrease is primarily attributable to 1998 costs
associated with CanArgo's involvement in some Eastern European oil and gas
ventures, which involvement CanArgo has effectively terminated, and 1998 costs
associated with CanArgo's business combination with CanArgo Oil & Gas Inc.,
partially offset by the cost of general and administrative activity related to
the Ninotsminda field.
The increase in depreciation, depletion and amortization expense from
$261,000 for the nine month period ended September 30, 1998 to $827,000 for the
nine month period ended September 30, 1999 is attributable principally to
depletion related to Ninotsminda field oil production and depreciation of
drilling equipment in use in the 1999 period.
The equity loss from investments in unconsolidated subsidiaries
decreased to $52,000 for the nine month period ended September 30, 1999 from
$152,000 for the nine month period ended September 30, 1998 as a result of the
substantially lower level of activity conducted through unconsolidated
subsidiaries in 1999, reflecting the termination of CanArgo's involvement in the
development activities of some Eastern European oil and gas ventures conducted
through unconsolidated subsidiaries.
During the nine months ended September 30, 1998, CanArgo wrote down 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 quarterly
application of the full cost ceiling limitation. There was no comparable write
down during the nine months ended September 30, 1999.
During the nine months ended September 30, 1999, CanArgo wrote down its
investment in and advances to Boryslaw Oil Company by $5,460,000. Under the
terms of the license Boryslaw Oil Company holds in the Stynawske field, field
operations were to be transferred to Boryslaw Oil Company effective January 1,
1999. While negotiations continue on the transfer of the field, the length and
difficulty of the negotiations have created significant uncertainty as to
CanArgo's ability to raise funds for the project or enter into a satisfactory
farm-out agreement on a timely basis. Accordingly, CanArgo cannot be reasonably
assured that development of the Stynawske project will proceed.
CanArgo recorded net other expenses of $232,000 for the nine months
ended September 30, 1999, as compared to net other income of $171,000 during the
nine months ended September 30, 1998. The principal reason for the decrease is
lower interest income as a result of lower cash balances during the nine months
ended September 30, 1999 compared to the same period for the previous year and
the payment of a facility and commitment fee pursuant to Ninotsminda Oil
Company's $6,000,000 Loan Agreement with the International Finance Corporation.
The net loss of $7,514,000, or $0.32 per share, for the nine month
period ended September 30, 1999 compares to a net loss of $4,790,000, or $0.34
per share, for the nine month period ended September 30, 1998. As a result of
the issuance of shares in connection with the business combination, the weighted
average number of common shares outstanding was substantially higher during the
nine month period ended September 30, 1999 than during the nine month period
ended September 30, 1998.
Three Month Periods Ended September 30, 1999 and 1998
CanArgo recorded operating revenue of $1,157,000 during the three month
period ended September 30, 1999 compared with $375,000 for the three month
period ended September 30, 1998. Ninotsminda Oil Company generated $1,110,000 of
revenue in the three month period ended September 30, 1999. Its net share of the
96,700 barrels of gross production from the Ninotsminda field in the period
amounted to 31,100 barrels. Ninotsminda Oil Company sold from storage in the
three month period ended September 30, 1999 42,600 barrels of oil into the
Georgian local and regional markets. Because lower transportation costs are
involved, CanArgo believes that sales of Ninotsminda oil to customers in the
Georgian local and regional markets generally yield relatively higher net sales
prices to Ninotsminda Oil Company than sales to other customers. Net sale prices
for Ninotsminda oil sold during the three months ended September 30, 1999
averaged $15.06 per barrel. Oil production from the Sylvan Lake
18
<PAGE> 19
property in Alberta, Canada accounted for $47,000 of revenue in the three month
period ended September 30, 1999 and $45,000 of revenue for the three month
period ended September 30, 1998. Effective September 1, 1999, CanArgo sold its
interest in the Sylvan Lake property.
The operating loss for the three month period ended September 30, 1999
amounted to $5,866,000 compared with $787,000 for the corresponding period in
1998. The increase in the operating loss is attributable to the impairment of
CanArgo's investment in and advances to Boryslaw Oil Company of $5,460,000 in
the three month period ended September 30, 1999. The increase caused by the
impairment is partially offset by revenue from the Ninotsminda field, 1998 costs
associated with CanArgo's involvement in some Eastern European oil and gas
ventures which involvement CanArgo has effectively terminated and 1998 costs
associated with CanArgo's business combination with CanArgo Oil & Gas Inc.
Lease operating expenses increased to $351,000 for the three month
period ended September 30, 1999 from $300,000 for the three month period ended
September 30, 1998. The increase is primarily as a result of the deferral of
Ninotsminda field expenses of $150,000 in 1998 for oil production placed in
storage during the period. No oil was placed in storage during the three month
period ended September 30, 1999.
Direct project costs increased to $327,000 for the three month period
ended September 30, 1999, from $228,000 for the three month period ended
September 30, 1998, reflecting increased activity related to the Ninotsminda
field partially offset by 1998 costs associated with CanArgo's involvement in
some Eastern European oil and gas ventures which involvement CanArgo has
effectively terminated.
General and administrative costs decreased to $446,000 for the three
month period ended September 30, 1999 from $517,000 for the three month period
ended September 30, 1998. The decrease is primarily attributable to 1998 costs
associated with CanArgo's involvement in some Eastern European oil and gas
ventures, which involvement CanArgo has effectively terminated, and 1998 costs
associated with CanArgo's business combination with CanArgo Oil & Gas Inc.,
partially offset by the cost of activity related to the Ninotsminda field.
The increase in depreciation, depletion and amortization expense from
$101,000 for the three month period ended September 30, 1998 to $429,000 for the
three month period ended September 30, 1999 is attributable principally to
increased sales in the period from Ninotsminda field oil production and
depreciation of drilling equipment.
The equity loss from investments in unconsolidated subsidiaries
decreased to $10,000 for the three month period ended September 30, 1999, from
$17,000 for the three month period ended September 30, 1998 as a result of the
substantially lower level of activity conducted through unconsolidated
subsidiaries in 1999, reflecting the termination of CanArgo's involvement in the
development activities of some Eastern European oil and gas ventures conducted
through unconsolidated subsidiaries.
During the three months ended September 30, 1999, CanArgo wrote down
its investment in and advances to Boryslaw Oil Company by $5,460,000. Under the
terms of the license Boryslaw Oil Company holds in the Stynawske field, field
operations were to be transferred to Boryslaw Oil Company effective January 1,
1999. While negotiations continue on the transfer of the field, the length and
difficulty of the negotiations have created significant uncertainty as to
CanArgo's ability to raise funds for the project or enter into a satisfactory
farm-out agreement on a timely basis. Accordingly, CanArgo cannot be reasonably
assured that development of the Stynawske project will proceed.
Gain on disposition of equipment increased to $40,000 for the three
month period ended September 30, 1999 from nil for the three month period ended
September 30, 1998 following the sale of the Sylvan Lake property effective
September 1, 1999.
The net loss of $5,939,000, or $0.25 per share, for the three month
period ended September 30, 1999 compares to a net loss of $781,000, or $0.04 per
share, for the three month period ended September 30, 1999. As a result of the
issuance of shares in connection with the business combination, the weighted
average number of
19
<PAGE> 20
common shares outstanding was substantially higher during the three month period
ended September 30, 1999 than during the three month period ended September 30,
1998.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 2 and elsewhere
in this Form 10-Q are subject to various risks, uncertainties and other factors
that could cause actual results to differ materially from the results
anticipated in such forward looking statements. Included among the important
risks, uncertainties and other factors are those hereinafter discussed.
Few of such forward looking statements deal with matters that are
within the unilateral control of CanArgo. Joint venture, acquisition, financing
and other agreements and arrangements must be negotiated with independent third
parties and, in some cases, must be approved by governmental agencies. Such
third parties generally have interests that do not coincide with those of
CanArgo and may conflict with CanArgo's interests. Unless CanArgo and such third
parties are able to compromise their respective objectives in a mutually
acceptable manner, agreements and arrangements will not be consummated.
Operating entities in various foreign jurisdictions must be registered
by governmental agencies, and production licenses for development of oil and gas
fields in various foreign jurisdictions must be granted by governmental
agencies. These governmental agencies generally have broad discretion in
determining whether to take or approve various actions and matters. In addition,
the policies and practices of governmental agencies may be affected or altered
by political, economic and other events occurring either within their own
countries or in a broader international context.
CanArgo does not have a majority of the equity in the entity that is
the licensed developer of some projects that CanArgo may pursue in Eastern
Europe such as the Stynawske field project, even though CanArgo may be the
designated operator of the oil or gas field. In such circumstances, the
concurrence of co-venturers may be required for various actions. Other parties
influencing the timing of events may have priorities that differ from those of
CanArgo, even if they generally share CanArgo's objectives. As a result of all
of the foregoing, among other matters, the forward looking statements regarding
the occurrence and timing of future events may well anticipate results that will
not be realized.
The availability of equity or debt financing to CanArgo or to the
entities that are developing projects in which CanArgo has interests is affected
by many factors including:
o world economic conditions;
o international relations;
o the stability and policies of various governments;
o fluctuations in the price of oil and gas and the outlook for
the oil and gas industry;
o competition for funds; and
o an evaluation of CanArgo and specific projects in which
CanArgo has an interest.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of CanArgo and its projects and comparisons with alternative investment
opportunities.
The development of oil and gas properties is subject to substantial
risks. Expectations regarding production, even if estimated by independent
petroleum engineers, may prove to be unrealized. There are many uncertainties
inherent in estimating production quantities and in projecting future production
rates and the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to CanArgo's properties are subject to change as additional
information becomes available.
20
<PAGE> 21
Most of CanArgo's interests in oil and gas properties and ventures are
located in Eastern European countries. Operations in those countries are subject
to certain additional risks including the following:
o enforceability of contracts;
o currency convertibility and transferability;
o unexpected changes in tax rates;
o availability of trained personnel; and
o availability of equipment and services and other factors that
could significantly change the economics of production.
Production estimates are subject to revision as prices and costs
change. Production, even if present, may not be recoverable in the amount and at
the rate anticipated and may not be recoverable in commercial quantities or on
an economically feasible basis. World and local prices for oil and gas can
fluctuate significantly, and a reduction in the revenue realizable from the sale
of production can affect the economic feasibility of an oil and gas project.
World and local political, economic and other conditions could affect CanArgo's
ability to proceed with or to effectively operate projects in various foreign
countries.
Demands by or expectations of governments, co-venturers, customers and
others may affect CanArgo's strategy regarding the various projects. Failure to
meet such demands or expectations could adversely affect CanArgo's participation
in such projects or its ability to obtain or maintain necessary licenses and
other approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CanArgo had no interest in investments subject to market risk during
the period covered by this report.
21
<PAGE> 22
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In the three month period ended September 30, 1999, CanArgo issued an
aggregate of 211,667 shares of common stock to four persons in consideration for
financial consulting and other services valued at $0.4229 per share.
The offers and sales of the shares were exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), under
Section 4(2) of the Act as a transaction by an issuer not involving a public
offering. The purchasers of the shares represented to the Registrant, among
other things, that they were acquiring the shares for their own account; that
they were acquiring the shares for investment and not with a view towards the
distribution thereof; and that they would not sell the shares without
registration under the Act or an applicable exemption from such registration
requirement. The certificates representing the shares have a restrictive legend
endorsed thereon reflecting the restrictions on transferability arising out of
the foregoing matters, and CanArgo has issued "stop transfer" instructions to
its transfer agent with respect to the shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
1(1) Escrow Agreement with Signature Stock Transfer, Inc.
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on June 9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities
Limited, David Williamson Associates Limited, and Orkla Finans
(Fondsmegling) ASA (Incorporated herein by reference from Form
S-1 Registration Statement, File No. 333-72295 filed on June
9, 1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on June 9, 1999).
1(4) Selling Agent Agreement with National Securities Corporation
(Incorporated herein by reference from Post-Effective
Amendment No. 1 to Form S-1 Registration Statement, File No.
333-72295 filed on July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust
Company (Incorporated herein by reference from Post-Effective
Amendment No. 1 to Form S-1 Registration Statement, File No.
333-72295 filed on July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the Issued
Share Capital of Gastron International Limited dated August
10, 1995 by and among Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference from October
19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International Limited
dated November 3, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
22
<PAGE> 23
2(3) Supplemental Deed Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
May 29, 1996 by and among Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference from June 30,
1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services
Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated
dated May 16, 1995 (Incorporated herein by reference from
December 31, 1997 Form 10-K/A).
2(5) Amended and Restated Combination Agreement between Fountain
Oil Incorporated and CanArgo Energy Inc. dated as of February
2, 1998 (Incorporated herein by reference from Form S-3
Registration Statement, File No. 333-48287 filed on June 9,
1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated
herein by reference as Annex G from Form S-3 Registration
Statement, File No. 333-48287 filed on June 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15, 1998
Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
*10(1) 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(2) Employment Agreement between Fountain Oil Incorporated and
Susan E. Palmer (Incorporated herein by reference from August
31, 1995 Form 10-KSB).
*10(3) Amended and Restated 1995 Long-Term Incentive Plan
(Incorporated herein by reference from Post-Effective
Amendment No. 1 to Form S-1 Registration Statement, File No.
333-72295 filed on July 29, 1999).
*10(4) 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(5) 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(6) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
*10(7) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September
30, 1998 Form 10-Q).
*10(8) Consultancy Agreement between CanArgo Energy Corporation and
Fincom AS, Norway (Incorporated herein by reference from
September 30, 1998 Form 10-Q).
*10(9) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30,
1998 Form 10-Q).
*10(10) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as
Consultant (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February
12, 1999).
23
<PAGE> 24
10(11) Convertible Loan Agreement between Ninotsminda Oil Company
(NOC) and International Finance Corporation (IFC) dated
December 17, 1998 (Incorporated herein by reference from Form
S-1 Registration Statement, File No. 333-72295 filed on
February 12, 1999).
10(12) Put Option Agreement between CanArgo Energy Corporation, JKX
Oil & Gas PLC. and IFC dated December 17, 1998 (Incorporated
herein by reference from Form S-1 Registration Statement, File
No. 333-72295 filed on February 12, 1999).
10(13) Guarantee Agreement between CanArgo Energy Corporation and IFC
dated December 17, 1998 (Incorporated herein by reference from
Form S-1 Registration Statement, File No. 333-72295 filed on
February 12, 1999).
10(14) Agreement between Georgian Oil Refinery Company and CanArgo
Petroleum Products Ltd. dated September 26, 1998 (Incorporated
herein by reference from Form S-1 Registration Statement, File
No. 333-72295 filed on February 12, 1999).
10(15) Terrenex Acquisition Corporation Option regarding CanArgo
(Nazvrevi) Limited (Incorporated herein by reference from Form
S-1 Registration Statement, File No. 333-72295 filed on
February 12, 1999).
10(16) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and JKX Navtobi Ltd. dated February 12, 1996
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on June 7, 1999).
10(17) Agreement and Promissory Note dated July 19, 1999, with
Terrenex Acquisition Corporation (Incorporated herein by
reference from Post-Effective Amendment No. 1 to Form
S-1 Registration Statement, File No. 333-72295 filed on July
29, 1999).
10(18) Agreement between CanArgo Energy Corporation, Ninotsminda Oil
Company and IFC dated October 19, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
24
<PAGE> 25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
<S> <C>
CANARGO ENERGY CORPORATION
Date: November 12, 1999 By: /s/ Michael Binnion
----------------------------
Michael Binnion
President and Chief Financial Officer
</TABLE>
24
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED
HEREWITH EXHIBIT
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<S> <C>
1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on June 9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities
Limited, David Williamson Associates Limited, and Orkla Finans
(Fondsmegling) ASA (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on June 9, 1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on June 9, 1999).
1(4) Selling Agent Agreement with National Securities Corporation
(Incorporated herein by reference from Post-Effective Amendment No.
1 to Form S-1 Registration Statement, File No. 333-72295 filed on
July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust Company
(Incorporated herein by reference from Post-Effective Amendment No.
1 to Form S-1 Registration Statement, File No. 333-72295 filed on
July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated August 10, 1995 by
and among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
November 3, 1995 by and among Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser, and John Richard Tate as
Warrantor (Incorporated herein by reference from October 19, 1995
Form 8-K).
2(3) Supplement Deed Relating to the Sale and Purchase of All the Issued
Share Capital of Gastron International Limited dated May 29, 1996
by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from June 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services Pty,
Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated dated May
16, 1995 (Incorporated herein by reference from December 31, 1997
Form 10-K/A).
2(5) Amended and Restated Combination Agreement between Fountain Oil
Incorporated and CanArgo Energy Inc. dated as of February 2, 1998
(Incorporated herein by reference from Form S-3 Registration
Statement, File No. 333-48287 filed on June 9, 1998).
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
FILED
HEREWITH EXHIBIT
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<S> <C>
2(6) Voting, Support and Exchange Trust Agreement (Incorporated herein
by reference as Annex G from Form S-3 Registration Statement, File
No. 333-48287 filed on June 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments thereto
(Incorporated herein by reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration Statement,
File No. 333-72295 filed on July 29, 1999).
*10(1) 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(2) Employment Agreement between Fountain Oil Incorporated and Susan E.
Palmer (Incorporated herein by reference from August 31, 1995 Form
10-KSB).
*10(3) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 333-72295 filed on July 29, 1999).
*10(4) 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).
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
FILED
HEREWITH EXHIBIT
- -------- -------------------------------------------------------------------
<S> <C>
*10(5) 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(6) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
*10(7) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September 30,
1998 Form 10-Q).
*10(8) Consultancy Agreement between CanArgo Energy Corporation and Fincom
AS, Norway (Incorporated herein by reference from September 30,
1998 Form 10-Q).
*10(9) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30, 1998
Form 10-Q).
*10(10) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as
Consultant (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February 12,
1999).
10(11) Convertible Loan Agreement between Ninotsminda Oil Company (NOC)
and International Finance Corporation (IFC) dated December 17, 1998
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on February 12, 1999).
10(12) Put Option Agreement between CanArgo Energy Corporation, JKX Oil &
Gas PLC. and IFC dated December 17, 1998 (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295
filed on February 12, 1999).
10(13) Guarantee Agreement between CanArgo Energy Corporation and IFC
dated December 17, 1998 (Incorporated herein by reference from Form
S-1 Registration Statement, File No. 333-72295 filed on February
12, 1999).
10(14) Agreement between Georgian Oil Refinery Company and CanArgo
Petroleum Products Ltd. dated September 26, 1998 (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on February 12, 1999).
10(15) Terrenex Acquisition Corporation Option regarding CanArgo
(Nazvrevi) Limited (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February 12,
1999).
10(16) Production Sharing Contract between (1) Georgia and (2) Georgian
Oil and JKX Navtobi Ltd. dated February 12, 1996 (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on June 7, 1999).
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
FILED
HEREWITH EXHIBIT
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<S> <C>
10(17) Agreement and Promissory Note dated July 19, 1999, with Terrenex
Acquisition Corporation (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration Statement,
File No. 333-72295 filed on July 29, 1999).
X 10(18) Agreement between CanArgo Energy Corporation, Ninotsminda Oil
Company and IFC dated October 19, 1999.
X 27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10(18)
[LETTERHEAD OF INTERNATIONAL FINANCE CORPORATION]
OIL, GAS AND MINING DEPARTMENT
PHILIPPE LIETARD
DIRECTOR
October 19, 1999
Dr. David Robson
Chairman
Ninotsminda Oil Company Limited
P.O. Box 291,
Commerce House, Les Banques
St. Peter Port, Guernsey, GY1 3RR
British Isles
Dear Dr. Robson:
Ninotsminda Oil Company
We refer to the Convertible Loan Agreement between IFC and Ninotsminda
Oil Company ("NOC" or the "Company") dated December 17, 1998 (the "Convertible
Loan Agreement"), and the other Transaction Documents entered into between IFC,
the Company and the other parties thereto as specified therein, for the
financing of the Project. Capitalized terms used but not defined herein shall
have the same meanings assigned thereto in the Convertible Loan Agreement.
Further to the Company's disbursement request dated June 14, 1999 and
our letter dated June 22, 1999, at your request and after due consideration, IFC
has determined that it is prepared to waive Section 6.02 (e) of the Convertible
Loan Agreement and agree to an initial Disbursement of up to US$1.5 million to
NOC, subject to all other conditions of the Convertible Loan Agreement having
been complied with to IFC's satisfaction in accordance with the provisions of
the Convertible Loan Agreement, and subject to the following additional
conditions:
1. Instead of providing the Sponsor Loan, the Sponsors shall have
invested the amount of US$2,000,000 as a capital contribution to the
Company, and shall have received in exchange common shares ranking pari
passu and having in all other respects the same rights as the existing
shares already held by the NOC shareholders, and the Company shall have
certified the fulfilment of these conditions in form and substance
satisfactory to IFC.
<PAGE> 2
2. CanArgo shall have granted to IFC a first ranking security
interest (by way of a mortgage, deed or other appropriate legal
instrument as necessary and in compliance with Georgian law) over one
of its drilling rigs at present located in Georgia (the "Additional IFC
Security"), providing collateral with a market value at least equal to
the proposed Disbursement; and one or more legal opinion(s) from
counsel acceptable to IFC addressing the creation, registration and
perfection of the Additional IFC Security and such other customary
matters in connection with the legality, validity, and enforceability
of the security agreement governing the Additional IFC Security shall
have been delivered to and found satisfactory by IFC as a condition to
the initial Disbursement. As at the date of this letter agreement
CanArgo has already provided to IFC (at the sole cost and expense of
CanArgo) an independent valuation of the rig to be subject to the
Additional IFC Security.
Furthermore, it is hereby agreed to amend the provisions of Sections
7.02 (x) and 7.02 (y) of the Convertible Loan Agreement so that the sum of the
NOC Administration Overhead Charges and the NOC Direct Overhead Charges,
referred to in Sections 7.02 (x) and 7.02 (y) of the Convertible Loan Agreement
shall not exceed, in Fiscal Year 1999, US$1.25 million, and US$1.25 million
escalated at 2% annually thereafter. Of this total allowable amount, a maximum
of 30% may be apportioned to the Administration Overhead Charges, and a maximum
of 70% may be apportioned to the Direct Overhead Charges, subject to
documentation and justification for any payments, as required under the
Convertible Loan Agreement.
Following the initial Disbursement, any subsequent Disbursements under
the Convertible Loan Agreement will only be made by IFC if, in addition and
without prejudice to all of the conditions of disbursement specified in the
Convertible Loan Agreement (including Section 6.02 (e)) having been met, all of
the following conditions, each of which which shall be necessary but none of
which, either by itself or all together, shall be sufficient, have also been
met: (a) Well N97 has been completed and is producing to IFC's satisfaction, (b)
the total production of the Ninotsminda Field has averaged at least 2,500
barrels of oil per day for at least 30 days immediately prior to the date of any
subsequent disbursement, (c) IFC is satisfied that the Ninotsminda field has
adequate supplies of electrical power to carry out its operations as provided
for in the Field Development Plan without material delays or interruptions, and
(d) IFC has approved NOC's arrangements for the sale of crude oil and natural
gas.
Except as expressly waived hereby, the Convertible Loan Agreement, each
other Transaction Documents, and each of their respective terms and conditions
shall remain in full force and effect. By countersigning this Letter, you are
agreeing to all of the terms of this Letter, and the terms and conditions
imposed by this Letter in connection with the initial Disbursement and any
subsequent Disbursements. In particular, and without limitation, you are
agreeing that IFC's waiver of Section 6.02 (e) of the Convertible Loan Agreement
applies solely to the initial Disbursement and that achievement of the target
performance and production levels set forth in the preceding paragraph shall
not, in and
<PAGE> 3
of itself, serve to remedy the material adverse change waived hereby in
connection with the initial Disbursement only. Nothing contained in this Letter
shall impose or be deemed or construed as imposing any obligation or liability
on the part of IFC, and IFC hereby expressly disclaims any such obligation or
liability, toward the Company, CanArgo, or any of their Affiliates, or toward
JKX Oil & Gas plc., JKX Nederlands, B.V., or any other shareholder of the
Company, or toward any shareholder, director, officer, employee, agent, or
stakeholder of whatever nature of any of the foregoing entities to grant any
waivers (of any kind and with respect to any of the terms and conditions of any
Transaction Document) in connection with any other Disbursement or otherwise in
the course of administration of the Convertible Loan, the Convertible Loan
Agreement and the Transaction Documents.
This Letter shall be governed by, and construed in accordance with, the
laws of the State of New York, United States of America.
This Letter, and the waiver granted hereby, shall be of no force and
effect unless and until countersigned by the Company and CanArgo where indicated
below and an original countersigned copy delivered to our attention.
International Finance Corporation
By: /s/ Philippe Lietard
-------------------------------------
Title: Director
Oil, Gas and Mining Department
Agreed and Accepted as of the date first above
Ninotsminda Oil Company
By: /s/ David Robson
-------------------------------------
Title: Chief Executive
CanArgo Energy Corporation
By: /s/ David Robson
-------------------------------------
Title: Chief Executive
Copy:
Mr. Michael Binnion
Finance Director
Ninotsminda Oil Company
Suite 1580, 727 - 7th Avenue S.W.
Calgary, Alberta,
Canada T2P 0Z5.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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