<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
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)
Registrant's telephone number, including area code: (403) 777-1185
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated herein by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of December 31, 1998, was $4,973,937.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: Common Stock, $0.10 par value,
19,389,920 shares outstanding as of February 28, 1999. An additional 1,874,723
shares of Common Stock are issuable at any time without additional consideration
upon exercise of CanArgo Oil & Gas Inc. Exchangeable Shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
CanArgo Energy Corporation was formed in 1994 to continue, through
reincorporation in Delaware, the business of a predecessor Oklahoma corporation
which was formed in 1980. CanArgo changed its name from Fountain Oil
Incorporated to CanArgo Energy Corporation in connection with a business
combination with CanArgo Oil & Gas Inc. completed on July 15, 1998. CanArgo
conducts its principal operations through subsidiaries, and unless otherwise
indicated by the context, the terms CanArgo and the Company refer to CanArgo
Energy Corporation and its consolidated subsidiaries.
CanArgo initially operated as an oil and gas exploration and production
company. It altered its principal focus to the application of electrically
enhanced heavy oil recovery technology in 1988, and that focus continued through
1994. In early 1995, CanArgo shifted its principal activities to acquiring and
developing interests in Eastern European oil and gas properties. From 1995 to
1997, CanArgo established significant ownership interests in four Eastern
European oil and gas development projects. As a result of disappointing results
and other negative indications, CanArgo during the fourth quarter of 1997
wrote-off its entire investments in three of those four projects and began
actively to seek a business combination or similar transaction with another oil
and gas company.
As a result of this effort, CanArgo entered into a business combination
with CanArgo Oil & Gas Inc. Upon completion of the business combination in July
1998, CanArgo Oil & Gas Inc. became a subsidiary of CanArgo, the management of
CanArgo Oil & Gas Inc. assumed the senior management positions in CanArgo, and
CanArgo changed its name from Fountain Oil Incorporated to CanArgo Energy
Corporation.
At the time of the business combination, the principal operations and
assets of CanArgo Oil & Gas Inc. were associated with the producing Ninotsminda
oil field in the Republic of Georgia. Since the combination, development of the
Ninotsminda field and related activities have become CanArgo's main focus.
CanArgo has additional exploratory and developmental oil and gas properties and
prospects in Georgia and Ukraine, owns interests in other Eastern European oil
and gas projects which CanArgo is not actively pursuing, and holds interests in
small oil and gas properties in North America, some of which are producing
modest amounts of oil and gas. CanArgo's principal product is crude oil, and the
sale of that oil is its principal source of revenue.
NINOTSMINDA OIL FIELD
Since completion of the business combination with CanArgo Oil & Gas
Inc., CanArgo's resources have been focused on the development of the
Ninotsminda oil field and some associated activities. The Ninotsminda oil field
covers some 2,500 acres and is located
2
<PAGE> 3
forty kilometers east of the Georgian capital, Tbilisi. It is adjacent to and
west of the Samgori oil field, which is Georgia's most productive oil field. The
Ninotsminda field was discovered later than the Samgori field and has
experienced substantially less development activity. The state oil company,
Georgian Oil, and others including CanArgo have drilled sixteen wells in the
Ninotsminda field, of which seven are currently classified as producing. Three
of the seven wells classified as producing are presently shut-in while
undergoing or awaiting rehabilitation, and production from the remaining four
wells currently is approximately 1,200 barrels of oil per day.
Business Structure
CanArgo's activities at the Ninotsminda oil field are conducted through
Ninotsminda Oil Company, a 68.5% owned subsidiary. In November 1998, CanArgo
increased its percentage ownership of Ninotsminda Oil Company from 55.9% to
68.5% when the other shareholder chose not to subscribe for its pro rata portion
of shares being offered to increase Ninotsminda Oil Company's capital. During
1998, CanArgo invested $6,394,000 of cash in Ninotsminda Oil Company and, in
addition, capitalized an aggregate of $1,164,000 in loans and accrued interest.
If the other shareholder of Ninotsminda Oil Company declines to provides its pro
rata share of required capital in the future, CanArgo may have to provide a
disproportionate share of the capital Ninotsminda Oil Company requires, if those
capital requirements are to be met. This would result in an increase in
CanArgo's percentage ownership of Ninotsminda Oil Company. At the present time,
Ninotsminda Oil Company does not have any plans to increase its capital.
Ninotsminda Oil Company obtained its rights to the Ninotsminda field
and two other fields under a 1996 production sharing contract with Georgian Oil.
Ninotsminda Oil Company's rights under the agreement expire in December 2019,
subject to possible loss of undeveloped areas prior to that date and possible
extension with regard to developed areas.
Under the production sharing contract, Georgian Oil has a priority
right to receive oil representing a projection of what the Ninotsminda field
would have yielded during through 2001 based upon the wells and equipment in use
at the time the contract was entered into. The priority right amounts to
approximately:
o 542 barrels of oil per day during 1999;
o 280 barrels of oil per day during 2000; and
o 93 barrels of oil per day during 2001.
Of the remaining production, up to 50% will be allocated to Ninotsminda Oil
Company for the recovery of the cumulative capital and operating costs
associated with the Ninotsminda field, which Ninotsminda Oil Company initially
pays. The balance of production is allocated on a 70/30 basis between Georgian
Oil and Ninotsminda Oil Company. Thus while Ninotsminda Oil Company continues to
have unrecovered costs, it will receive 65% of production in excess of the oil
allocated to Georgian Oil on a priority basis with respect to projected base
production. The allocation of a share of production to Georgian Oil relieves
Ninotsminda Oil Company of all
3
<PAGE> 4
obligations it would otherwise have to pay taxes and similar levies to the
Republic of Georgia with respect to Ninotsminda field operations.
Georgian Oil and Ninotsminda Oil Company take their respective shares
of production in kind, and they market their oil separately.
Pursuant to the terms of the production sharing contract, a local,
Georgian company must be appointed as field operator. The field operator
provides the operating personnel and is responsible for day-to-day operations.
Ninotsminda Oil Company pays the operating company's expenses associated with
the development of the Ninotsminda field, and the operating company performs on
a non-profit basis. The Georgian company serving as Ninotsminda field operator
has eighty-eight full time employees, and substantially all of its activities
relate to the development of the Ninotsminda field. The use of the Georgian
company as field operator gives Ninotsminda Oil Company less control of
operations than it might have if it were conducting operations directly.
Ninotsminda field operations are determined by a governing body
composed of members designated by Georgian Oil and Ninotsminda Oil Company, with
the deciding vote allocated to Ninotsminda Oil Company.
Field Development
When Ninotsminda Oil Company assumed developmental responsibility for
the Ninotsminda field in 1996, production was minimal. CanArgo believes that the
development and productivity of the Ninotsminda field had in the past been
hampered by, among other factors, a lack of funding, civil strife and
utilization of non-optimal technology.
Ninotsminda Oil Company's initial approach to Ninotsminda field
development involved rehabilitating and adding additional perforations to
existing wells, and this program is continuing. In 1997, Ninotsminda Oil Company
commenced a drilling program, which has involved three wells thus far. The first
was completed in October 1997. Under normal production conditions, this well has
been producing at the rate of 400 to 600 barrels of oil per day but is currently
shut-in. The second well was completed in October 1998. While testing and
stimulation of this well are continuing prior to placing it on production,
CanArgo believes that the second well will be less productive than the first.
The drilling of the third well was suspended in December 1998 at a depth of 700
meters as a result of undependable electrical supply and is expected to resume
in the spring of 1999 when the electrical supply is expected to improve. The
lack of a reliable power supply has also caused delays in the testing of the
second well and in the continuing field rehabilitation program. Ninotsminda Oil
Company expects that the electrical supply problem will be resolved or mitigated
if and when a planned gas fired, electric generating power plant near
Ninotsminda commences operations. See "Ancillary Ninotsminda Area
Projects-Electrical Power Generation", which discusses CanArgo's investment in a
private power generation project in the Ninotsminda area which when operational
should increase the supply of power available to the Ninotsminda field
development program.
4
<PAGE> 5
During 1997 and 1998, Ninotsminda Oil Company acquired additional
seismic data about the Ninotsminda field, which CanArgo believes will be useful
in selecting additional drilling sites. To date, exploration and production at
the Ninotsminda field have focused on one zone. There is, however, a second
zone, from which oil has been produced in one well, that Ninotsminda Oil Company
intends to examine. In addition, the Ninotsminda field has a gas cap above the
principal producing zone. CanArgo has not yet fully evaluated the reserves and
economics of production relating to the gas cap. There is no ready market at the
present time for Ninotsminda gas. Most of the gas that is produced incidentally
with Ninotsminda field oil is currently being flared. CanArgo expects that in
the future such gas will be utilized by the private power generation operation
to be established at Ninotsminda. CanArgo would, however, consider gas
production in the future should a market develop into which the gas could be
profitably sold.
Ninotsminda Oil Company's current development program is defined in a
schedule to Ninotsminda Oil Company's loan agreement with International Finance
Corporation discussed below. The program described in the schedule covers a
period that began in 1998 and will extend into 2000. The principal elements of
the current development program include:
o Drilling and testing five new wells, of which one has been completed
and a second started; one or more of the wells are expected to be
drilled as horizontal wells;
o An extensive program for rehabilitating and maintaining existing wells,
including major rehabilitations of at least five additional wells;
major rehabilitations involve such actions as gas and water isolation
procedures, reperforation of existing casing and application of
stimulation techniques;
o Acquisition and analysis of additional seismic data, which has largely
been completed; and
o Installation of additional facilities designed to support increased
production to at least the level of 4,500 barrels of oil per day.
The current development program is expected to cost approximately $18.9 million,
of which CanArgo estimates approximately one-half has already been expended.
CanArgo expects the loan from the International Finance Corporation and a
$2,000,000 subordinated loan from CanArgo to Ninotsminda Oil Company, both of
which are discussed below, will provide most of the funds required to complete
the current development program. Completion is anticipated by mid-2000, provided
funding through the IFC loan and the subordinated loan from CanArgo is made
available to Ninotsminda Oil Company promptly. At the present time, CanArgo is
not able to fund the subordinated loan, which must be in place before
disbursements will be made under the IFC loan.
The objective of the current development plan for the Ninotsminda field
is to increase the field's production level to 4,500 barrels of oil per day.
Ninotsminda Oil Company's ability to complete the program successfully and reach
that production level is subject to many risks, including those described in
"Risks Associated with CanArgo's Oil and Gas Activities" below. No assurances
can be given that the current development program for the Ninotsminda field will
be successfully completed or that the 4,500 barrels of oil per day production
level will be achieved.
While it is highly speculative and will depend significantly upon the
results of the current development program, CanArgo currently estimates that a
full Ninotsminda field
5
<PAGE> 6
development plan would cost an additional $16 million and include the drilling
of nine additional wells. Should Ninotsminda Oil Company attempt to implement
such a plan during the two or three years immediately following completion of
the current development plan, it would require substantial additional funding.
It is unlikely CanArgo could provide such funding unless CanArgo itself obtained
substantial additional funding.
International Finance Corporation Loan
In December 1998, Ninotsminda Oil Company entered into a convertible
loan agreement with International Finance Corporation, an affiliate of the World
Bank. Pursuant to the loan agreement, IFC agrees under specified conditions to
lend $6 million to Ninotsminda Oil Company primarily to fund the Ninotsminda
field current development program. The first disbursement under the loan
agreement must be made before July 1, 1999, and IFC has no obligation to
disburse funds after June 29, 2000.
Ninotsminda Oil Company is required to repay the loan in five
semi-annual payments of $1.2 million each commencing December 2001. Ninotsminda
Oil Company has pledged substantially all of its assets to IFC to secure the
loan.
The loan will bear interest at LIBOR plus 3%. LIBOR is currently
approximately 5% per year. In addition, Ninotsminda Oil Company has paid to IFC
a facility fee of $60,000 and will pay a commitment fee equal to 1/2 of 1% per
annum on the portion of the $6 million that has not been disbursed.
Both the initial disbursement of the loan and each subsequent
disbursement are subject to a large number of conditions. The conditions
applicable to all disbursements include:
o The maintenance of specified financial ratios by Ninotsminda Oil
Company, including:
o a debt-to-equity ratio that does not exceed 1:1; and
o a ratio of the present value of projected future cash flows from
proved reserves to outstanding long-term indebtedness that
exceeds 1.6:1;
o The absence of any material adverse changes in Ninotsminda Oil
Company's financial condition or business prospects;
o Ninotsminda Oil Company's reaffirmance of various representations and
warranties on and as of the date of disbursement.
Before IFC will advance the initial funds to Ninotsminda Oil Company,
additional significant conditions must be satisfied. Among the important
conditions to the first disbursement are:
o The shareholders of Ninotsminda Oil Company must provide a $2 million
subordinated loan to Ninotsminda Oil Company; since the other
shareholder has indicated that it will not participate in such a loan,
this is effectively a condition that CanArgo provide the $2 million
loan;
6
<PAGE> 7
o Evidence has been presented to IFC that Ninotsminda Oil Company has
received at least $10 million from its shareholders since the beginning
of 1998 in the form of equity contributions and the $2 million
subordinated loan, which either has been expended on the Ninotsminda
field current development program or is held in a cash account; and
o IFC has received favorable legal opinions on a variety of matters
relating to the loan.
No assurances 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 $6,000,000 loan.
CanArgo does not presently have the resources to provide the $2,000,000
subordinated loan to Ninotsminda Oil Company. CanArgo has filed a registration
statement with the Securities and Exchange Commission for an offering of
21,264,643 shares of its common stock with a view towards raising a minimum of
$3,000,000 in gross proceeds. A high priority use of the proceeds of this
offering, if it is completed, was intended to be funding the $2,000,000
subordinated loan. CanArgo may seek stockholder authorization of a reverse stock
split of its common stock before proceeding with the offering, which could delay
any such offering. CanArgo also intends to pursue financing alternatives, such
as a secured loan, to obtain the resources to fund the subordinated loan on an
accelerated basis. No assurances can be given that CanArgo will be able to
complete this offering successfully. In the absence of a successful offering,
CanArgo may be unable to fund the $2,000,000 subordinated loan.
The IFC has the right under the loan agreement to convert all or part
of the loan into common shares of Ninotsminda Oil Company. If the entire
$6,000,000 loan were converted, IFC would receive shares representing 20% of the
equity of Ninotsminda Oil Company. This would reduce CanArgo's percentage
ownership of Ninotsminda Oil Company from 68.5% to 54.8% but would leave
Ninotsminda Oil Company as a consolidated subsidiary of CanArgo. The conversion
right remains in effect until approximately three months after:
o the completion of the current development program for the Ninotsminda
field;
o the achievement of sustained production of at least 4,500 barrels of
oil per day; and
o the completion of various procedural requirements.
CanArgo has provided a partial guaranty of the IFC loan to Ninotsminda
Oil Company and has pledged the shares of Ninotsminda Oil Company stock that it
owns to secure its guaranty obligation. Under the guaranty, CanArgo will be
responsible for the first $4.1 million of guaranteed indebtedness and related
monetary obligations of Ninotsminda Oil Company to IFC under the loan agreement
and 68.5% of any such guaranteed obligations in excess of $6 million.
If IFC converts the loan into Ninotsminda Oil Company stock, it has the
right to require CanArgo and the other shareholder of Ninotsminda Oil Company to
purchase a portion of the shares IFC acquires through conversion. The purchase
price for those shares shall be based on the greater of the cost of those shares
to IFC plus interest and the portion of Ninotsminda Oil Company net asset value
attributable to those shares. CanArgo is obligated to purchase all shares that
IFC is requiring the existing shareholders of Ninotsminda Oil Company to
purchase until it has spent $4,100,000 on such purchases, and then CanArgo must
purchase 68.5% of all shares that IFC is requiring the existing shareholders of
Ninotsminda Oil Company to
7
<PAGE> 8
purchase after an aggregate of $6 million has been spent on such purchases. The
repurchase obligation will terminate no later than December 31, 2007.
Processing, Sale and Customers
Georgian Oil built a considerable amount of infrastructure in and
adjacent to the Ninotsminda field prior to entering into the production sharing
contract with Ninotsminda Oil Company, and those infrastructure improvements,
including initial processing equipment, are now used by Ninotsminda Oil Company.
The mixed oil and water fluid produced from the Ninotsminda field wells
flows into a two-phase separator located at the Ninotsminda field, where gas
associated with the oil is separated. The oil and water mixture is then
transported eleven kilometers in a pipeline to Georgian Oil's central processing
facility at Sartichala for further treatment. The gas is transported to
Sartichala in a separate pipeline where some is used for fuel and the rest is
currently flared.
At Sartichala, the water is separated from the oil. Ninotsminda Oil
Company then sells oil in this state to buyers at Sartichala, and the buyers at
that point assume responsibility for the oil. The buyers generally transport the
oil at their risk and cost by pipeline 20 kilometers to a railhead at Ghaciani.
At the railhead, the oil is loaded into railcars for transport directly to the
buyers or their customers or to the Black Sea port of Batumi, Georgia, where oil
can be loaded onto tankers for international shipment.
Ninotsminda Oil Company sells its oil directly to local and
international buyers. Ninotsminda Oil Company sold all of its 1997 production to
one buyer, Glencore International AG. In 1998, Ninotsminda Oil Company sold its
production to three customers as follows:
<TABLE>
<CAPTION>
CUSTOMER PERCENT OF PRODUCTION
----------------- ---------------------
<S> <C>
Sis Plus 7 Ltd. 35.9%
Glencore International AG 34.4
Navtobi Ltd. 29.7
</TABLE>
The price received for oil by Ninotsminda Oil Company has generally
been negotiated on the basis of the European spot price for Brent grade crude
oil, less discounts for transportation and related charges. The price received
by Ninotsminda Oil Company has ranged from the full Brent price to Brent minus
$5.83 per barrel. The average discount from Brent prices was less in 1998 than
1997, as buyers have begun to purchase oil from Ninotsminda Oil Company for use
in Georgia and neighboring countries and have accordingly faced smaller
transportation costs. Ninotsminda Oil Company now maintains an inventory of oil
available for local buyers principally on cash payment terms. The average per
barrel discount from the spot price for Brent grade crude oil is approximately
$1.50 at the present time.
8
<PAGE> 9
Prices for oil and natural gas are subject to wide fluctuations in
response to a number of factors including:
o changes in the supply and demand for oil and natural gas;
o weather conditions;
o domestic and foreign governmental regulations;
o the price and availability of alternative fuels;
o political conditions in the Middle East and elsewhere; and
o overall economic conditions.
For example, the European spot price for a barrel of Brent crude oil increased
from $10.18 on February 5, 1999 to $14.47 on March 29, 1999. The even more
significant decline in oil prices during 1998 adversely affected CanArgo's
results of operations and increased its operating loss in 1998.
In order for Ninotsminda Oil Company to cover production and depletion
expenses under its production sharing contract at its current production level
of approximately 1,200 barrels per day and at recent average $1.50 discounts to
the Brent price, the price for Brent crude oil needs to be approximately $11.50
per barrel. While the price for Brent crude oil is above that level at March 25,
1999, very recently it was below that level. No assurances can be given that
world oil prices will remain at a level that will enable Ninotsminda Oil Company
to cover its production and depletion expenses.
CanArgo believes that the loss of one or more of its current customers
would not result in any significant delay in sale of its production, but could
result in lower selling prices. At a spot price for Brent grade crude oil of
approximately $14.50 per barrel, a discount for transportation and related
charges that is substantially greater than $4.50 per barrel could render the
production and sale of Ninotsminda field oil uneconomic at current production
levels.
Production History
The Ninotsminda field was discovered and initial development began in
1979. Ninotsminda field is currently producing approximately 1,200 barrels per
day of oil plus associated gas primarily from four wells. Gross production from
the Ninotsminda field for the past three years was as follows:
<TABLE>
<CAPTION>
YEAR ENDED OIL -- GROSS
DECEMBER 31, BARRELS
------------- ------------
<S> <C>
1998 554,633
1997 639,910
1996 515,000
</TABLE>
9
<PAGE> 10
Productive Wells and Acreage
The following table summarizes the number of productive oil wells and
the total developed acreage for the Ninotsminda field. Such information has been
presented on a gross basis, representing the interest of Ninotsminda Oil
Company, and on a net basis, representing the interest of CanArgo based on its
68.5% interest in Ninotsminda Oil Company.
<TABLE>
<CAPTION>
GROSS NET
--------------------------- -----------------------------
NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE
--------------- ------- --------------- -------
<S> <C> <C> <C> <C>
Ninotsminda field (1) 7 2,500 4.8 1,713
</TABLE>
On December 31, 1998, there were no productive wells or developed
acreage on any of CanArgo's other Georgian properties, except for one well on
the West Rustavi field which was shut-in at that date.
Reserves
The following table summarizes net hydrocarbon reserves for the
Ninotsminda oil field, which are the only significant reserves for CanArgo. This
information is derived from a report as of December 31, 1998 prepared by AMH
Group Ltd., independent petroleum consultants. This report is available for
inspection at CanArgo's principal executive offices during regular business
hours.
<TABLE>
<CAPTION>
OIL RESERVES PSC ENTITLEMENT VOLUMES (1)
--------------------- -----------------------------------
NINOTSMINDA CANARGO SHARE OF
OIL COMPANY NINOTSMINDA OIL
GROSS NET (2) ENTITLEMENT COMPANY ENTITLEMENT
------ -------- ----------- --------------------
(In Thousands of Barrels)
<S> <C> <C> <C> <C>
Proved Producing 2,404 1,647 1,340 918
Proved Non-Producing 1,379 945 890 610
Proved Undeveloped 15,200 10,412 8,783 6,016
------ ------ ----- -----
TOTAL PROVED 18,983 13,004 11,013 7,544
</TABLE>
------------------
(1) PSC Entitlement Volumes are those produced volumes which,
through the production sharing contract, accrue to the benefit
of Ninotsminda Oil Company and,
10
<PAGE> 11
as a result of CanArgo's interest in Ninotsminda Oil Company,
accrue to the benefit of CanArgo for the recovery of capital,
repayment of operating costs and share of profit.
(2) Net Oil Reserves represent CanArgo's 68.5% share of
Ninotsminda Oil Company's interest under the production
sharing contract in the gross reserves, before taking into
account the interest of Georgian Oil.
Proved reserves are those reserves estimated as recoverable under
current technology and existing economic conditions from that portion of a
reservoir which can be reasonably evaluated as economically productive on the
basis of analysis of drilling, geological, geophysical and engineering data,
including the reserves to be obtained by enhanced recovery processes
demonstrated to be economically and technically successful in the subject
reservoir. Proved reserves includes proved producing reserves, proved
non-producing reserves and proved undeveloped reserves.
Proved producing reserves are those proved reserves that are actually
on production or, if not producing, that could be recovered from existing wells
or facilities and where the reasons for the current non-producing status is the
choice of the owner rather than the lack of markets or some other involuntary
reason. An illustration of such a situation is where a well or zone is capable
but is shut-in because its deliverability is not required to meet commitments.
1998 production was 554,633 barrels.
Proved non-producing reserves have been calculated based on the
following parameters. Due to the general well rehabilitation program delays,
several wells were shut-in or remained shut-in during 1998. These non-producing
reserves are expected to be recovered from producing zones in existing well
bores open at the time of the reserve estimate, but production is not occurring
for mechanical reasons or the lack of maintenance type rehabilitation. Although
these reserves are currently not producing, they are expected to be producing in
the short term.
Proved undeveloped reserves are proven reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where
relatively major expenditures are required for the completion of these wells or
for installation of processing and gathering facilities prior to the production
of these reserves. Reserves on undrilled acreage are limited to those drilling
units offsetting productive wells that are reasonably certain of production when
drilled.
Considerable uncertainty exists in the interpretation and extrapolation
of existing data for the purposes of projecting the ultimate production of oil
from underground reservoirs and the corresponding future net cash flows
associated with that production. The process of estimating quantities of proved
crude oil, and the subcategories thereof, is very complex. The estimating
process requires significant subjective decisions relating to the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may change substantially over time as a result of
such factors as additional development activity, evolving production history and
changing economic conditions. No assurance can given that the
11
<PAGE> 12
projections included in the report by AMH will be realized. The evaluation by
AMH represents the efforts of AMH to predict the performance of the oil recovery
project using their expertise and the available data at the effective date of
their report.
Other Fields and Prospects Under 1996 Production Sharing Contract
Ninotsminda Oil Company has rights to one other field, West Rustavi,
and one prospect, Manavi, in addition to the Ninotsminda field, under the 1996
production sharing contract.
The West Rustavi field is located some 40 km southeast of Ninotsminda.
Ten wells were drilled by Georgian Oil in the West Rustavi field, two of which
produced oil. Ninotsminda Oil Company has initiated an appraisal program and
commenced test production from one of the wells. The appraisal program, which
includes acquiring further seismic data and performing rehabilitation work on
some of the wells, is aimed at assessing Georgian Oil's original reserve
estimates and ultimately initiating an appropriate development program. No
assurances can be given that the West Rustavi field will be developed by
Ninotsminda Oil Company.
The Manavi prospect is located east of Ninotsminda. Ninotsminda Oil
Company has seismic data regarding the Manavi prospect from both work it
commissioned and earlier efforts by Georgian Oil. Georgian Oil's attempt to
drill in the Manavi prospect was thwarted by logistical problems and did not
reach the reservoir. CanArgo's management ranks Manavi highly as an exploration
prospect.
Ancillary Ninotsminda Area Projects
Electrical Power Generation
CanArgo has an effective 42.5% interest in a Georgian stock company
that intends to produce electricity. This company is planning to install and
operate a pilot 3.0 megawatt gas fired power plant to be located adjacent to the
Ninotsminda field. The plant would utilize as its principal fuel gas produced in
conjunction with oil from Ninotsminda field wells. Most of this gas is presently
being flared, with no economic benefit to Ninotsminda Oil Company. The Georgian
power generation company would sell the electricity generated to Ninotsminda Oil
Company for the Ninotsminda field project and to other local purchasers. The
basic equipment, a refurbished Rolls Royce Proteus single cycle gas turbine with
attached Siemens electrical generating equipment, is expected to be in Georgia
and operational during the second quarter of 1999.
Once operational, this project would be one of the first private sector
power producers in Georgia. Privatization of the Georgian power sector is well
underway. The 1997 Electricity Law is causing a restructuring of the Georgian
power sector to facilitate competition through provisions having the following
effects, among others:
o unbundling the generation, transmission and distribution functions;
12
<PAGE> 13
o increasing tariffs substantially; and
o establishing an independent regulatory commission to grant licenses and
regulate tariffs.
Ninotsminda Oil Company expects that the private power company will
supply electricity for Ninotsminda field operations on a priority basis. If this
happens, Ninotsminda Oil Company should be able to avoid or mitigate the
electrical supply problems it has encountered, which forced a suspension of
drilling activity on its third well and interfered with other operations during
late 1998 and early 1999.
CanArgo is actively seeking to expand its involvement in the Georgian
power sector. It is, among other things, seeking to attract financial partners
to join CanArgo in pursuing opportunities for private sector power production in
Georgia.
Refinery
In September 1998, CanArgo signed an agreement to purchase up to 24% of
the equity in a company which owns a small refinery located at Sartichala,
Georgia. Thus far, CanArgo has purchased a 12.9% interest for $1,000,000, with
the proceeds being used to upgrade and expand the refinery. CanArgo retains a
right, currently scheduled to expire on April 30, 1999, to purchase the
remaining 11.1% interest at the same rate. Unless able to extend the purchase
right, CanArgo is unlikely to exercise it.
The refinery, which utilizes primarily refurbished American equipment,
began operations in July 1998 and has a current capacity of approximately 2,000
barrels per day. It is the only refinery in Georgia employing western
technology. It is able to produce naphtha, diesel fuel, fuel oil, kerosene and
jet fuel. Refinery expansion plans envision capacity of over 4,000 barrels per
day, with further capacity expansion and product extension possible in the
future. The refinery does not currently purchase crude oil from Ninotsminda Oil
Company.
Sartichala is the primary processing center for east Georgian oil
production, including production from Ninotsminda. Refined products are sold on
both the local and export markets. Although the refinery receives some revenue
from the sale of its products in the Georgian currency, the Lari, most pricing
is related to dollar based world market prices. To mitigate the currency
exchange risk, the refinery has established some export sales contracts
denominated in United States dollars. CanArgo believes that its involvement in
Georgian refining activity strengthens its position in the Georgian energy
sector and provides specific support for Ninotsminda Oil Company's activities in
Ninotsminda.
OTHER GEORGIAN PROJECT - NAZVREVI/BLOCK XIII
In February 1998, CanArgo entered into a second production sharing
contract with Georgian Oil. This contract covers the Nazvrevi and Block XIII
areas of East Georgia, a 2,100 square kilometer exploration area adjacent to the
Ninotsminda and West Rustavi fields and containing existing infrastructure. The
agreement extends for twenty-five years. CanArgo is required to relinquish at
least half of the area then covered by the production sharing contract, but not
any portions being actively developed, at five year intervals commencing in
2003.
13
<PAGE> 14
Under the production sharing contract, CanArgo pays all operating and
capital costs. CanArgo first recovers its cumulative operating costs from
production. After deducting production attributable to operating costs, 50% of
the remaining production, considered on an annual basis, is applied to reimburse
CanArgo for its cumulative capital costs. While cumulative capital costs remain
unrecovered, the other 50% of remaining production is allocated on a 50/50 basis
between Georgian Oil and CanArgo. After all cumulative capital costs have been
recovered by CanArgo, remaining production after deduction of operating costs is
allocated on a 70/30 basis between Georgian Oil and CanArgo. The allocation of a
share of production to Georgian Oil relieves CanArgo of all obligations it would
otherwise have to pay the Republic of Georgia for taxes and similar levies
related to activities covered by the production sharing contract. Both Georgian
Oil and CanArgo will take their respective shares of production under this
production sharing contract in kind.
The first phase of the preliminary work program under the
Nazvrevi/Block XIII production sharing agreement involves primarily a seismic
survey of a portion of the exploration area and the processing and
interpretation of the data collected. The seismic survey has been completed, and
the results of those studies are currently being interpreted, with a view
towards defining possible oil and gas prospects and exploration drilling
locations. The cost of the seismic program is approximately $1,200,000, a
portion of which CanArgo expects to fund from working capital, including any
supplied by the proceeds of the offering of common stock for which CanArgo filed
a registration statement with the SEC on February 12, 1999.
In October 1998, XCL Ltd., a Louisiana based oil exploration company,
agreed to purchase shares representing 11.5% of the outstanding equity of
CanArgo's subsidiary holding the Nazvrevi-Block XIII production sharing contract
for $650,000. The proceeds will be applied by the subsidiary to fund a portion
of the cost of the seismic acquisition, processing and interpretation program.
Most of the $650,000 has not yet been paid.
The second phase of the preliminary work program under the
Nazvrevi/Block XIII production sharing agreement involves the drilling of one
well at an estimated cost of $4 million. CanArgo can terminate the production
sharing contract if it decides not to proceed with drilling.
OTHER EASTERN EUROPEAN PROJECTS
Stynawske Field, Western Region, Ukraine
In November 1996, CanArgo entered into a joint venture arrangement with
the Ukrainian state oil company, Ukranafta, for the development of the 6,000
acre Stynawske field, located in Western Ukraine near the town of Stryv. CanArgo
has a 45% interest in the joint venture entity, with Ukranafta holding the
remaining 55% interest. Ukranafta retains rights to base production,
representing a projection of what the Stynawske field would produce in the
future, based on the physical plant and technical processes in use at the time
of license grant, on a declining basis through 2001. The joint venture will be
entitled to all incremental production above that declining base.
14
<PAGE> 15
The Stynawske field is a relatively tight sandstone reservoir
containing light sweet oil. The production from the field commenced in 1967 but
was substantially terminated after a few years of production due to
environmental considerations. The field is located underneath the main water
supply for Western Ukraine, and leakage from producing wells some 20 years ago
threatened to pollute this aquifer. Four wells that are located away from the
water supply have been allowed to continue production.
In preparation for the commencement of development activities, the
joint venture has carried out the following activities:
o an environmental audit of the Stynawske field;
o a technical and economic evaluation of the project; and
o the selection of drilling sites.
CanArgo expects that the initial phase of the project will consist of the
rehabilitation of a number of existing wells, with a view towards increasing
production and gathering data for the preparation of a full field development
program. The feasibility of the initial phase is currently being considered,
including financing and ultimate recovery of funds invested.
CanArgo has concluded on a preliminary basis that the full field
development plan for the rehabilitation of the Stynawske field will probably be
based on deviated drilling, in which the drilling sites for the wells would be
located a safe distance from the water supply and the wells would enter the
reservoir at angles avoiding the aquifer. Additional measures would be taken
with the drilling mud and otherwise to protect the environmental integrity of
the project. Reservoir pressure support through gas or water injection may be
necessary to optimize recovery. The full field development plan for the
Stynawske field will, however, depend upon data developed during an initial
rehabilitation phase.
CanArgo is actively seeking to establish arrangements under which oil
and gas production companies or other investors would acquire a portion of
CanArgo's interest in the Stynawske field joint venture in return for supplying
financing or services to implement the initial phase of the project.
If CanArgo does not proceed with the Stynawske field development
program, it may be in breach of obligations it has with regard to the joint
venture. This could place CanArgo's rights to the Stynawske field at risk and
could subject CanArgo to possible liability.
Potential Caspian Exploration Project
In May 1998, CanArgo led a consortium which submitted a bid in a tender
for two large exploration blocks in the Caspian Sea, located off the shore of
the autonomous Russian republic of Dagestan. The consortium was the successful
bidder in the tender and was awarded the right to negotiate licenses for the
blocks. Following negotiations, licenses were issued in February 1999 to a
majority-owned subsidiary of CanArgo. The licenses impose substantial
commitments
15
<PAGE> 16
on the licensee, and CanArgo is assessing its options for meeting such
commitments in light of CanArgo's limited resources and existing commitments. If
CanArgo determines that it cannot assume the commitments, CanArgo will
relinquish its rights under the licenses.
Previously Impaired Projects
Gorisht-Kocul Field, Albania
CanArgo and the Albanian state oil company, Albpetrol, formed a 50/50
joint venture to rehabilitate and develop the Gorisht-Kocul field. The Albanian
government granted the joint venture a 25 year production license covering
approximately 16.5 square kilometers constituting the Gorisht-Kocul field.
Production at the Gorisht-Kocul field commenced in 1966. The field, which
contains relatively heavy oil, has reportedly produced approximately 69 million
barrels to date. CanArgo was named operator of the Gorisht-Kocul field with
responsibility for implementing the development plan and arranging financing for
the project.
In March 1997, CanArgo declared the political unrest in Albania to be a
force majeure, and the joint venture suspended activities. The suspension
continues. In light of the extended period that the force majeure condition had
continued and the absence of any indication of an imminent termination of the
condition, CanArgo recorded during the fourth quarter of 1997 an impairment for
the entire amount of its investment in and advances to the Albanian joint
venture. Albpetrol has requested that the joint venture recommence activities at
the Gorisht-Kocul field, and CanArgo is evaluating that request and seeking
others who may want to participate in this project. If it is unsuccessful in
attracting others to participate in this project, CanArgo may relinquish this
project.
Lelyaki Field, Pryluki Region, Ukraine
CanArgo holds an effective 45% interest in a joint venture company
formed to develop the Lelyaki field in eastern Ukraine. CanArgo's partner in
this joint venture is Ukranafta, which holds a 55% interest. The joint venture
received a 20 year oil and gas production license for a 67 square kilometer
portion of the Lelyaki field, as well as a five year exploration license for 327
square kilometer area surrounding the production area.
Based on its analysis of initial development efforts including
consulting with independent petroleum engineers, CanArgo concluded that the
Lelyaki field would not support a successful commercial development. On the
basis of that conclusion, CanArgo recorded during the fourth quarter of 1997 an
impairment for the entire amount of its remaining investment in and advances to
the Lelyaki joint venture and advised the joint venture that CanArgo would not
provide it with any further financial support. The joint venture continues to
produce a modest amount of oil from wells recompleted by the joint venture,
which is sold in the Ukrainian market.
Maykop Field, Adygea
CanArgo holds a 37% interest in Intergas, a Russian joint stock company
with a license for the Maykop gas field. In 1994, Intergas was granted an
exclusive 25 year exploration and
16
<PAGE> 17
production license covering specified zones in the 12,500 acre Maykop gas
condensate field in the southern Russian autonomous republic of Adygea, located
approximately 185 kilometers from the Black Sea. In 1996 through 1997, CanArgo
experienced delays and difficulty in resolving operating arrangements and other
matters relating to Intergas. This caused CanArgo to conclude that it could not
effectively pursue commercial activities and develop the Maykop field as
planned. As a result, CanArgo recorded during the fourth quarter of 1997 an
impairment for the entire amount of its investment in and advances to Intergas.
CanArgo is currently in discussions with the other shareholders regarding the
future of Intergas. CanArgo believes that it has no further obligation to fund
any operations of Intergas, but Intergas and other shareholders of Intergas and
other parties may assert claims against CanArgo. See "Item 3. Legal Proceedings"
for a discussion of possible claims against CanArgo relating to Intergas.
RISKS ASSOCIATED WITH CANARGO'S OIL AND GAS ACTIVITIES
CanArgo's exploration, development and production activities are
subject to a number of factors and risks, many of which may be beyond CanArgo's
control. First, CanArgo must successfully identify commercial quantities of
recoverable oil and gas. The development of an oil and gas deposit can be
affected by a number of factors, such as the size of the deposit, proximity to
infrastructure, oil prices and government regulations, which are beyond
CanArgo's control. CanArgo's activities can also be affected by a number of
hazards, such as:
o unexpected or unusual geological conditions;
o natural phenomena, such as bad weather and earthquakes;
o operating hazards, such as fires, explosions, blow-outs, pipe failures
and casing collapses; and
o environmental hazards, such as oil spills, gas leaks, ruptures and
discharges of toxic gases.
Any of the hazards could result in damage, losses or liability for CanArgo. Its
operations involving the rehabilitation of fields where less than optimal
practices and technology were employed, as was often the case in Eastern Europe,
carry increased risk for encountering some of these hazards. CanArgo maintains
insurance customary in the oil and gas industry relative to the scope of its
operations. That insurance, however, does not cover all of the possible risks
that are involved in oil and gas exploration, development and production.
CanArgo's principal oil and gas properties, including the Ninotsminda
field, are located in Eastern Europe. Development of these fields is subject to
special risks and uncertainties such as:
o Political instability : The governments of the Eastern European
countries in which CanArgo operates were established relatively
recently and may not yet have reached the point of stability. CanArgo's
operations could be adversely affected by political instability,
changes in government institutions, personnel or policies, or shifts in
political power. CanArgo's operations typically involve partnerships or
joint ventures with the local government or state-owned companies,
which increases the potential
17
<PAGE> 18
disruptive effect of political instability. There is also a risk that
new governments could seek to nationalize or otherwise take control of
CanArgo's oil and gas properties.
o Social and economic instability: Countries in Eastern Europe have
experienced and may in the future experience social and economic
instability due to a number of factors including:
- low standards of living;
- outmoded technology;
- immature legal, social and economic institutions; and
- conflicts with neighboring countries.
Such instability can become reflected in social or economic unrest
that makes continued operations difficult or impossible.
o Inadequate infrastructure: Countries in Eastern Europe often either
have underdeveloped infrastructures or, as a result of shortages of
resources, have permitted infrastructure improvements to deteriorate to
a point of lessened utility. The lack of necessary infrastructure
improvements can adversely affect operations. For example, the lack of
a reliable power supply at Ninotsminda caused the drilling of one well
in the Ninotsminda field to be suspended and the testing of a second
well to be delayed.
o Currency risks: Payment to CanArgo for oil and gas sold in Eastern
European countries may be in local currencies. Although CanArgo
currently sells its oil for U.S. dollars, it may not be able to
continue to require payment in hard currencies. Although most Eastern
European currencies are presently convertible into U.S. dollars, there
is no assurance that convertibility will continue. Even if currencies
are convertible, the rate at which they convert into U.S. dollars is
subject to fluctuation. CanArgo's ability to transfer currencies into
or out of Eastern European countries may be restricted or limited.
The consolidated financial statements of CanArgo do not give effect
to any further impairment in the value of CanArgo's investment in oil and gas
properties and ventures or other adjustments that would be necessary if the
properties or ventures cannot be successfully developed for the following or
other reasons:
o one or more of the risks specified above or other risks thwart
CanArgo's efforts to develop such properties and ventures;
o financing cannot be arranged for the development of such properties and
ventures; or
o such properties and ventures are unable to achieve profitable
operations.
CanArgo's consolidated financial statements have been prepared under the
assumption of a going concern. Failure to avoid such risks, to arrange such
financing on reasonable terms or to achieve profitability could have a material
adverse effect on the results of operations, financial condition including
realization of assets, cash flows and prospects of CanArgo and ultimately in its
ability to continue as a going concern.
18
<PAGE> 19
CanArgo has made advances and may make additional advances to its
Eastern European oil and gas ventures for capital and operating expenditures.
Advances are generally recoverable only from future production or revenue of the
ventures. No assurance can be given that future production or revenue will be
adequate to recover any such advances.
NORTH AMERICAN OIL AND GAS PROPERTIES AND VENTURES
CanArgo has interests in several small oil and gas properties located
in Alberta, Canada and Texas. These properties either are non-producing or are
producing modest amounts of oil and gas. CanArgo intends to offer one or more
of these properties for sale in order to raise additional working capital.
COMPETITION
The oil and gas industry is highly competitive. CanArgo encounters
competition from other oil and gas companies in all phases of its operations,
including:
o the acquisition of producing properties;
o obtaining scarce resources and services including oil field services;
and
o the sale of crude oil.
CanArgo's competitors include integrated oil and gas companies, independent oil
and gas companies, individuals and drilling and income programs. Many of these
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than CanArgo and which, in many
instances, have been engaged in the energy business for a much longer time than
CanArgo. Such competitors may be able to outperform CanArgo on a number of
dimensions including:
o development of information;
o analysis of available information;
o ability to pay for productive oil and gas properties and exploratory
prospects; and
o commitment of resources to define, evaluate, bid for and purchase oil
and gas properties and prospects.
In the competition to acquire oil and gas properties, CanArgo has
relied substantially on the relationships its officers and directors have
developed in the international oil and gas industry and in its areas of
operation and interest. As a result of the termination of employment of various
former officers, CanArgo's ability to benefit from such relationships outside of
Georgia has been significantly reduced. CanArgo's management believes that
CanArgo's relatively small size has enabled it to consider projects that would
be deemed to be too small for consideration by many larger competitors.
TECHNOLOGY FOR ENHANCED RECOVERY OF HEAVY OIL
CanArgo has rights to a technology based upon heating heavy oil in the
reservoir with electric current. Heavy oil is very viscous at reservoir
temperatures and normally needs to be
19
<PAGE> 20
heated in order to flow easily. Several pilot projects involving the technology
have been implemented during the past ten years, and while results have varied,
CanArgo believes that they suggest the validity of the technology. CanArgo,
however, has not successfully commercialized this technology, and during the
past several years CanArgo has not devoted any significant resources to the
development or commercialization of this technology. CanArgo may devote a modest
amount of resources to this technology during the next year.
GOVERNMENTAL AUTHORIZATIONS
CanArgo's business in Eastern Europe operates pursuant to licenses,
concession agreements or other authorizations granted by the local governmental
authorities. These authorizations impose various requirements upon CanArgo,
either directly or indirectly. The failure to satisfy the requirements of any
authorization could result in its termination or cancellation. In addition, as
sovereign agencies, the governmental authorities that have granted
authorizations may have greater power than private parties to terminate such
authorizations arbitrarily. Loss of such authorizations could have a material
adverse effect upon the financial condition, results of operations, cash flows
and prospects of CanArgo.
ENVIRONMENTAL AND REGULATORY MATTERS
The development of oil and gas fields and the production of
hydrocarbons inherently involve environmental risks. These risks can be
minimized, but not eliminated, through use of various engineering and other
technological methods, and CanArgo intends to employ such methods to industry
standards. The potential environmental problems are enhanced when the oil and
gas development and production activities involve the rehabilitation of fields
where the practices and technologies employed in the past have not embodied the
highest standards then in effect, which has been the case in the Eastern
European oil fields in which CanArgo has commenced operations.
CanArgo's business is subject to various national, provincial, state
and local laws and regulations relating to the exploration for and the
development, production and transportation of oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have become
more stringent in recent years, imposing greater liability on a larger number of
potentially responsible parties. CanArgo believes it has complied in all
material respects with these laws and regulations. Because the requirements
imposed by such laws and regulations are frequently changed, CanArgo is unable
to predict the ultimate cost of compliance with these requirements or their
effect on its operations.
EMPLOYEES
As of February 1, 1999, CanArgo had 12 full time employees. The entity
acting as operator of the Ninotsminda oil field for Ninotsminda Oil Company has
88 full time employees, and substantially all of that company's activities
relate to the development of the Ninotsminda field.
20
<PAGE> 21
ITEM 2. PROPERTIES
The Company does not have outright ownership of any real property. Its
real property interests are limited to leasehold and mineral interests.
PRODUCTIVE WELLS AND ACREAGE
The following table summarizes the number of productive oil wells and the
total developed acreage for the Ninotsminda field. Such information has been
presented on a gross basis, representing the interest of Ninotsminda Oil
Company, and on a net basis, representing the interest of the Company based on
its 68.5% interest in Ninotsminda Oil Company. The information is presented as
at December 31, 1998.
<TABLE>
<CAPTION>
GROSS NET
------------------------ ------------------------
NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE
--------------- ------- --------------- -------
<S> <C> <C> <C> <C>
Ninotsminda field (1) 7 2,500 4.8 1,713
</TABLE>
- ----------
[FN]
(1) On December 31, 1998, there were no productive wells or developed
acreage on any of the Company's other Georgian properties, except for
one well on the West Rustavi field which was shut-in at that date.
</FN>
The following table summarizes the gross and net undeveloped acreage held
under the Ninotsminda and Nazvrevi/Block XIII production sharing contracts on
December 31, 1998. The information regarding gross acreage represents the
interest of Ninotsminda Oil Company under the Ninotsminda contract and the
interest of a majority-owned subsidiary of the Company under the Nazvrevi/Block
XIII contract. The information regarding net acreage represents the interest of
the Company based on its 68.5% interest in Ninotsminda Oil Company and its
anticipated 88.5% interest in the subsidiary holding the Nazvrevi/Block XIII
contract.
<TABLE>
<CAPTION>
GROSS ACREAGE NET ACREAGE
------------- -----------
<S> <C> <C>
Ninotsminda field 24,000 16,440
Nazvrevi/Block XIII 518,500 458,873
------- -------
Total 542,500 475,313
</TABLE>
The Company leases office space in Calgary, Alberta, Houston, Texas,
Tbilisi, Republic of Georgia, and Maidenhead, England. The leases have remaining
terms varying from one to two years. The Company has subleased its Maidenhead
offices.
ITEM 3. LEGAL PROCEEDINGS
ZHODA LITIGATION
On February 20, 1998, Zhoda Corporation ("Zhoda") filed suit against the
Company in the District Court of Harris County, Texas. Zhoda had sold to the
Company shares in a subsidiary through which the Company acquired most of its
interest in the Lelyaki field project. Substantially all of the consideration
payable to Zhoda was contingent upon achievement of specified Lelyaki field
operating objectives, and because these objectives were not achieved, the
Company did not pay the consideration. In the litigation, Zhoda asserts that it
was wrongfully deprived of the value of the shares it transferred to the Company
and of the contingent consideration it might have
21
<PAGE> 22
received, based upon claims of breach of contract, breach of fiduciary duty and
duty of good faith and fair dealing, fraud and constructive fraud, fraud in the
inducement, negligent misrepresentation, civil conspiracy, breach of trust,
unjust enrichment and rescission. Zhoda is seeking more than $7,500,000 in
damages, return of the shares transferred to the Company, and other relief. The
Company believes it has meritorious defenses to Zhoda's claims which it intends
to assert vigorously.
The Harris County District Court has stayed the litigation pending
completion of arbitration proceedings, which are being held in Calgary, Alberta.
On March 24, 1998, the Company filed an action against Zhoda in the Court
of Queen's Bench of Alberta, Judicial Centre of Calgary, in which the Company
seeks to recover $190,000, plus interest, which the Company asserts Zhoda owes
the Company pursuant to promissory notes and loan agreements. On March 31, 1998,
Zhoda filed a statement of defense and a counterclaim in which it asserted
essentially the same claims as were asserted in the Texas action described
above. On the basis of its counterclaim, Zhoda seeks relief similar to that
sought in the Texas action. The Company's claim against Zhoda in the Alberta
action is not within the scope of the arbitration proceeding being conducted in
Calgary.
A judgment in favor of Zhoda on its claims could have a material adverse
effect on the Company's financial condition, results of operations, cash
flows and prospects.
RIBALTA LITIGATION
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to the
Company shares in a subsidiary through which the Company acquired most of its
interest in the Maykop field project, filed suit against the Company in the
Third Judicial District Court of Salt Lake County, Utah. Ribalta, however, has
not yet served the complaint on the Company.
In its complaint, Ribalta alleges breach by the Company of the contract
governing the sale of the shares it transferred to the Company and failure of a
condition in that contract that should have resulted in the termination of the
contract. Ribalta seeks the return of all benefits conferred on the Company
pursuant to the contract or damages equal to the value of such benefits, as well
as other relief. Under that contract, as amended, the maximum consideration to
which Ribalta might have been entitled was $800,000 and 350,000 shares of
Company Common Stock. The Company believes that no consideration is payable
under that contract because conditions to payment specified in the contract were
not satisfied. An outcome of this proceeding unfavorable to the Company could
have a material adverse impact on the Company's financial condition, results of
operations, cash flows and prospects. The Company believes it has meritorious
defenses to Ribalta's claims which it intends to assert vigorously.
POTENTIAL CLAIMS RELATING TO PREVIOUSLY IMPAIRED PROJECTS
As a result of the Company's decision to cease active development of the
Lelyaki, Maykop and Gorisht-Kocul projects, the Company may be subject to
contingent liabilities in the form of claims from the joint ventures developing
such projects or from others participating in those projects. The Company was
advised during the first quarter of 1998 that Intergas and another shareholder
of Intergas were considering asserting such claims in relation to the Maykop
project, but no such claims have yet been asserted. The Company is unable to
estimate the range that such claims, if made, might total. However, if one or
more such claims were asserted and determined to be valid, they could have a
material adverse effect on the Company's financial position, results of
operations, cash flows and prospects. Such claims may be adjudicated in the
host country forum under host country laws.
22
<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock traded from April 6, 1995 through March 29, 1999
on the Nasdaq National Market System under the symbol "GUSH". CanArgo common
stock has also been listed and traded on the Oslo Stock Exchange since May 1995
and its symbol there is "CNR". On March 29, 1999, CanArgo was advised by The
Nasdaq Stock Market that it had delisted CanArgo's common stock effective with
the close of business on March 29, 1999. CanArgo is considering an appeal of the
delisting decision. On March 30, 1999, CanArgo's common stock commenced trading
on the OTC Bulletin Board.
As a result of the delisting of CanArgo's common stock from The Nasdaq
Stock Market, the common stock is now classified as a penny stock under SEC
regulations. Those regulations include within the definition of penny stock any
equity security that is not listed on a national securities exchange or quoted
on Nasdaq that has a market price less than $5.00 per share. A quotation on the
OTC Bulletin Board is not considered to be a quotation on Nasdaq.
Rules applicable to penny stocks impose additional sales practices on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. In general, an individual would qualify as
an accredited investor if:
o his or her net worth, either individually or joint with spouse, exceeds
$1,000,000; or
o his or her individual income exceeds $200,000 or joint income with spouse
exceeds $300,000 for the two most recent years and is expected to reach
that level in the current year.
For transactions involving penny stocks, a broker-dealer must make a special
suitability determination regarding the purchaser and must have received the
purchaser's written consent prior to effecting the transaction.
In addition, the rules generally require delivery of a disclosure schedule
relating to the penny stock market prior to effecting a transaction. The
broker-dealer must disclose the commissions payable to both the broker-dealer
and the registered representative and current quotations for the penny stock
security. If the broker-dealer is the sole market maker for the security, the
broker-dealer must disclose this fact and its presumed control over the market.
Finally, monthly statements must be sent disclosing recent price information for
the penny stocks held in a customer's account and information on the limited
market in penny stocks.
As a result of the delisting of CanArgo's common stock from The Nasdaq
Stock Market, stockholders may find it more difficult to obtain current price
quotations for CanArgo common stock and to dispose of CanArgo common stock.
CanArgo's listing on the Oslo Stock Exchange has been a secondary listing,
with the primary listing being on The Nasdaq Stock Market. In the event any
CanArgo appeal of the delisting of its common stock from The Nasdaq Stock Market
is unsuccessful or if CanArgo decides not to appeal, it could not maintain a
secondary listing on the Oslo Stock Exchange. While CanArgo could apply for a
primary listing on the Oslo Stock Exchange, some administrative requirements of
that exchange attaching to a primary listing would probably make a primary
listing not feasible for CanArgo, even if the Oslo Stock Exchange were inclined
to approve it.
Prices reported in the table below are from The Nasdaq Stock Market and
reflect trade prices. During July 1998, the Company effected a 1-for-2 reverse
stock split of the Company's Common Stock. Figures for the periods prior to the
effective date of the reverse stock split have been restated to give effect to
the reverse stock split.
<TABLE>
<CAPTION>
BY FISCAL QUARTER IN THE
YEAR ENDED COMMON STOCK
DECEMBER 31, 1998 HIGH LOW
------------------------ ------ ------
<S> <C> <C>
QUARTER ENDED:
March 31, 1998 $ 2.63 $1.44
June 30, 1998 2.25 1.00
September 30, 1998 1.81 0.47
December 31, 1998 0.81 0.22
</TABLE>
<TABLE>
<CAPTION>
BY FISCAL QUARTER IN THE
YEAR ENDED COMMON STOCK
DECEMBER 31, 1997 HIGH LOW
------------------------ ------ ------
<S> <C> <C>
QUARTER ENDED:
March 31, 1997 $14.25 $8.75
June 30, 1997 10.13 7.81
September 30, 1997 9.13 4.84
December 31, 1997 7.00 1.19
</TABLE>
On December 31, 1998 the number of holders of record of the Common Stock of
the Company was approximately 3,849. The Company has not paid any cash
dividends on its Common Stock. The Company currently intends to retain future
earnings, if any, for use in its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. The payment of future
dividends, if any, will depend, among other things, on the Company's results of
operations and financial condition and on such other factors as the Company's
Board of Directors may, in its discretion, consider relevant. Under its loan
agreement with the IFC, Ninotsminda Oil Company's ability to transfer funds to
the Company and its affiliates is severely restricted. In addition, the Company
may not pay dividends on its Common Stock unless its subsidiary, CanArgo Oil &
Gas Inc., is able to pay and simultaneously pays an equivalent dividend on the
exchangeable shares issued by that subsidiary.
23
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
The following data reflect the historical results of operations and
selected balance sheet items of the Company and should be read in conjunction
with Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements included in
Item 8. "Financial Statements and Supplementary Data" herein.
<TABLE>
<CAPTION>
TWELVE TWELVE FOUR TWELVE TEN TEN
Reported in $1,000 except MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
for per common share ENDED ENDED ENDED ENDED ENDED ENDED
Amounts 12/31/98 12/31/97 12/31/96 8/31/96 8/31/95 8/31/94
-------- -------- -------- ------- ------- -------
FINANCIAL PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 821 $ 313 $ 17 $ 35 $ 625 $ 3
Operating loss (6,488) (29,090) (2,983) (5,640) (7,882) (1,466)
Other income (expense) 196 1,202 361 (854) 312 (366)
Net loss (6,110) (27,683) (2,604) (6,494) (7,600) (1,832)
Net loss per common share -
basic and diluted (0.39) (2.47) (0.28) (1.04) (1.82) (0.90)
Working capital 1,366 13,971 30,382 16,926 4,188 1,145
Total assets 46,568 37,434 55,375 32,089 10,710 4,944
Notes payable &
long-term debt --- --- --- 300 --- 163
Stockholders' equity 40,031 26,779 53,245 30,505 9,608 4,181
Cash dividends per
common share --- --- --- --- --- ---
</TABLE>
24
<PAGE> 25
ITEM 7. 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," in Item 1. "Business - Risks Associated with CanArgo's Oil and Gas
Activities," and elsewhere in this Annual Report on Form 10-K 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 Annual Report on Form
10-K, 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 Annual Report on Form 10-K, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe," "hope," "may" and
similar expressions, as well as "will," "shall" and other indications of future
tense, are intended to identify forward-looking statements.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
During the fourth quarter of 1997, CanArgo commenced a program to preserve
its financial resources. That program consisted of efforts to reduce general
and administrative expenses and to limit CanArgo's investments in and advances
to oil and gas ventures and properties in which it held interests, while CanArgo
explored and pursued strategic alternatives with the assistance of investment
advisors. As a result of its consideration of strategic alternatives, on
February 2, 1998 CanArgo, which was then known as Fountain Oil Incorporated,
entered into an agreement with CanArgo Oil & Gas Inc., which was then known as
CanArgo Energy Inc. That agreement contemplated a series of transactions to
effect a business combination involving those two companies. The business
combination was consummated on July 15, 1998. The completion of the business
combination had the following principal effects:
o CanArgo Oil & Gas Inc. became a subsidiary of CanArgo;
o the assets and liabilities of CanArgo Oil & Gas Inc. and the results of its
operations subsequent to July 15, 1998 are included in CanArgo's
Consolidated Financial Statements, which has had a significant impact on
CanArgo's Consolidated Financial Statements;
o each previously outstanding CanArgo Oil & Gas Inc. common share was
converted into the right to receive 0.8 share of CanArgo's common stock,
which provided the former holders of CanArgo Oil & Gas Inc. securities with
the right to receive approximately 47% of CanArgo's common stock;
o the management of CanArgo Oil & Gas Inc. succeeded to a majority of the
senior management positions in CanArgo; and
o CanArgo on July 15, 1998 filed amendments to its Certificate of
Incorporation effecting a one-for-two reverse stock split and changing
CanArgo's name from Fountain Oil Incorporated to CanArgo Energy
Corporation.
Upon completion of the business combination, CanArgo resumed a more active
status and has focused its business activities on the development of the
Ninotsminda oil field and some associated ventures.
Under the new management, CanArgo continues to control expenses and limits
investment in and advances to oil and gas ventures without prospects for early
cash flow. CanArgo continues to incur general and administrative costs and
project costs for which commitments were made prior to the business combination
and
25
<PAGE> 26
which CanArgo would not choose to incur under present circumstances. These costs
averaged approximately $40,000 per month during the second half of 1998 and are
expected to continue on a diminishing basis through mid-1999.
As of December 31, 1998, CanArgo had working capital of $1,366,000,
compared to working capital of $13,971,000 as of December 31, 1997. The
$12,605,000 decrease in working capital from December 31, 1997 to December 31,
1998 principally reflects a reduction in cash and cash equivalents. The payment
of liabilities accrued at December 31, 1997, principally those related to
CanArgo's Lelyaki field oil and gas venture, resulted in a $9,165,000
reduction in accrued liabilities from December 31, 1997 to December 31, 1998,
which was largely offset by the utilization of $8,567,000 of restricted cash
during 1998 to pay accrued liabilities.
Cash and cash equivalents decreased $12,239,000 during 1998 from
$14,164,000 at December 31, 1997 to $1,925,000 at December 31, 1998, primarily
as a result of expenditures on operating and investment activities and
activities relating to the business combination. Cash and cash equivalents at
December 31, 1998 included $819,000 held by Ninotsminda Oil Company, to which
CanArgo has limited access. The utilization of cash during 1998 involved
principally the following:
o the net loss of $6,110,000 incurred in 1998, most of which involved cash
items;
o the investment of $5,727,000 in oil and gas properties, principally the
Ninotsminda field;
o $1,652,000 of investments in and advances to oil and gas and other
ventures, principally the acquisition of minority interests in a refinery
and a proposed power generation project in the Republic of Georgia; and
o $1,215,000 of capitalized acquisition costs related to the business
combination.
The use of cash to fund 1998 expenditures was partially offset by the release of
restrictions in 1998 that had applied to $1,133,000 of CanArgo's previously
restricted cash.
CanArgo's cash balance at December 31, 1998 is not sufficient to cover
CanArgo's working capital requirements and capital expenditure plans for 1999.
CanArgo's management believes that its current cash augmented by the anticipated
proceeds from the planned disposition of assets not central to its operations
should be adequate to continue for at least six months CanArgo's operations at
the same activity level as they have experienced during the past several months.
This would not, however, include any major expenditures on any of its properties
or ventures. No assurances can be given that CanArgo will be able to complete
any asset sales or that the proceeds from any such sales will be as great as
CanArgo anticipates.
Current development plan 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
$9,573,000. The development plan is scheduled to be implemented in 1999 and the
first half of 2000, but that timing is dependent upon funding for the
development being available promptly. A key portion of the funding program is
not yet in place.
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 the Ninotsminda field current development plan will be
funded, that the funding 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.
While it is highly speculative and will depend significantly upon the
results of the current development program, CanArgo currently estimates that a
full Ninotsminda field development plan would entail an additional $16 million
and the drilling of nine additional wells. Should Ninotsminda Oil Company
attempt to implement such a plan during the two or three years immediately
following completion of the current development plan, it would require
substantial additional funding. It is unlikely CanArgo could provide such
funding unless CanArgo itself obtained substantial additional funding.
To avoid cutbacks to CanArgo's capital expenditure and working capital
plans, CanArgo is seeking additional capital. Potential sources of funds include
additional equity, project financing, debt financing and the participation of
26
<PAGE> 27
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 Stock Market National Market System effective at the
close of business on March 29, 1999. The management of CanArgo is assessing the
impact the delisting will have on CanArgo's plans and ability to raise required
funds. See "Item 5. Market for Common Equity and Related Stockholder Matters"
for a discussion of some of the effects of the delisting.
In December 1998, Ninotsminda Oil Company entered into a $6,000,000 Loan
Agreement with the International Finance Corporation, with the proceeds to be
used principally to fund the development of the Ninotsminda field. Disbursement
of the IFC loan is conditioned upon, among other things, the funding of a
$2,000,000 subordinated loan to Ninotsminda Oil Company from its shareholders.
CanArgo believes that the other shareholder of Ninotsminda Oil Company will not
participate in the subordinated loan 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.
CanArgo does not presently have the resources to fund the $2,000,000
subordinated loan to Ninotsminda Oil Company. CanArgo has filed a registration
statement with the Securities and Exchange Commission under which it proposes to
offer up to 21,264,643 shares of Common Stock with a view towards raising a
minimum of $3,000,000 in gross proceeds. The primary use of proceeds from the
offering was intended to be funding the $2,000,000 subordinated loan to
Ninotsminda Oil Company. CanArgo may seek stockholder authorization of a
reverse stock split of its common stock before proceeding with the offering,
which could delay any such offering. CanArgo also intends to pursue financing
alternatives, such as a secured loan, to obtain the resources to fund the
subordinated loan. A number of uncertainties affect CanArgo's financing plans,
and no assurances can be given that:
o the SEC will declare CanArgo's registration statement effective;
o CanArgo will be able to proceed with its offering of common stock or that
such offering will be successful;
o CanArgo will be able to arrange acceptable alternative financing if the
offering is not successfully completed;
o CanArgo will be able to fund the subordinated loan to Ninotsminda Oil
Company; or
o Ninotsminda Oil Company will satisfy the other conditions for the
disbursement of the IFC loan.
In the event CanArgo is successful in generating at least $3,000,000 in
gross proceeds from the sale of Common Stock, CanArgo believes that it will be
able to fund its planned operations through mid-2000. Depending upon the amount
of proceeds generated by the sale of Common Stock, revenue generated by
operations and partial funding of Company 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.
Accounts receivable increased from nil at December 31, 1997, when the
minimal amount of accounts receivable were classified within other current
assets, to $424,000 at December 31, 1998. The increase is primarily as a result
of $257,000 of accounts receivable relating to oil sales. In addition, $88,000
of receivables which had previously been included within other current assets
were reclassified as accounts receivable at December 31, 1998.
Advances to operator increased from nil at December 31, 1997 to $377,000 at
December 31, 1998 as a result of advance payments made to the entity performing
the operations at the Ninotsminda field on behalf and at the direction of
CanArgo.
Inventory increased from nil at December 31, 1997 to $170,000 at December
31, 1998 as result of placing a portion of CanArgo's oil produced at the
Ninotsminda field in storage to be available for sale in the Georgian domestic
and regional market.
Other current assets decreased from $762,000 at December 31, 1997 to
$453,000 at December 31, 1998, primarily as a result of:
o the 1998 amortization of prepaid expenses amounting to $264,000;
o the collection in 1998 of $234,000 on claims that had been included
within other current assets; and
o the 1998 reclassification of $88,000 of accounts receivables previously
included in other current assets.
27
<PAGE> 28
These reductions in other current assets were partly offset by the prepayment of
insurance premiums amounting to $131,000 in the third quarter of 1998 and 1998
deposits of $169,000.
The $8,671,000 decrease in current liabilities during the year ended
December 31, 1998 is primarily attributable to a $9,165,000 decrease in accrued
liabilities. The decrease in accrued liabilities is, in turn, primarily
attributable to payment of liabilities accrued at December 31, 1997 relating to:
o bank debt and related interest incurred by Kashtan Petroleum
Ltd., the entity operating the Lelyaki field project;
o Lelyaki field project closedown costs;
o employee termination costs; and
o acquisition of oilfield equipment.
These reductions in accrued liabilities in 1998 were partially offset by
accounts payable for which CanArgo became responsible as a result of the
business combination and those arising out of active operations which resumed
following completion of the business combination.
Property and equipment, net, increased from $5,942,000 at December 31, 1997
to $6,202,000 at December 31, 1998 primarily as a result of capitalized costs
associated with moving two drilling rigs and related equipment to the Republic
of Georgia from Cyprus and the acquisition of property and equipment in
connection with the business combination.
Oil and gas properties, net increased from $1,479,000 at December 31, 1997
to $30,138,000 at December 31, 1998 primarily as a result of the business
combination. The increase was partly offset by 1998 impairment write downs of
the Sylvan Lake project aggregating $900,000 as a result of the application of
the quarterly full cost ceiling test in the context of a severe heavy oil price
decline in 1998.
Investments in and advances to oil and gas and other ventures, net
increased from $5,387,000 at December 31, 1997 to $6,878,000 at December 31,
1998. The increase reflects principally:
o $1,004,000 of investment in and advances to Georgian American Oil
Refinery;
o $468,000 of investment in CanArgo Power Corporation, through which CanArgo
is participating in a start-up private power generation project in the
Republic of Georgia; and
o $155,000 of 1998 advances to Boryslaw Oil Company , the entity developing
the Stynawske field project.
These investments and advances were partially offset by CanArgo's $161,000
equity in the loss of Boryslaw Oil Company in 1998.
As of December 31, 1998 and 1997, CanArgo had net investments in and
advances to Boryslaw Oil Company totaling $5,406,000 and $5,387,000,
respectively. CanArgo has the responsibility for arranging financing for this
venture, and unless third-party financing can be arranged, CanArgo might have to
supply the capital to finance operations until the venture generates positive
cash flow, which would have the effect of increasing investments in and advances
to oil and gas and other ventures. The amount of such advances may be greater
than the amount of the operating losses recognized by CanArgo, which would cause
such net investment balances to increase. Such investments and advances at the
initial stages of development are essentially unevaluated oil and gas
properties, and such costs may not be recovered if the venture is not
successful. No assurance can be given that CanArgo will be able to arrange
third-party financing for such venture, that CanArgo will have sufficient
resources to fund the capital and operating needs of the venture, or that the
venture will be successful.
28
<PAGE> 29
CanArgo has the right to acquire an additional interest in Georgian
American Oil Refinery for approximately $860,000, which if exercised could also
result in an increase in investments in and advances to oil and gas and other
ventures during 1999.
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 is involved in several lawsuits which are described in "Item 3.
Legal Proceedings". CanArgo could incur significant costs in defending these
lawsuits, and the loss of any of these lawsuits 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 December 31, 1998, CanArgo had a
contingent obligation to issue 187,500 shares of common stock to a third party
upon satisfaction of 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 the limited ability to transfer funds
from Ninotsminda Oil Company to CanArgo.
29
<PAGE> 30
Minority interest in subsidiaries at December 31, 1998 of $4,552,000
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. The majority of other software and hardware currently used by
CanArgo is believed to be Year 2000 compliant, and the cost of converting any
non-compliant systems is not expected to be material to CanArgo's financial
condition. 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.
CanArgo has identified several significant suppliers of goods and services,
primarily in the banking, transportation, refining 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. Efforts of these suppliers to become fully Year 2000 compliant are
reportedly continuing with the expectation that they will be substantially Year
2000 compliant in 1999. CanArgo will continue to monitor the progress of these
suppliers. 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
annual financial statements and based on present circumstances would not have
any material effect on CanArgo's financial statements.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
CanArgo recorded operating revenue of $821,000 during the year ended
December 31, 1998, compared with $313,000 for the year ended December 31, 1997.
Ninotsminda Oil Company generated $603,000 of 1998 revenue subsequent to the
consummation of the business combination in July 1998. Its net share of the
275,300 barrels of gross production from the Ninotsminda field subsequent to the
business combination amounted to 92,400 barrels of oil. From its share,
Ninotsminda Oil Company placed 41,700 barrels of oil into storage to be held for
sale into the Georgian local and regional market. Because lower transportation
costs are involved, CanArgo believes that sales of Ninotsminda oil to customers
in the Georgian local and regional market generally yield relatively higher net
sales prices to Ninotsminda Oil Company than sales to other customers. Sale
prices for Ninotsminda oil
30
<PAGE> 31
sold during the second half of 1998 averaged $10.63 per barrel. Oil production
from the Sylvan Lake property in Alberta, Canada accounted for $202,000 of 1998
revenue and substantially all of 1997 revenue. CanArgo also recorded a nominal
amount of revenue during the year ended December 31, 1998 from the sale of
electrically enhanced oil recovery equipment; there was no revenue from the
sale of such equipment for the year ended December 31, 1997.
CanArgo expects that revenue for 1999 should be substantially higher than
in 1998, since Ninotsminda field operating results will be included for the full
twelve months and CanArgo has plans to increase Ninotsminda field production
substantially during 1999.
Prices for crude oil are subject to wide fluctuations in response to
changes in supply and demand and additional political, economic and other
factors. The significant decline in oil prices during 1998 adversely affected
the results of CanArgo's operations for that year. World oil prices are likely
to have a significant impact on CanArgo's revenue and operating profit or loss
in 1999 and subsequent years.
The operating loss for 1998 amounted to $6,488,000, compared with
$29,090,000 for 1997. The decrease in the operating loss is attributable
primarily to the impairment in 1997 of oil and gas ventures, oil and gas
properties, property and equipment and other assets which aggregated
$19,424,000, as well as a $3,778,000 loss in 1997 representing CanArgo's equity
in the loss of oil and gas ventures. Both are associated with CanArgo's
decision in 1997 to effectively terminate its involvement in some Eastern
European oil and gas ventures and write-off its investment related to them.
Lease operating expenses increased to $843,000 during 1998, as compared to
$200,000 for 1997, primarily as a result of the inclusion of Ninotsminda field
expenses subsequent to the business combination.
Direct project costs decreased to $1,157,000 in 1998 from $1,753,000 for
1997, reflecting the 1997 termination of CanArgo's involvement in some Eastern
European oil and gas ventures, partially offset by activity related to the
Ninotsminda field subsequent to the business combination.
The decrease in depreciation, depletion and amortization expense from
$345,000 for 1997 to $239,000 during 1998 is attributable principally to the
write-down of proved properties in the Sylvan Lake area in the first and second
quarter of 1998 as a result of a severe decline in the price of heavy oil and
the application of the quarterly full cost ceiling test. These write-downs had
the effect of reducing the per barrel depletion expense for oil produced at the
Sylvan Lake field. The decrease in 1998 depreciation, depletion and
amortization expense related to the Sylvan Lake write-downs was partially offset
by depletion related to Ninotsminda field oil production subsequent to the
business combination and to a 1998 increase in the number of barrels of oil
produced from the Sylvan Lake property.
The equity loss from investments in unconsolidated subsidiaries decreased
to $161,000 during 1998, from $3,778,000 for 1997, as a result of the
substantially lower level of activity conducted through unconsolidated
subsidiaries in 1998, reflecting the 1997 termination of development activities
of some Eastern European oil and gas ventures conducted through unconsolidated
subsidiaries.
During 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 application of the quarterly full cost ceiling test.
If oil prices decline further, CanArgo may experience additional impairments of
these or other properties. In 1998 CanArgo also wrote down by $113,000 to its
estimated recoverable amount the carrying value of camp equipment to be utilized
as living accommodations by oil field crews at remote locations. The $1,013,000
in 1998 impairment expense compares to an aggregate of $19,424,000 of impairment
expense recorded in 1997.
CanArgo recorded net other income of $196,000 for 1998, as compared to
$1,202,000 during 1997. The principal reason for the decrease is CanArgo's 1998
payment of interest expense related to the Lelyaki field project. This was
partially offset by a reduction in the loss that CanArgo recorded on the
disposition of miscellaneous equipment and property, which dropped from $271,000
in 1997 to $30,000 in 1998.
31
<PAGE> 32
The net loss of $6,110,000, or $0.39 per share, for 1998 compares to a net
loss of $27,683,000, or $2.47 per share for 1997. 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 1998 than
during 1997.
Year Ended December 31, 1997 Compared to Year Ended August 31, 1996
CanArgo recorded operating revenue of $313,000 during the year ended
December 31, 1997 compared with $35,000 for the year ended August 31, 1996.
Revenue in both years was related to a modest amount of oil and gas production
from property in Alberta, Canada in which CanArgo has interests. The 1997
production was generated primarily at the Sylvan Lake property in which CanArgo
acquired an interest in 1997.
CanArgo incurred an operating loss of $29,090,000 for the year ended
December 31, 1997, compared to an operating loss of $5,640,000 for the year
ended August 31, 1996. The increase in the operating loss is attributable
primarily to the impairment of oil and gas ventures, oil and gas properties,
property and equipment and other assets which aggregated $19,424,000 in 1997, as
well as a $3,778,000 loss representing CanArgo's equity in the loss of oil and
gas ventures. There were no comparable impairment charges in fiscal 1996, and in
that year, CanArgo's equity in the loss of oil and gas ventures was $13,000.
Lease operating expenses increased to $200,000 in 1997, as compared to
$11,000 in fiscal 1996, primarily as a result of CanArgo's acquisition of an
interest in the Sylvan Lake property in early 1997. 1997 direct project costs
increased $485,000 from the $1,268,000 experienced during the fiscal year ended
August 31, 1996, reflecting principally the higher level of project activity and
the inability of CanArgo to recoup from the oil and gas venture developing the
Lelyaki field certain expenses related to the Lelyaki field project incurred
during December 1997. General and administrative expenses in the years ended
December 31, 1997 and August 31, 1996 were comparable. The level of general and
administrative expense is expected to decrease during 1998, at least prior to
the consummation of the business combination with CanArgo Oil & Gas Inc. The
increase in depreciation and amortization expense from $77,000 in the year ended
August 31, 1996 to $345,000 in the year ended December 31, 1997 is attributable
principally to the increased production of oil.
During the year ended December 31, 1997, CanArgo recognized an aggregate of
$19,237,000 in losses as a result of the impairment of long-lived assets, as
compared to an impairment loss of $420,000 for the year ended August 31, 1996.
Impairment of the ventures operating the Lelyaki, Maykop and Gorisht-Kocul field
projects resulted in a combined loss of $15,736,000. The impairment of drilling
rigs and related equipment originally intended to be utilized in the Maykop
field project and certain office furniture, fixtures and equipment resulted in a
loss of $3,244,000. The remaining investment in the Rocksprings property, which
was carried in CanArgo's December 31, 1996 balance sheet as a $257,000
unevaluated oil and gas property, was recognized as impaired in 1997. The
remaining assets impaired during 1997 were notes receivable from the entity that
sold to CanArgo its principal interest in the Lelyaki field project, as to which
there were doubts regarding collectability.
In 1997, CanArgo recorded total other income of $1,202,000, as compared to
total other expense of $854,000 in the year ended August 31, 1996. Interest
income increased to $1,615,000 for the year ended December 31, 1997 from
$332,000 for the year ended August 31, 1996 due to higher average cash and cash
equivalent investments. Interest expense decreased from $1,016,000 for the year
ended August 31, 1996, when CanArgo recorded amortization of financing costs,
discount and interest related to CanArgo's 8% Convertible Subordinated
Debentures, to $69,000 for calendar 1997. In both 1997 and fiscal 1996, CanArgo
recorded losses from the sale of miscellaneous equipment and property amounting
to $271,000 and $182,000, respectively.
The net loss of $27,683,000, or $2.47 per share, in 1997 compares to a net
loss of $6,494,000, or $1.04 per share, in the fiscal year ended August 31,
1996. The disproportionate losses per share are attributable to
32
<PAGE> 33
CanArgo's issuance of additional shares subsequent to August 31, 1996, resulting
in a substantially higher weighted average number of common shares outstanding
during the year ended December 31, 1997.
Four Months Ended December 31, 1996 Compared With Four Months Ended December 31,
1995
CanArgo recorded an operating loss of $2,983,000 during the four month
period ended December 31, 1996, compared with an operating loss of $1,470,000
for the comparable 1995 period. The increased loss resulted from an increase of
approximately $1,357,000 in CanArgo's loss from investments in unconsolidated
subsidiaries, primarily associated with the activities of the oil and gas
ventures in Eastern Europe in which CanArgo had interests.
General and administrative expenses for the four month period ended
December 31, 1996 amounted to $1,282,000, reflecting a modest decrease from the
$1,303,000 for the comparable 1995 period. For the 1995 period, general and
administrative costs included a charge for external services for public
relations activities of a non-recurring nature. The decrease in the 1996 period
for that expense was substantially offset by increases in salaries and other
administrative costs related to the build-up of staff associated with the
projects in Eastern Europe. General and administrative expense is net of
$1,220,000 and $320,000 capitalized pursuant to full cost accounting rules
during the four month periods ended December 31, 1996 and 1995, respectively.
Interest income increased to $424,000 for the four month period ended
December 31, 1996 from $55,000 in the comparable period of the prior year due to
higher average cash investments. Interest expense increased to $13,000 for the
four month period ended December 31, 1996 from $3,000 in the comparable period
for the prior year due to the amortization of financing costs and interest
related to debentures CanArgo issued and interest associated with the financing
of insurance premiums.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 7 and elsewhere in
this Form 10-K 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 be 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.
33
<PAGE> 34
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. CanArgo's ability to finance all of its present oil
and gas projects and other ventures according to present plans is dependent upon
obtaining additional funding. An inability to obtain financing could require
CanArgo to scale back its project development, capital expenditure, production
and other plans.
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.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet effective.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be filed in this Report
begin at Page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
34
<PAGE> 35
There were no changes in or disagreements between CanArgo and its
principal accountants during the two most recent fiscal years.
35
<PAGE> 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE OFFICE OR OFFICES
---- --- -----------------
<S> <C> <C>
David Robson 41 Chairman of the Board and Chief Executive Officer
Michael R. Binnion 38 Director, President and Chief Financial Officer
Robert A. Halpin (1) 63 Director
J.F. Russell Hammond (2) 57 Director
Peder Paus (1) 53 Director
Nils N. Trulsvik (2) 50 Director
Ron Gerlitz 44 Vice President, Technology
Anthony J. Potter 34 Vice President, Finance
Ravinder Sierra 46 Vice President, (Significant Employee)
Niko Tevzadze 34 Vice President, (Significant Employee)
</TABLE>
----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
DAVID ROBSON was elected a Director, Chairman of the Board and Chief
Executive Officer on July 15, 1998. He has also served as a Director, Chairman
of the Board and Chief Executive Officer of the Company's subsidiary, CanArgo
Oil & Gas Inc., since July 1997, as President of CanArgo Oil & Gas Inc.'s
subsidiary, Ninotsminda Oil Company, since 1996, and as Managing Director and
sole owner of Vazon Energy Limited, a company which provides consulting services
to the energy industry, since March 1997. From April 1992 until March 1997,
Dr. Robson was a senior officer of JKX Oil & Gas plc, including Managing
Director and Chief Executive Officer. He holds a B.Sc. (Hon) in Geology and a
Ph.D in Geochemistry from the University of Newcastle upon Tyne, and an MBA from
the University of Strathclyde. He is the energy sector representative on the
United Kingdom government's East European Trade Council.
MICHAEL R. BINNION was elected a Director, President and Chief Financial
Officer on July 15, 1998. He has also served as a Director, Chief Financial
Officer and Secretary of the Company's subsidiary, CanArgo Oil & Gas Inc., since
March 1997. Mr. Binnion is also President and a director of Terrenex
Acquisition Corporation, an Alberta Stock Exchange listed investment company
which is the Company's largest stockholder, and sole director of Ruperts
Crossing, a private investment company. He is also a director of NRI Online
Inc., Fintech Services Ltd. and Smartor Products Inc. Prior to April 1997, he
served as Chief Financial Officer and a Director of Trans-Dominion Energy
Company, a Toronto Stock Exchange listed international exploration and
production company, for four years.
ROBERT A. HALPIN was elected a Director on March 4, 1995. He served as
Chairman of the Board from November 14, 1995 to February 4, 1997 and as Vice
Chairman of the Board from February 4, 1997 to July 15, 1998. Mr. Halpin has
long experience in the oil and gas industry. Mr. Halpin has been a director of
TransGlobe Energy Corporation, Synerseis Technologies Inc. and Pacific Tiger
Energy Ltd., all Canadian companies, since 1997. From 1989 to his retirement in
September 1993, he served as Vice President for International Exploration and
Production with Petro-Canada. In October 1993, Mr. Halpin became President of
Halpin Energy Resources Ltd., a firm he formed to provide advisory services to
energy companies with emphasis on international petroleum projects.
J.F. RUSSELL HAMMOND was elected a Director on July 15, 1998. He has also
served as a Director of the Company's subsidiary, CanArgo Oil & Gas Inc., since
June 1997. For over five years, Mr. Hammond has been an investment advisor to
Provincial Securities Ltd., a private investment company. Mr. Hammond has been
Chairman of Terrenex Acquisition Corporation since 1992 and a director of Cadiz
Inc., a Nasdaq National Market listed company, since 1989.
36
<PAGE> 37
PEDER PAUS was elected a Director on July 15, 1998 and is an independent
businessman based in Oslo, Norway. Since 1995, he has been a consultant on
investor relations for various companies. From 1981 to 1995, Mr. Paus was Chief
Executive Officer of North Venture Ltd., a shipping and offshore consulting firm
based in London, England.
NILS N. TRULSVIK was elected a Director of the Company on August 17, 1994.
He has served the Company as President and Chief Executive Officer from February
4, 1997 to July 15, 1998 and from November 21, 1994 to March 9, 1995; and as
Executive Vice President from March 9, 1995 to February 4, 1997 and from
September 8, 1994 until November 21, 1994. In August 1998, Mr. Trulsvik became
a partner in a consulting company, The Bridge Group, located in Norway. Mr.
Trulsvik is a petroleum explorationist with extensive experience in petroleum
exploration and development throughout the world. Prior to joining the Company,
he held various positions with Nopec a.s., a Norwegian petroleum consultant
group of companies of which he was a founder, including Managing Director from
1987 to 1993 and Special Advisor from 1993 to August 1994.
RON GERLITZ was elected Vice President, Technology on November 1, 1998.
From 1997 to September 1998, he was Manager of Engineering with First Calgary
Petroleums. From 1992 until 1997 he was an independent petroleum consultant in
Calgary, Alberta, Canada. From 1983 to 1992, Mr. Gerlitz worked as an engineer
in various capacities and positions with a number of corporations, including
Mobil Oil. In 1983, he graduated from the University of Calgary with a Bachelor
of Science in Engineering.
ANTHONY J. POTTER was elected Vice President, Finance on July 15, 1998. He
also serves the Company as Group Controller. He has served as Vice President,
Finance and Group Controller of the Company's subsidiary, CanArgo Oil & Gas
Inc., since May 1998. From September 1986 to April 1998, Mr. Potter was
employed with Coopers & Lybrand Chartered Accountants. In 1986, he graduated
from the University of Calgary with a Bachelor of Commerce degree in Accounting.
RAVINDER SIERRA was elected Vice President on July 15, 1998 and has served
as Vice President of the Company's subsidiary, EOR International Inc., since
December 15, 1994. Mr. Sierra first joined EOR International Inc. in November
1990 as Senior Project Engineer. Mr. Sierra has over 16 years experience in the
international oil and gas industry.
NIKO TEVZADZE was elected Vice President on July 15, 1998. He has been the
General Director of Georgian British Oil Company, which operates the Ninotsminda
field on behalf of the Company, since October 1993. From 1991 to 1993, Mr.
Tevzadze was involved in the joint venture "Georgia Makoil" as a General
Director. From 1986 to 1991, he worked at the East Georgia Drilling Office of
Georgian Oil a foreman, drilling engineer and chief technologist.
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Officers serve at the
pleasure of the directors.
37
<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all compensation paid or accrued by the Company
and its subsidiaries during the fiscal year ended August 31, 1996, the four
month period ended December 31, 1996 and the years ended December 31, 1997 and
December 31, 1998 to certain executive officers of the Company (the "Named
Officers").
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------------------
SECURITIES
NAME AND YEAR UNDERLYING ALL OTHER
PRINCIPAL POSITION ENDED SALARY ($) OPTIONS/SARS (#) COMPENSATION ($) (5)
------------------ ----- ---------- ---------------- --------------------
<S> <C> <C> <C> <C>
David Robson 12/98 82,500 390,000 ---
(1)
Nils N. Trulsvik 12/98 87,376 --- 3,681
(2) 12/97 140,333 --- 6,653
12/96* 51,834 50,000 5,679
8/96 161,241 --- 8,635
Rune Falstad 12/98 112,852 25,000 3,786
(3) 12/97 82,952 15,000 3,825
Alfred Kjemperud 12/98 133,338 50,000 3,124
(4) 12/97 101,296 5,000 5,014
12/96* 38,875 10,000 2,342
</TABLE>
- ----------
* Four month period ended December 31, 1996.
(1) Mr. Robson has served as Chief Executive Officer since July 15, 1998 and
provides services to the Company through Vazon Energy Limited.
(2) Mr. Trulsvik served as President and Chief Executive Officer from February
4, 1997 to July 15, 1998 and as Executive Vice President from March 9, 1995
to February 4, 1997. Included in 1998 salary is $1,671 paid as
non-employee director's fees subsequent to July 31, 1998. See "Directors'
Compensation" and "Employment Contracts."
(3) Mr. Falstad has served as Vice President since June 3, 1997, but has not
been deemed an executive officer of the Company since October 1998.
Included in 1998 salary are payments for consulting services rendered to
the Company subsequent to July 31, 1998 pursuant to a contract with FinCom
AS, of which Mr. Falstad is a partner. See "Employment Contracts."
(4) Mr. Kjemperud resigned as Vice President on September 3, 1998. Included in
1998 salary are payments for consulting services rendered to the Company
subsequent to September 3, 1998 pursuant to a contract with The Bridge
Group. See "Employment Contracts."
(5) Represents the Company's contributions to or accruals with respect to
individual retirement and pension plans.
38
<PAGE> 39
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1998
The following table sets forth information concerning options granted to
the Named Officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT DATE
UNDERLYING GRANTED TO PRESENT VALUE(2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
NAME GRANTED (1) IN FY 12/98 PRICE DATE PER SHARE TOTAL
---- ----------- ----------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
David Robson 120,000 16.58% $0.69 10/6/08 $0.3233 $ 38,796
270,000 37.30 1.25 7/16/08 0.5874 158,598
Nils N. Trulsvik 0 --- --- --- --- ---
Rune Falstad 25,000 3.45 0.70 12/16/00 0.1225 3,063
Alfred Kjemperud 50,000 6.91 0.70 12/16/00 0.1225 6,125
</TABLE>
- ----------
(1) The options granted to Mr. Robson vest in three equal installments
commencing on the first anniversary of the grant date and were granted at
an exercise price equal to the fair market value of the Company's Common
Stock on the date of grant. The options granted to Messrs. Falstad and
Kjemperud are exercisable only from November 16, 2000 through the
expiration date of December 16, 2000, and were granted at an exercise price
equal to 124% of the fair market value of the Company's Common Stock on the
date of grant. Pursuant to the terms of the Company's various stock option
plans, the Compensation Committee may, subject to each plan's limits,
modify the terms of outstanding options, including the exercise price and
vesting schedule thereof.
(2) These values were derived using the Black-Scholes option pricing model
applying the following assumptions:
<TABLE>
<CAPTION>
RISK-FREE
EXERCISE PRICE DIVIDEND YIELD VOLATILITY INTEREST RATE EXPECTED TERM
-------------- -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
$0.69 0% 44.76% 5.72% 5 years
1.25 0 44.76 5.72 5 years
0.70 0 44.76 5.69 2.1 years
</TABLE>
These values are not intended to forecast future appreciation of the
Company's stock price. The actual value, if any, that an executive officer
may realize from his options (assuming that they are exercised) will depend
solely on the increase in the market price of the shares acquired through
option exercises over the exercise price, measured when the shares are
sold.
OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth information concerning the number and
hypothetical value of stock options held by the Named Officers at December 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END FISCAL YEAR END (1)
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE
NAME EXERCISABLE UNEXERCISABLE ($) ($)
---- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
David Robson 75,000 495,000 0 0
Nils N. Trulsvik 30,000 0 0 0
Rune Falstad 0 25,000 0 0
Alfred Kjemperud 0 50,000 0 0
</TABLE>
----------
(1) The exercise price of all options exceeded the market value of the
Common Stock on December 31, 1998.
39
<PAGE> 40
DIRECTORS' COMPENSATION
The Company does not currently pay directors' fees, but it does reimburse
ordinary out-of-pocket expenses for attending Board and Committee meetings. From
July 15, 1998 until October 1, 1998, the Company paid non-employee directors
fees at the rate of $10,000 per year. Prior thereto, the Company paid
non-employee directors (other than Mr. Halpin) fees at the rate of $14,000 per
year plus a fee of $3,000 per year for each committee on which such non-employee
director served. The Company also previously paid a fee of $1,000 per day,
other than a day on which the Board met, for each day spent by a non-employee
director on the business of Board committees which exceeded one day per year
with respect to the Compensation Committee and three days per year with respect
to the Audit Committee and the Petroleum Committee.
From January 1998 through July 15, 1998, Robert A. Halpin was compensated
for his services as Vice Chairman of the Board and member of Board committees
pursuant to an agreement which provided for an annual fee of $45,000 plus $1,000
per day for each day of service in excess of 66 days per year. During that
period, the Company also provided Mr. Halpin with an office at the Company's
offices located in Calgary, Alberta, Canada, and reimbursed Mr. Halpin for his
out-of-pocket expenses in connection with services on behalf of the Company.
The Company also from time to time used the consulting services of Halpin Energy
Resources, Ltd., which is controlled by Mr. Halpin, in the area of petroleum
projects, for which Halpin Energy Resources, Ltd. was compensated at its
customary rates.
Mr. Trulsvik may provide consulting services to the Company through The
Bridge Group (of which Mr. Trulsvik is a partner) pursuant to a work order dated
August 1, 1998 between the Company and Mr. Trulsvik at the rate of $1,200 per
day plus expenses. No consulting services were provided by Mr. Trulsvik during
1998.
From January 1, 1996 to July 15, 1998, Eugene J. Meyers, a non-employee
director until July 15, 1998, provided financial relations consulting services
to the Company at the rate of $15,000 per year for 22 days of service, and
thereafter at the rate of $100 per hour ($1,000 maximum per day). The Company
also reimbursed him for his out-of-pocket expenses associated with such
services.
The Company provides automatic grants of non-qualified options to
non-employee directors pursuant to the 1995 Long-Term Incentive Plan. Pursuant
to the Plan, a non-qualified option to purchase 3,750 shares of Common Stock is
granted automatically to each non-employee director on each of (i) the date of
each meeting of stockholders at which such non-employee is elected or re-elected
as a director or, if in any fiscal year directors are not elected at a meeting
of stockholders, on the last date of such fiscal year and (ii) the date such
non-employee is first elected as a director, if not at a meeting of
stockholders. In addition, a non-employee director will automatically be
granted a non-qualified option to purchase 3,750 shares of Common Stock on each
date on which such non-employee director is elected or re-elected by the Board
of Directors as Chairman of the Board of Directors, or, if the Chairman of the
Board is then an employee of the Company, as Vice Chairman of the Board of
Directors. The exercise price of each option is equal to 100% of the fair
market value of the Common Stock on the date of grant. Each option so granted
is 100% vested six months after the date of grant. Options expire on the first
to occur of three years from the date of grant or the first anniversary of the
date the director ceases to be a director for any reason. Non-employee
directors are not eligible to receive other options pursuant to the 1995
Long-Term Incentive Plan.
40
<PAGE> 41
The following table shows the compensation paid to all persons who were
non-employee directors, including their respective affiliates, during the year
ended December 31, 1998:
<TABLE>
<CAPTION>
DIRECTORS FEES
AND OTHER CONSULTING
NAME COMPENSATION PAYMENTS OPTIONS GRANTED
- ---- --------------- ---------- ---------------
<S> <C> <C> <C>
Robert A. Halpin $26,293 $0 3,750(3)
J.F. Russell Hammond 2,137 0 3,750(4)
Stanley D. Heckman (1) 10,685 0 --
Eugene J. Meyers (1) 7,537 43,100 (2) --
Peder Paus 2,137 0 3,750(4)
Nils N. Trulsvik 1,671 0 --
</TABLE>
- ----------
(1) Messrs. Heckman and Meyers served as a non-employee directors
until July 15, 1998.
(2) Includes $35,600 for services rendered during 1997.
(3) The options were granted on December 31, 1998 at an exercise
price of $0.313, expire on December 30, 2001 and will be 100% vested
at June 30, 1999.
(4) The options were granted July 15, 1998 at an exercise price
of $1.00, expire on July 14, 2001 and became 100% vested on January
15, 1999.
EMPLOYMENT CONTRACTS
The Company had employment contracts with Nils N. Trulsvik, Rune Falstad
and Alfred Kjemperud which were terminated effective July 31, 1998. The
contracts provided for annual salaries of approximately $150,000 in the case of
Mr. Trulsvik, approximately $125,000 in the case of Mr. Falstad and
approximately $100,000 in the case of Mr. Kjemperud. In addition, each person
received an allowance equal to 12.5% of his base salary, a portion of which was
used to provide minimum life and disability insurance coverage for each such
person. The remainder of such allowance was used by each person for additional
life, medical or accident insurance and to fund individual pension and
retirement plans.
The Company has entered into consulting arrangements with each of Messrs.
Falstad and Kjemperud. Mr. Falstad's consulting services are provided by FinCom
AS under an agreement that commenced August 1, 1998 at the rate of $7,000 per
month plus expenses. This agreement may be terminated by either party upon
90-day notice. Mr. Kjemperud's consulting services are provided through The
Bridge Group pursuant to a one-year work order commencing August 1, 1998 between
the Company and Mr. Kjemperud at the rate of $13,000 per month plus expenses.
41
<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1999 with
respect to beneficial ownership of the Company's Voting Securities by each
person known by the Company to be the beneficial owner of more than 5% of the
Voting Securities, by each director and Named Officer of the Company and by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------ ---------------------- ----------------
<S> <C> <C> <C>
Terrenex Acquisition Corporation
1580, 727 - 7th Avenue SW
Calgary, AB, Canada T2P 0Z5 2,355,391 (1) 11.27%
Provincial Securities Limited
607 Gilbert House, Barbican
London EC2Y 8BD UK 1,671,250 8.17%
Michael R. Binnion 426,159 (2) 2.08%
Peder Paus 365,894 (3) 1.79%
Nils N. Trulsvik 103,700 (4) *
David Robson 75,000 (5) *
J.F. Russell Hammond 28,750 (6) *
Robert A. Halpin 13,500 (7) *
Rune Falstad 10,500 *
Alfred Kjemperud 0 0%
All executive officers and
Directors as a group (8 persons) 1,033,003 (8) 4.99%
</TABLE>
- ----------
* Less than 1%.
(1) Includes 447,360 shares underlying presently exercisable
warrants to acquire Exchangeable Shares issued by the Company's
subsidiary, CanArgo Oil & Gas Inc. and exchangeable for the
Company's Common Stock on a share for share basis.
(2) Includes 21,793 Exchangeable Shares and 58,333 shares underlying
presently exercisable options beneficially owned by Mr. Binnion.
Also includes 127,191 shares, but excludes 2,228,200 shares
beneficially owned by Terrenex Acquisition Corporation of which Mr.
Binnion is President, a director and an approximately 5.4%
shareholder. Mr. Binnion disclaims beneficial ownership of all
shares beneficially owned by Terrenex, other than the 127,191 shares
which represent his 5.4% proportionate interest. See Note (1) above.
(3) Includes 15,715 shares underlying presently exercisable
warrants to acquire Exchangeable Shares and 3,750 shares underlying
presently exercisable options.
(4) Includes 30,000 shares underlying presently exercisable
options.
(5) Represents 75,000 shares underlying presently exercisable
options.
(6) Represents 28,750 shares underlying presently exercisable
options. Excludes 2,355,391 shares owned by Terrenex Acquisition
Corporation of which Mr. Hammond is Chairman, and 1,671,250 shares
owned by Provincial Securities Limited for which Mr. Hammond is an
investment advisor as to which Mr. Hammond disclaims beneficial
ownership.
(7) Includes 7,500 shares underlying presently exercisable
options.
42
<PAGE> 43
(8) See Notes 2-7; also includes 20,000 shares underlying
presently exercisable options held by an executive officer not named
in the foregoing table.
CHANGES IN CONTROL
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Nicholas G. Dobrotwir served as Vice President of the Company from
September 1997 until January 26, 1998. He continues to provide consulting
services to the Company. Pursuant to a Memorandum of Agreement dated May 16,
1995 between Fielden Management Services Pty, Ltd. ("Fielden") and the Company,
under which the Company acquired its interest in the Stynawske field, in the
first quarter of 1997 the Company paid $500,000 and issued 87,500 shares of
Common Stock having a value of $1,060,938 to Fielden in connection with an
agreement to develop and operate the Stynawske field project. Mr. Dobrotwir has
indirect beneficial ownership of the 87,500 shares of Common Stock owned by
Fielden. Under the agreement, Fielden has the contingent right to receive up to
an additional 187,500 shares of the Company's Common Stock subject to the
satisfaction of conditions related to the achievement of specified performance
standards by the Stynawske field project.
The Company is a 50% shareholder of CanArgo Power Corporation, which in
turn owns 85% of a Georgian private power company. The other 50% of CanArgo
Power is owned by Terrenex Acquisition Corporation, an entity that is affiliated
with three of the Company's directors and is itself a principal stockholder of
the Company. Michael R. Binnion is President and a director of both the Company
and Terrenex; J. F. Russell Hammond is a director of the Company and Chairman of
Terrenex; and Peder Paus, a director of the Company, is a 12% stockholder of
Terrenex. During the first half of 1998, Terrenex, on behalf of both itself and
the Company, provided all of the funds required by CanArgo Power. After the
July 1998 business combination between the Company and CanArgo Oil & Gas Inc.
was completed, the Company reimbursed Terrenex $398,000, representing half of
the amount that had been advanced through that time. The Company and Terrenex
have funded CanArgo Power equally since that time.
In May 1998, Terrenex agreed to lend CanArgo Oil & Gas Inc. up to
$1,000,000 through August 31, 1998 and subsequently advanced the $1,000,000.
CanArgo Oil & Gas Inc. paid Terrenex a $10,000 commitment fee, $50,000 in draw
down fees and interest at the rate of 1/2% per month. In addition, CanArgo Oil
& Gas Inc. granted Terrenex options exercisable until December 31, 1998 to
acquire 12 1/2% of the stock of the subsidiary holding the Nazvrevi/Block XIII
production sharing contract and 15% of CanArgo Oil & Gas Inc.'s position in any
license received as a result of a consortium submission in response to the
Dagestan tender for offshore drilling and production rights. The terms of the
loan were negotiated and approved by the directors of CanArgo Oil & Gas Inc. who
had no affiliation with Terrenex. The Company subsequently extended the options
through March 31, 1999 in consideration of the efforts of Terrenex in attempting
to arrange financing for the Company. Terrenex can exercise either option by
paying the percentage of the amounts expended on such projects through the
exercise date as equals the percentage of the project being acquired through the
exercise of the option. The Company repaid the Terrenex loan following
completion of the business combination in July 1998.
On July 14, 1998, CanArgo Oil & Gas Inc. issued to Peder Paus but
retained in escrow 225,000 of its common shares, which were issued to Mr. Paus
for financial services rendered in connection with the business combination that
had been negotiated between CanArgo, then known as Fountain Oil Incorporated,
and CanArgo Oil & Gas Inc. Upon the consummation of the business combination,
Mr. Paus became a director of CanArgo, and the 225,000 common shares of CanArgo
Oil & Gas Inc. were converted into 180,000 CanArgo Oil & Gas Inc. exchangeable
shares, each of which could be exchanged for a share of CanArgo common stock.
The shares were issued to Mr. Paus subject to the condition that the financial
services rendered by Mr. Paus result in completed transactions. Although the
business combination closed, post-combination financing that had been
contemplated did not take place. As a result, Mr. Paus and CanArgo Oil & Gas
Inc. agreed in September 1998 that since the condition had not been satisfied,
the shares were not earned and should be canceled. The 180,000 exchangeable
shares were subsequently canceled.
43
<PAGE> 44
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated August 10, 1995 by and
among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor (Incorporated herein by
reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated November 3,
1995 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the Issued
Share Capital of Gastron International Limited dated May 29, 1996 by and
among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor (Incorporated herein by
reference from June 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services Pty, Ltd.,
A.C.N. 005 506 123 and Fountain Oil Incorporated dated May 16, 1995
(Incorporated herein by reference from December 31, 1997 Form 10-K/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 December 31,
1996 Form 10-K).
4 Form of 8% Convertible Subordinated Debenture (Incorporated herein by
reference from February 29, 1996 Form 10-QSB).
*10(1) Securities Compensation Plan (Incorporated herein by reference from
August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil Recovery,
Inc., the Company's predecessor).
*10(2) Form of Certificate for Common Stock Purchase Warrants issued pursuant
to the Securities Compensation Plan (Incorporated herein by reference
from Form S-8 Registration Statement, File No. 33-82944 filed on August
17, 1994, filed by Electromagnetic Oil Recovery, Inc., the Company's
predecessor).
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
*10(3) Form of Option Agreement for options granted to certain persons,
including Directors (Incorporated herein by reference from August 31,
1994 Form 10-KSB, filed by Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
*10(4) Form of Certificate for Common Stock Purchase Warrants issued to
certain investors in August 1994, including Directors (Incorporated
herein by reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., the Company's predecessor).
*10(5) Restated Employment Agreement between Fountain Oil Incorporated and
Nils N. Trulsvik (Incorporated herein by reference from December 31,
1997 Form 10-K/A).
*10(6) Employment Agreement between Fountain Oil Incorporated and Ravinder S.
Sierra (Incorporated herein by reference from August 31, 1995 Form
10-KSB).
*10(7) Employment Agreement between Fountain Oil Incorporated and Susan E.
Palmer (Incorporated herein by reference from August 31, 1995 Form
10-KSB).
*10(8) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated
herein by reference from September 30, 1998 Form 10-Q).
*10(9) 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(10) Fee Agreement between Fountain Oil Incorporated and Eugene J. Meyers
(Incorporated herein by reference from August 31, 1996 Form 10-KSB).
*10(11) 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(12) Employment Agreement between Fountain Oil Incorporated and Alfred
Kjemperud (Incorporated herein by reference from March 31, 1997 Form
10-Q).
*10(13) Employment Agreement between Fountain Oil Norway AS and Rune Falstad
(Incorporated herein by reference from December 31, 1997 Form 10-K/A).
*10(14) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(15) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September 30, 1998
Form 10-Q).
*10(16) Consultancy Agreement between CanArgo Energy Corporation and FinCom
AS, Norway (Incorporated herein by reference from September 30, 1998
Form 10-Q).
*10(17) Employment Contract between CanArgo Energy Inc. and Anthony J. Potter
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(18) 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).
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
10(19) 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(20) 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(21) 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(22) 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(23) 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).
21 List of Subsidiaries (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February 12, 1999).
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K:
During the year ended December 31, 1998, the Company filed the following current
reports on Form 8-K:
1. Form 8-K dated January 27, 1998, reporting Item 5. Other Events,
regarding the signing of a letter of intent with CanArgo Energy Inc.
under which a business combination involving the two companies would be
effected.
2. Form 8-K dated July 7, 1998, reporting Item 5. Other Events and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits,
regarding the rejection of Bargo Acquisition Corporation proposal.
3. Form 8-K dated July 15, 1998, reporting Item 2. Acquisition or
Disposition of Assets, Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits, regarding (i)
a change in the directors of the Company in connection with (ii) the
acquisition of all of the common shares of CanArgo Oil and Gas Inc.,
formerly known as CanArgo Energy Inc. and (iii) amendments to the
Company's Certificate of Incorporation (1) to change the Company's name
from Fountain Oil Incorporated to CanArgo Energy Corporation and (2) to
effect a one-for-two reverse stock split.
46
<PAGE> 47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
(Registrant)
<TABLE>
<S> <C> <C>
By: /s/ Michael Binnion Date: March 31, 1999
-------------------
Michael Binnion, President and
Chief Financial Officer
</TABLE>
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ Michael Binnion Date: March 31, 1999
-------------------
Michael Binnion, Director, President and
Chief Financial Officer
By: /s/ Anthony J. Potter Date: March 31, 1999
---------------------
Anthony J. Potter, Vice President
(Principal Accounting Officer)
By: /s/ David Robson Date: March 31, 1999
----------------
David Robson, Chief Executive Officer and
Chairman of the Board
By: /s/ Robert A. Halpin Date: March 31, 1999
--------------------
Robert A. Halpin, Director
By: /s/ J.F. Russell Hammond Date: March 31, 1999
------------------------
J.F. Russell Hammond, Director
By: /s/ Peder Paus Date: March 31, 1999
--------------
Peder Paus, Director
By: /s/ Nils N. Trulsvik Date: March 31, 1999
--------------------
Nils N. Trulsvik, Director
</TABLE>
47
<PAGE> 48
REPORT ON MANAGEMENT'S RESPONSIBILITIES
To the Stockholders of CanArgo Energy Corporation:
CanArgo's management is responsible for the integrity and objectivity of
the financial information contained in this Annual Report. The financial
statements included in this report have been prepared in accordance with
generally accepted accounting principles in the United States and, where
necessary, reflect the informed judgements and estimates of management.
Management maintains and is responsible for systems of internal accounting
control designed to provide reasonable assurance that all transactions are
properly recorded in the Company's books and records, that procedures and
policies are adhered to, and that assets are safeguarded from unauthorized use.
The financial statements have been audited by the independent accounting
firm of PricewaterhouseCoopers LLP. Management has made available to
PricewaterhouseCoopers LLP all the Company's financial records and related data
and minutes of directors' and audit committee meetings. The independent
accountants conduct a review of internal accounting controls to the extent
required by generally accepted auditing standards and perform such tests and
procedures as they deem necessary to arrive at an opinion on the fairness of the
financial statements presented herein.
CanArgo's audit committee, consisting solely of directors who are not
employees of CanArgo, is responsible for: reviewing the Company's financial
reporting; reviewing accounting and internal control practices; recommending to
the Board of Directors and shareholders the selection of independent
accountants; and monitoring compliance with applicable laws and company
policies. The independent accountants have full and free access to the audit
committee and meet with it, with and without the presence of management, to
discuss all appropriate matters. On the recommendation of the audit committee,
the consolidated financial statements have been approved by the Board of
Directors.
/s/ Michael R. Binnion
Michael R. Binnion
President and Chief Financial Officer
March 29, 1999
F-1
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CanArgo Energy Corporation:
We have audited the accompanying consolidated balance sheets of CanArgo
Energy Corporation (formerly Fountain Oil Incorporated) and subsidiaries (the
"Company") as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998, 1997 and August 31, 1996 and the four month period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1998 and 1997 and the consolidated results of
their operations and their cash flows for the years ended December 31, 1998,
1997 and August 31, 1996 and the four month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Notes 3 and 8 to the consolidated financial statements, the Company
will require substantial capital in order to finance the development of its oil
and gas interests. In addition, the Company and its oil and gas ventures must
produce and market oil and gas in sufficient quantities and at sufficient prices
to provide positive cash flow to the Company. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 8 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 5, 1999 (except for note 20 which
is as of March 29, 1999)
F-2
<PAGE> 50
CANARGO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................ $ 1,924,908 $ 14,164,177
Restricted cash .................................................. -- 9,700,000
Accounts receivable .............................................. 424,367 --
Advances to operator ............................................. 376,890 --
Inventory ........................................................ 170,405 --
Other current assets ............................................. 453,476 761,904
------------- ------------
Total current assets .................................... 3,350,046 24,626,081
Property and equipment, net ...................................... 6,201,936 5,942,273
Oil and gas properties, net, full cost method
(including unevaluated amounts of $13,266,368
and $324,500 respectively) ................................... 30,137,573 1,478,974
Investments in and advances to oil and gas and other
ventures - net .............................................. 6,877,974 5,386,707
------------- ------------
TOTAL ASSETS ..................................................... 46,567,529 37,434,035
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................................. $ 821,761 $ 328,171
Accrued liabilities .............................................. 1,162,050 10,326,608
------------- ------------
Total current liabilities ................................ $ 1,983,811 $ 10,654,779
Minority interest in subsidiaries ................................ 4,552,285 --
Commitments and contingencies (Notes 8 and 11) ................... -- --
Stockholders' equity:
Preferred stock, par value $0.10 per share,
5,000,000 shares authorized: 100 shares
issued and outstanding .................................. -- --
Common Stock, par value $0.10 per share,
50,000,000 shares authorized: 15,157,868
and 11,223,744 shares issued and outstanding
respectively;
5,856,775 additional shares issuable on demand
at December 31, 1998 without receipt
of further consideration ................................ 2,101,464 1,122,374
Capital in excess of par value .............................. 101,545,941 83,162,531
Accumulated deficit ......................................... (63,615,972) (57,505,649)
------------- ------------
Total stockholders' equity .............................. $ 40,031,433 $ 26,779,256
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 46,567,529 $ 37,434,035
============= ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-3
<PAGE> 51
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND AUGUST 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Operating Revenues:
Oil and gas sales ................................. $ 804,552 $ 313,301 $ 26,562
Other ............................................. 16,400 -- 8,615
----------- ------------ -----------
TOTAL REVENUES ....................................... 820,952 313,301 35,177
----------- ------------ -----------
Operating expenses:
Lease operating expenses .......................... 843,169 200,321 10,988
Cost of sales ..................................... 7,888 -- 31,991
Direct project costs .............................. 1,157,163 1,753,166 1,267,555
General and administrative ........................ 3,887,386 3,903,446 3,853,972
Depreciation, depletion and amortization .......... 238,924 344,666 77,253
Equity loss from investments in unconsolidated
subsidiaries .................................... 161,180 3,778,287 13,272
Impairment of notes receivable .................... -- 186,611 --
Impairment of property and equipment .............. 113,000 3,243,997 --
Impairment of oil and gas properties .............. 900,000 257,407 419,835
Impairment of oil and gas ventures ................ -- 15,735,592 --
----------- ------------ -----------
TOTAL OPERATING EXPENSES ............................. 7,308,710 29,403,493 5,674,866
----------- ------------ -----------
OPERATING LOSS ....................................... (6,487,758) (29,090,192) (5,639,689)
----------- ------------ -----------
Other (expense) income:
Interest income ................................... 782,596 1,615,066 332,071
Interest expense .................................. (479,932) (69,286) (1,016,465)
Other ............................................. (76,540) (72,714) 12,551
Loss on disposition of equipment and property ..... (30,333) (271,205) (182,020)
----------- ------------ -----------
TOTAL OTHER (EXPENSE) INCOME ......................... 195,791 1,201,861 (853,863)
----------- ------------ -----------
Net loss before income tax expense ................... (6,291,967) (27,888,331) (6,493,552)
Income tax expense ................................... -- -- --
----------- ------------ -----------
NET LOSS BEFORE MINORITY INTEREST .................... (6,291,967) (27,888,331) (6,493,552)
Minority interest in loss of consolidated subsidiaries 181,644 205,380 --
----------- ------------ -----------
NET LOSS ............................................. $(6,110,323) $(27,682,951) $(6,493,552)
----------- ------------ -----------
NET LOSS PER COMMON SHARE -- BASIC ................... $ (0.39) $ (2.47) $ (1.04)
----------- ------------ -----------
NET LOSS PER COMMON SHARE -- DILUTED ................. $ (0.39) $ (2.47) $ (1.04)
----------- ------------ -----------
Weighted average number of common
shares outstanding ................................ 15,783,889 11,206,506 6,247,568
----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-4
<PAGE> 52
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS -- CONTINUED
FOR THE FOUR MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
Unaudited
<S> <C> <C>
Operating Revenues:
Oil and gas sales ................................................... $ 16,980 $ 6,440
Other income ........................................................ -- 1,908
----------- -----------
TOTAL REVENUES ......................................................... 16,980 8,348
----------- -----------
Operating expenses:
Cost of sales ....................................................... 4,052 4,581
Lease operating expenses ............................................ 1,550 2,536
Direct project costs ................................................ 314,100 120,268
General and administrative .......................................... 1,281,821 1,303,048
Loss from investments in unconsolidated subsidiaries ................ 1,359,246 4,424
Depreciation, depletion and amortization ............................ 39,578 43,643
----------- -----------
TOTAL OPERATING EXPENSES ............................................... 3,000,347 1,478,500
----------- -----------
OPERATING LOSS ......................................................... (2,983,367) (1,470,152)
----------- -----------
Other (expense) income:
Interest income ..................................................... 423,681 54,992
Interest expense .................................................... (12,744) (3,006)
Other ............................................................... (49,995) (24,016)
----------- -----------
TOTAL OTHER (EXPENSE) INCOME ........................................... 360,942 27,970
----------- -----------
Net loss before income tax expense ..................................... (2,622,425) (1,442,182)
Income tax expense ..................................................... -- --
----------- -----------
NET LOSS BEFORE MINORITY INTEREST ...................................... (2,622,425) (1,442,182)
Minority interest in loss of consolidated subsidiaries ................. 17,970 --
----------- -----------
NET LOSS ............................................................... $(2,604,455) $(1,442,182)
----------- -----------
NET LOSS PER COMMON SHARE - BASIC ...................................... $ (.28) $ (.27)
----------- -----------
NET LOSS PER COMMON SHARE - DILUTED .................................... $ (.28) $ (.27
----------- -----------
Weighted average number of common
shares outstanding .................................................. 9,348,106 5,417,032
----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-5
<PAGE> 53
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 31, 1996 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1996 ....... 8,688,304 $ 868,830 $ 56,854,403 $(27,218,243) $ 30,504,990
---------- ----------- ------------ ------------ ------------
Issuance of common stock upon
conversion of debentures........ 29,563 2,956 277,438 -- 280,394
Issuance of common stock upon
exercise of warrants and
options......................... 2,366,377 236,638 24,827,704 -- 25,064,342
Net loss ....................... -- -- -- (2,604,455) (2,604,455)
---------- ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 ..... 11,084,244 $ 1,108,424 $ 81,959,545 $(29,822,698) $ 53,245,271
---------- ----------- ------------ ------------ ------------
Issuance of common stock for
purchase of interest in oil and
gas venture .................... 87,500 8,750 1,052,186 -- 1,060,936
Issuance of common stock upon
exercise of options............. 52,000 5,200 150,800 -- 156,000
Net loss ....................... -- -- -- (27,682,951) (27,682,951)
---------- ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 ..... 11,223,744 $ 1,122,374 $ 83,162,531 $(57,505,649) $ 26,779,256
---------- ----------- ------------ ------------ ------------
Issuance of common stock upon
exchange of CanArgo Oil & Gas
Inc. Exchangeable Shares ....... 3,934,124 393,412 7,386,718 -- 7,780,130
Net loss ....................... -- -- -- (6,110,323) (6,110,323)
---------- ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 ..... 15,157,868 $ 1,515,786 $ 90,549,249 $(63,615,972) $ 28,449,063
---------- ----------- ------------ ------------ ------------
Common shares issuable upon
exchange of CanArgo Oil & Gas
Inc. Exchangeable Shares
without receipt of further
consideration .................. 5,856,775 585,678 10,996,692 -- 11,582,370
---------- ----------- ------------ ------------ ------------
TOTAL, DECEMBER 31, 1998 ....... 21,014,643 $ 2,101,464 $101,545,941 $(63,615,972) $ 40,031,433
---------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-6
<PAGE> 54
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND AUGUST 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss ................................................ $ (6,110,323) $(27,682,951) $ (6,493,552)
Depreciation and amortization ........................... 238,924 344,666 77,253
Loss on disposition of equipment and property ........... 30,333 271,205 182,020
Impairment of notes receivable .......................... -- 186,611 --
Impairment of property and equipment .................... 113,000 3,243,997 --
Impairment of oil and gas properties .................... 900,000 257,407 419,835
Impairment of oil and gas ventures ...................... -- 15,735,592 --
Amortization of debt issuance costs and discount ........ -- -- 866,666
Equity loss in investments in unconsolidated subsidiaries 161,180 3,778,287 13,272
Minority interest in loss of unconsolidated subsidiaries (181,644) (205,380) --
Changes in assets and liabilities:
Accounts receivable .................................. 649,671 259,040 53,905
Advance to operator .................................. 665,358 -- --
Inventory ............................................ (150,000) -- --
Other assets ......................................... 331,936 (139,493) (211,222)
Accounts payable ..................................... (2,202,203) (471,814) 62,638
Accrued liabilities .................................. (9,164,558) 246,920 (116,766)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES ....................... (14,718,326) (4,175,913) (5,145,951)
------------ ------------ ------------
Investing activities:
Restricted cash ......................................... 9,700,000 (4,300,000) --
Acquisition costs ....................................... (1,214,948) -- --
Investments in oil and gas properties ................... (5,727,029) (1,318,492) (155,938)
Investments in and advances to oil and gas and other
ventures ............................................. (1,652,447) (6,280,613) (2,644,837)
Capital expenditures .................................... -- (1,573,507) (3,728,770)
Proceeds from disposition of assets ..................... 438,033 232,638 104,000
Issuance of notes receivable ............................ -- -- (135,186)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ....................... 1,543,609 (13,239,974) (6,560,731)
------------ ------------ ------------
Financing activities:
Cash acquired ........................................... 935,448 -- --
Proceeds from issuance of debentures, net of expenses ... -- -- 3,346,723
Proceeds from sales of common stock, net of expenses .... -- -- 21,103,189
Proceeds from exercise of options ....................... -- 156,000 --
Proceeds from issuance of short-term borrowings ......... -- -- 4,848,476
Principal payments on short-term borrowings ............. -- -- (5,054,114)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 935,448 156,000 24,244,274
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ (12,239,269) (17,259,887) 12,537,592
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................ 14,164,177 31,424,064 4,791,645
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ...................... $ 1,924,908 $ 14,164,177 $ 17,329,237
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-7
<PAGE> 55
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- CONTINUED
FOR THE FOUR MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
Unaudited
<S> <C> <C>
Operating activities:
Net loss ............................................... $ (2,604,455) $(1,442,182)
Depreciation and amortization .......................... 39,578 43,643
Amortization of debt issuance costs and discount ....... 1,375 --
Loss in investments in unconsolidated subsidiaries ..... 1,359,246 4,424
Minority interest in loss of unconsolidated subsidiaries (17,970) --
Changes in assets and liabilities:
Accounts receivable ................................. (251,828) (114,236)
Other assets ........................................ 26,687 88,344
Accounts payable .................................... 68,453 (305,580)
Accrued liabilities ................................. 149,069 (242,037)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES ...................... (1,229,845) (1,967,624)
------------ -----------
Investing activities:
Restricted cash ........................................ (5,400,000) --
Investments in and advances to oil and gas and other
ventures ............................................ (3,108,472) (1,369,767)
Capital expenditures ................................... (1,200,042) (746,810)
Proceeds from disposition of assets .................... -- (73,900)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES ...................... (9,708,514) (2,190,477)
Financing activities:
Proceeds from exercise of warrants and options ......... 25,064,342 --
Proceeds from issuance of short-term borrowings ........ -- 122,153
Principal payments on short-term borrowings ............ (31,156) (25,108)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 25,033,186 97,045
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 14,094,827 (4,061,056)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 17,329,237 4,791,645
------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................... $ 31,424,064 $ 730,589
------------ -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-8
<PAGE> 56
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
On July 15, 1998, the Company completed the purchase of
CanArgo Energy Inc., changed its name to CanArgo Energy Corporation and
effected a one-for-two reverse split of its common stock. See Note 4,
Business Combination, of Notes to Consolidated Financial Statements.
The reverse split has been reflected retroactively in the accompanying
financial statements and notes thereto.
The principal activities of CanArgo Energy Corporation and its
consolidated subsidiaries (collectively the "Company") have involved
the acquisition of interests in and development of oil and gas fields
with a productive history that indicate the potential for increased
production through rehabilitation and utilization of modern production
techniques and enhanced oil recovery processes. The Company has
typically acquired its interests in oil and gas properties through
interests in joint ventures, partially owned corporate and other
entities, and joint operating arrangements. While the Company has
acquired interests representing 50% or less of the equity in various
oil and gas projects, it has generally sought operational
responsibility for the substantial oil and gas projects in which it has
interests. Accordingly, certain activities in which the Company has
interests are conducted through unconsolidated entities. The Company
has acquired less than majority interests in entities developing or
seeking to develop oil and gas properties in Eastern Europe including
the Russian Federation. These entities are accounted for as
unconsolidated subsidiaries.
The Company elected to change its fiscal year from August 31
to December 31 effective December 31, 1996 to conform to the calendar
year accounting which is required for most of the significant oil and
gas projects in which the Company participates. Accordingly, the
accompanying consolidated financial statements include information for
the four-month transition period ended December 31, 1996. The
comparable statements of operations and cash flows for the four month
period ended December 31, 1995 and all related footnote disclosures are
unaudited. Such unaudited information includes all adjustments
necessary in the opinion of the management of the Company for a fair
statement of the results of operations and cash flows. Results for the
four month period may not be indicative of results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements and
notes thereto are prepared in accordance with U.S. generally accepted
accounting principles. All amounts are in U.S. dollars.
CONSOLIDATION -- The consolidated financial statements include the
accounts of CanArgo Energy Corporation and its majority owned
subsidiaries. The majority owned subsidiaries at December 31, 1998 are
CanArgo Oil & Gas Inc. (formerly CanArgo Energy Inc.), Ninotsminda Oil
Company Limited, CanArgo Limited, CanArgo Nazvrevi Limited, CanArgo
(Kaspi) Limited, CanArgo Petroleum Products Limited, Novara Limited,
CaspArgo Limited, Electromagnetic Oil Recovery International Inc.,
Focan Ltd., Fountain Oil Adygea Incorporated, Fountain Oil Boryslaw
Incorporated, Fountain Oil Boryslaw Ltd., Fountain Oil Norway AS,
Fountain Oil Production Incorporated, Fountain Oil Services Ltd.,
Fountain Oil Ukraine Ltd., Fountain Oil U.S. Inc., Gastron
International Limited, Uentech Corporation and UK-RAN Oil Corporation.
All significant intercompany transactions and accounts have been
eliminated. Investments in less than majority-owned corporations and
corporate-like entities are accounted for using the equity method of
accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-9
<PAGE> 57
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATION -- Certain items in the Consolidated Financial
Statements have been reclassified to conform to the current year
presentation. There was no effect on net loss as a result of these
reclassifications.
CASH AND CASH EQUIVALENTS -- The Company considers unrestricted
short-term, highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.
INVENTORIES -- Inventories are valued at lower of cost or market.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost
unless the carrying amount is viewed as not recoverable in which case
the carrying value of the assets is reduced to the estimated
recoverable amount. See "Impairment of Long-Lived Assets" below.
Expenditures for major renewals and betterments, which extend the
original estimated economic useful lives of applicable assets, are
capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated
depreciation of assets sold or retired are removed from the accounts
and any gain or loss thereon is reflected in operations. Depreciation
of property and equipment is computed using the straight-line method
over the estimated useful lives of the assets ranging from three to ten
years.
OIL AND GAS PROPERTIES -- The Company and the unconsolidated entities
for which it accounts using the equity method account for oil and gas
properties and interests under the full cost method. Under this
accounting method, costs, including a portion of internal costs
associated with property acquisition and exploration for and
development of oil and gas reserves, are capitalized within cost
centers established on a country-by-country basis. Capitalized costs
within a cost center, as well as the estimated future expenditures to
develop proved reserves and estimated net costs of dismantlement and
abandonment, are amortized using the unit-of-production method based on
estimated proved oil and gas reserves. All costs relating to production
activities are charged to expense as incurred.
Capitalized oil and gas property costs, less accumulated
depreciation, depletion and amortization and related deferred income
taxes, are limited to an amount (the ceiling limitation) equal to (a)
the present value (discounted at 10%) of estimated future net revenues
from the projected production of proved oil and gas reserves,
calculated at prices in effect as of the balance sheet date (with
consideration of price changes only to the extent provided by fixed and
determinable contractual arrangements), plus (b) the lower of cost or
estimated fair value of unproved and unevaluated properties, less (c)
income tax effects related to differences in the book and tax basis of
the oil and gas properties.
REVENUE RECOGNITION -- The Company recognizes revenues when goods have
been delivered, when services have been performed, or when hydrocarbons
have been produced and delivered.
FOREIGN CURRENCY TRANSLATION -- The U.S. dollar is the functional
currency for all of the Company's operations. Accordingly, all monetary
assets and liabilities denominated in foreign currency are translated
into U.S. dollars at the rate of exchange in effect at the balance
sheet date and the resulting unrealized translation gains or losses are
reflected in operations. Non-monetary assets are translated at
historical exchange rates. Revenue and expense items (excluding
depreciation and amortization which are translated at the same rates as
the related assets) are translated at the average rate of exchange for
the year. Foreign currency translation amounts recorded in operations
for years ended December 31, 1998 and 1997, the year ended August 31,
1996 and the four months ended December 31, 1996 and 1995 were not
material.
INCOME TAXES -- The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax bases of assets
and liabilities using enacted rates in effect for the years in which
the differences are expected to reverse. Valuation allowances are
established, when appropriate, to reduce deferred tax assets to the
amount expected to be realized.
F-10
<PAGE> 58
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company reviews all of its
long-lived assets except its oil and gas assets, for impairment in
accordance with SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed Of. The Company evaluates
its oil and gas properties and its carrying value of investments in
unconsolidated entities conducting oil and gas operations in accordance
with the full cost ceiling limitation.
STOCK-BASED COMPENSATION PLANS -- The Company has adopted only the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, and has elected to continue to record stock-based
compensation expense using the intrinsic-value approach prescribed by
Accounting Principles Board ("APB") Opinion 25. Accordingly, the
Company computes compensation cost for each employee stock option
granted as the amount by which the quoted market price of the Company's
Common Stock on the date of grant exceeds the amount the employee must
pay to acquire the stock. The amount of compensation costs, if any, is
charged to operations over the vesting period.
RECENTLY ISSUED PRONOUNCEMENTS -- In 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS 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 the Company's financial statements. In
1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities which will be adopted in the 1999 annual
financial statements. The Company is currently evaluating the impact of
SFAS No. 133 on its financial statements.
3. GOING CONCERN ASSUMPTION
The Company has incurred recurring operating losses, and its
current operations are not generating positive cash flows. The ability
of the Company to continue as a going concern and to pursue its
principal activities of acquiring interests in and developing oil and
gas fields is highly dependent upon generating funds from external
sources and, ultimately, achieving sufficient positive cash flows from
operating activities.
Without sufficient cash from external sources, the Company's
ability to finance its ongoing operations and continue as a going
concern is doubtful. However, the Company's management believes that it
will be able to generate funds from external sources including
quasi-governmental financing agencies such as the International Finance
Corporation, conventional lenders, equity investors and other oil and
gas companies that may decide to participate in the Company's oil and
gas projects. See Note 8, Oil and Gas Properties and Investments, of
Notes to Consolidated Financial Statements.
The consolidated financial statements do not give effect to
any additional impairment of its investments in oil and gas properties
and ventures or other adjustments which would be necessary should the
Company be unable to obtain sufficient funds from external sources or
continue as a going concern.
4. BUSINESS COMBINATION
On July 15, 1998, the Company 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 the Company, and each
previously outstanding share of CAOG common stock was converted into
the right to receive 0.8 shares of the Company's Common Stock, giving
the former shareholders of CAOG the right to receive approximately 47%
of the Company's Common Stock. In addition, the former management of
CAOG now holds most of the Company's senior management positions.
F-11
<PAGE> 59
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price was allocated to the net assets of CAOG as follows:
<TABLE>
<S> <C>
Cash ............................. $ 935,448
Other Current Assets ............. 2,160,199
Property and Equipment ........... 841,029
Oil and Gas Properties ........... 22,855,546
Current Liabilities .............. (3,096,293)
Long Term Liabilities ............ (895,500)
Minority Interest ................ (3,437,929)
------------
Consideration given -- common
shares ............................ $ 19,362,500
------------
</TABLE>
Under purchase accounting, CAOG's results have been included in
the Company's consolidated financial statements since the date of
acquisition. The following pro forma statements of operations give
effect to the business combination as if such business combination had
occurred on January 1, 1997; however, as CAOG commenced operations in
June of 1997, the pro forma financial statements of operations have
been adjusted to reflect the results of operations of Ninotsminda Oil
Company Limited ("NOC"), a 68.5% (prior to November 30, 1998 -- 55.9%)
subsidiary of CAOG and now the Company, from January 1, 1997 to June
30, 1997. The historical results of operations have been adjusted to
reflect (i) revenues and expenses attributable to the Ninotsminda field
and (ii) the difference between the properties, historical depletion,
depreciation and amortization and such expenses calculated based on the
value allocated to the acquired assets. Management does not believe the
pro forma amounts are indicative of the results of operations that
would have been reported had the business combination occurred prior to
January 1, 1997 or that may be reported in the future.
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
----------------------------------
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues ........................ $ 1,813,904 $ 3,137,415
Operating expenses .............. 9,235,690 32,742,737
------------ ------------
Operating loss .................. (7,421,786) (29,605,322)
Other income (loss) ............. 203,750 1,131,532
Minority interest in loss of
unconsolidated subsidiary .... 449,066 402,654
------------ ------------
Net loss ........................ $ (6,768,970) $(28,071,136)
------------ ------------
Basic and diluted net loss
per common share ........... $ (0.32) $ (1.33)
============ ============
Weighted average number of common
shares outstanding ............ 21,014,643 21,177,425
============ ============
</TABLE>
The business combination will result in the issuance of 9,790,900
shares of the Company's Common Stock without receipt of additional
consideration by the Company. At December 31, 1998, 3,934,124 of these
shares had been issued. Giving effect to the full issuance of such
shares, the number of shares of the Company's Common Stock outstanding
as at December 31, 1998 would be 21,014,643.
F-12
<PAGE> 60
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRICTED CASH
At December 31, 1997 and 1996, the Company pledged an
aggregate of $9,700,000 and $5,400,000, respectively, to collateralize
bank letters of credit issued to assure repayment of borrowings under a
line of credit established by Kashtan Petroleum Ltd. ("Kashtan"), the
entity through which the Lelyaki field project was being developed. At
December 31, 1997 and 1996, letters of credit of $8,150,000 and
$1,400,000 were outstanding, respectively. In 1997 the Company
concluded that the Lelyaki field could not support a successful
commercial development and as a result, wrote off its remaining
investments relating to the Lelyaki field project and accrued a
liability of $8,280,000 with respect to Kashtan indebtedness supported
by the Company's restricted cash deposits. The liability is included
within accrued liabilities on the Company's balance sheet as of
December 31, 1997.
In January 1998, $350,000 of restricted cash, which had been
used to collateralize a bank letter of credit relating to the
Gorisht-Kocul field project, was released.
In April 1998, restricted cash totaling $8,567,000 was applied
to repay such bank borrowings and related interest. The remaining
portion of restricted cash, totaling $783,000, was released to the
Company free of restrictions in May 1998.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment and the related accumulated depreciation at
December 31, 1998 included the following:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Electrically enhanced oil recovery
("EEOR") equipment ............... $ 562,953 $(290,855) $ -- $ 272,098
Oil and gas related equipment .... 8,363,505 -- (2,710,024) 5,653,481
Office furniture, fixtures and
equipment and other ............ 1,090,352 (413,995) (400,000) 276,357
----------- --------- ----------- ----------
PROPERTY AND EQUIPMENT, NET ...... $10,016,810 (704,850) (3,110,024) 6,201,936
----------- --------- ----------- ----------
</TABLE>
Property and equipment and the related accumulated
depreciation at December 31, 1997 included the following:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Electrically enhanced oil recovery
("EEOR") equipment ............... $ 562,953 $(284,909) $ -- $ 278,044
Oil and gas related equipment .... 8,348,309 -- (2,843,997) 5,504,312
Office furniture, fixtures and
equipment and other ............ 1,014,263 (454,346) (400,000) 159,917
---------- --------- ----------- ----------
PROPERTY AND EQUIPMENT, NET ...... $9,925,525 $(739,255) $(3,243,997) $5,942,273
---------- --------- ----------- ----------
</TABLE>
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 the Company in
the development of the Ninotsminda field. Much of the equipment was
originally planned to be used in the Maykop field, Republic of Adygea,
Russian Federation, but following extended delays in resolving
operating arrangements with the entity developing that project, the
Company recorded an impairment of $2,844,000 at December 31, 1997,
which represented the difference between the book value of the rigs and
related equipment and their estimated fair value.
F-13
<PAGE> 61
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Company's decision to close down or
significantly reduce its various corporate offices, the Company
recorded in 1997 an impairment of $400,000 to reduce the carrying value
of furniture, fixtures and equipment to their estimated fair value.
7. OIL AND GAS PROPERTIES
The Company has acquired interests in oil and gas properties
through joint ventures and other joint operating arrangements. A
summary of the Company's oil and gas properties as of December 31, 1998
and 1997 are set out below:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, 1998 1997
--------------------------------------------------------------------- -----------
REPUBLIC OF
GEORGIA CANADA USA OTHER TOTAL TOTAL
------------ ----------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proved properties . $ 16,743,816 $ 1,612,308 $ 1,174,734 $ -- $ 19,530,858 $ 2,650,327
Unproved properties 12,707,912 324,500 -- 233,956 13,266,368 324,500
Less: accumulated
depletion and
impairment ...... (174,421) (1,310,498) (1,174,734) -- (2,659,653) (1,495,853)
------------ ----------- ----------- -------- ------------ -----------
TOTAL OIL AND GAS
PROPERTIES, NET .. $ 29,277,307 $ 626,310 $ -- $233,956 $ 30,137,573 $ 1,478,974
============ =========== =========== ======== ============ ===========
</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 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 covered by the Ninotsminda PSC as well as
an other exploration area referred to as the Nazvrevi block operated
under the terms of a PSC between the Company's subsidiary, CanArgo
Nazvrevi Limited, and the Republic of Georgia.
At December 31, 1997 and 1996, the Company held oil and gas
properties in the United States and Canada. During the fiscal years
ended December 31, 1997 and August 31, 1996, the Company recognized
impairments of $257,407 and $419,835 respectively, on these oil and gas
properties as a result of applying the full cost ceiling limitation.
The impairments related to previously unproved properties.
During the first quarter of 1997, the Company purchased a 60%
interest in a heavy oil property in the Sylvan Lake area in Alberta,
Canada for approximately $1,009,000. One new well was successfully
drilled during the 1997 third quarter. The Sylvan Lake project includes
a total of four producing wells. During the year ended December 31,
1998, the Company recognized impairments aggregating $900,000 on its
oil and gas properties in the Sylvan Lake project as a result of a
decline of heavy oil prices and the application of the quarterly full
cost ceiling limitation. The impairments relate to proved properties.
Unproved properties and associated costs not currently being
amortized and included in oil and gas properties were $13,266,368 and
$324,500 at December 31, 1998 and 1997 respectively. Unproved oil and
gas properties at December 31, 1998 include costs of $12,854,368 with
respect to properties in Eastern Europe. These properties are expected
to be evaluated over the next five years. Remaining costs of $324,500
(December 31, 1997 -- $324,500) relate to the Sylvan Lake field which
are expected to be evaluated over the next 12 months. If no proved
reserves are added, these properties could result in additional
impairment.
F-14
<PAGE> 62
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENT IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES
The Company has acquired interests in oil and gas and other
ventures through less than majority interests in corporate and
corporate-like entities. A summary of the Company's net investment in
and advances to oil and gas and other ventures as of December 31, 1998
and 1997 is set out below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 1998 1997
----------- -----------
<S> <C> <C>
Ukraine -- Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company ................. $ 5,980,613 $ 5,800,407
Republic of Georgia -- Sartichala
Through 12.9% ownership of Georgian American Oil Refinery ..... 1,004,445 --
Republic of Georgia -- Ninotsminda
Through an effective 42.5% ownership Sagarego Power Corporation 467,796 --
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
Canada -- Inverness Unit
Through 50% ownership in Focan Ltd. ........................... -- --
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 ................................................. $18,802,375 $17,149,928
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES 1998 1997
----------- -----------
<S> <C> <C>
Ukraine -- Stynawske Field, Boryslaw ............................... (574,880) (413,700)
Ukraine -- Lelyaki Field, Pryluki Region ........................... $(2,435,725) $(2,435,725)
Adygea, Russian Federation - Maykop Field .......................... (1,452,510) (1,452,510)
Canada -- Inverness Unit ........................................... -- --
Albania -- Gorisht-Kocul Field ..................................... (833,191) (833,191)
----------- -----------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND
OTHER VENTURES .................................................. $(5,296,306) $(5,135,126)
----------- -----------
Impairment -- Maykop Field ......................................... $(5,258,364) $(5,258,364)
Impairment -- Gorisht-Kocul Field .................................. (1,369,731) (1,369,731)
----------- -----------
TOTAL IMPAIRMENT .................................................. $(6,628,095) $(6,628,095)
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER
VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT .................... $ 6,877,974 $ 5,386,707
----------- -----------
</TABLE>
As of December 31, 1998, the Company had net investments in
and advances to oil and gas ventures totaling $5,405,733 which relate
to Boryslaw Oil Company ("BOC"), the entity holding the license to
develop the Stynawske field, for which development operations have not
yet begun. Included are advances to BOC totaling $1,665,000 and
$1,508,000 at December 31, 1998 and 1997 respectively. Such advances
may be recoverable only from future revenue of or payments from future
participants in the venture, if any.
F-15
<PAGE> 63
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1998, the Company acquired a 12.9% interest in Georgian
American Oil Refinery ("GAOR") for investments and advances totaling
$1,004,445. The Company has the right to purchase an additional 11.1%
interest in GAOR for investment and advances totaling $860,000.
As of December 31, 1998, the Company has an effective 42.5%
interest in Sagarego Power Corporation, a Georgian joint stock company,
for which operations have not yet begun.
Based on its analysis of initial Lelyaki field development
efforts completed in the fourth quarter of 1997, the Company concluded
that the Lelyaki field would not support a successful commercial
development. As a result, the Company recorded an impairment charge
totaling $9,108,000 of which $8,280,000 represented debt and accrued
interest of Kashtan on which Kashtan defaulted and which was
effectively guaranteed by the Company through restricted cash deposits
and $691,000 related to estimated liabilities for severance and related
costs associated with closing down Kashtan's operations. In addition,
the Company recognized a loss in 1997 of $2,080,000 reflecting its
equity in the loss of Kashtan. The Company believes that it has no
further obligation to fund any operations of Kashtan.
Because of extended delays in resolving operating arrangements
and other matters associated with Intergas JSC ("Intergas"), the entity
developing the Maykop field project, the Company during the fourth
quarter of 1997 recorded an impairment for the entire amount of its
investment in and advances to Intergas of $5,258,000. In addition, the
Company recognized a loss in 1997 of $851,000, reflecting its equity in
the loss of Intergas. The Company believes that it has no further
obligation to fund any operations of Intergas.
In March 1997, the Company declared the political unrest in
Albania to be a force majeure with respect to the Gorisht-Kocul project
and suspended development activities. Due to the extended period that
the force majeure condition has continued and the absence of any
indication of an imminent termination of that condition, the Company
during the fourth quarter of 1997 recorded an impairment for the entire
amount of its investment in and advances to the Gorisht-Kocul joint
venture of $1,370,000. The Company also recognized a $433,000 loss in
1997 as its equity in the loss of that joint venture. At December 31,
1998, the force majeure condition remained in effect.
The Company's investment in and advances to BOC are
essentially unevaluated properties. At December 31, 1998 and 1997,
there were no material operations or assets (other than unevaluated
properties) of entities being accounted for using the equity method.
Accordingly, no other separate financial information has been
presented.
As a result of the events associated with the impairment of
the Company's investment in and advances to and other assets related to
Kashtan, Intergas and the Gorisht-Kocul joint venture, the Company may
be subject to contingent liabilities in the form of claims from those
ventures and other participants therein. The Company was advised early
in 1998 that Intergas and another shareholders of Intergas were
considering asserting such claims, but no such claims have yet been
asserted. Management is unable to estimate the range that such claims,
if any, might total. However, if any claims were determined to be
valid, they could have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Development of the oil and gas properties and ventures in
which the Company has interests involves multi-year efforts and
substantial cash expenditures. The Company had working capital of
$1,366,235 at December 31, 1998, which it considered inadequate to
proceed with full implementation of its program of developing its
principal oil and gas properties and ventures. Full development of
these properties and ventures would require the availability of
substantial funds from external sources. The Company believes that it
will be able to generate funds from external sources including
quasi-governmental financing agencies such as the International Finance
Corporation, conventional lenders, equity investors and other oil and
gas companies that may desire to participate in the Company's oil and
gas projects.
F-16
<PAGE> 64
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generally has the principal responsibility for
arranging financing for the oil and gas properties and ventures in
which it has an interest. There can be no assurance, however, that the
Company or the entities that are developing the oil and gas properties
and ventures will be able to arrange the financing necessary to develop
the projects being undertaken or to support the corporate and other
activities of the Company or that such financing as is available will
be on terms that are attractive or acceptable to or are deemed to be in
the best interests of the Company, such entities or their respective
stockholders or participants.
As of December 31, 1998 the Company had remaining net
investments in oil and gas properties and other ventures totaling
$37,015,547. Of this amount, $5,405,733 relates to the Stynawske field
in the Ukraine for which development operations have not yet begun.
Ultimate realization of the carrying value of the Company's oil and gas
properties and ventures will require production of oil and gas in
sufficient quantities and marketing such oil and gas at sufficient
prices to provide positive cash flow to the Company, which is dependent
upon, among other factors, achieving significant production at costs
that provide acceptable margins, reasonable levels of taxation from
local authorities, and the ability to market the oil and gas produced
at or near world prices. In addition, the Company must mobilize
drilling equipment and personnel to initiate drilling, completion and
production activities. The Company expects that the initial phase of
development of the Stynawske field will consist of the workover of a
number of existing wells, with a view towards increasing production and
gathering data for the preparation of a full field development program.
The Company is actively seeking to establish arrangements under which
oil and gas production companies or other investors would acquire a
portion of the Company's interest in the Stynawske field in return for
supplying financing or services to implement the initial phase of the
project. However, if one or more of the above factors, or other
factors, are different than anticipated, these plans may not be
realized, and the Company may not recover its carrying value. The
Company will be entitled to distributions from the various properties
and ventures in accordance with the arrangements governing the
respective properties and ventures.
The consolidated financial statements of the Company do not
give effect to any additional impairment in the value of the Company's
investment in oil and gas properties and ventures or other adjustments
that would be necessary if financing cannot be arranged for the
development of such properties and ventures or if they are unable to
achieve profitable operations. The Company's consolidated financial
statements have been prepared under the assumption of a going concern.
Failure to arrange such financing on reasonable terms or failure of
such properties and ventures to achieve profitability would have a
material adverse effect on the financial position, including
realization of assets, results of operations, cash flows and prospects
of the Company and ultimately its ability to continue as a going
concern.
9. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 included the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Compensation, including related taxes .............. $ -- $ 337,767
Professional fees .................................. 280,000 276,500
Termination costs .................................. -- 405,833
Effective guarantee of Kashtan obligations (Note 8) -- 8,280,000
Close down costs -- Kashtan project (Note 8) ....... -- 690,622
Seismic acquisition ................................ 771,207 --
Taxes payable ...................................... 61,000 --
Oilfield related equipment ......................... -- 268,000
Other .............................................. 49,843 67,886
----------- -----------
$ 1,162,050 $10,326,608
----------- -----------
</TABLE>
F-17
<PAGE> 65
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1997, the Company accrued termination costs for employees
who received contractually required termination notices during the
fourth quarter of 1997. The costs involved represent salaries and
related taxes and were reflected as general and administrative
expenses. The accrual included the termination costs for 11 employees,
who were located in the Company's offices in Calgary, Canada and Asker,
Norway.
10. CONVERTIBLE SUBORDINATED DEBENTURES
During the quarter ended February 29, 1996, the Company
completed an offering of its 8% Convertible Subordinated Debentures
(the "Debentures") due December 31, 1997. The Company issued $3,750,000
principal amount of Debentures at par and received net proceeds of
$3,346,723 after commissions and expenses. The Debentures were
convertible into shares of the Company's Common Stock at a price equal
to 82 1/2% of the average closing price of such shares on the five
trading days preceding the date of conversion. A maximum of 154,750
shares of the Company's Common Stock was issuable upon conversion of
each $1,000,000 principal amount of the Debentures. At August 31, 1996,
$3,450,000 principal amount of the Debentures had been converted into
498,662 shares of Common Stock. During the four months ended December
31, 1996, the remaining $300,000 principal amount of Debentures was
converted into 29,563 shares of Common Stock.
In accordance with Securities and Exchange Commission guidance
published in early 1997, the August 31, 1996 Consolidated Statement of
Operations was restated to reflect a $795,500 charge to interest
expense related to the discount feature of the Debentures. The discount
was amortized from the date of issuance to the earliest conversion
dates.
11. COMMITMENTS AND CONTINGENCIES
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
The Company has contingent obligations and may incur
additional obligations, absolute and contingent, with respect to
acquiring and developing oil and gas properties and ventures. At
December 31, 1998, the Company had the contingent obligation to issue
an aggregate of 187,500 shares of its Common Stock, subject to the
satisfaction of conditions related to the achievement of specified
performance standards by the Stynawske field project. The Company
believes that it has no further obligation to fund operations of
Kashtan or Intergas. Also see Note 8, Oil and Gas Properties and
Investments, of Notes to Consolidated Financial Statements.
LEGAL PROCEEDINGS AND POTENTIAL CLAIMS
On February 20, 1998, Zhoda Corporation ("Zhoda") filed suit
against the Company in the District Court of Harris County, Texas.
Zhoda had sold to the Company shares in a subsidiary through which the
Company acquired most of its interest in the Lelyaki field project.
Substantially all of the consideration payable to Zhoda was contingent
upon achievement of specified Lelyaki field operating objectives, and
because these objectives were not achieved, the Company did not pay the
consideration. In the litigation, Zhoda asserts that it was wrongfully
deprived of the value of the shares it transferred to the Company and
of the contingent consideration it might have received, based upon
claims of breach of contract, breach of fiduciary duty and duty of good
faith and fair dealing, fraud and constructive fraud, fraud in the
inducement, negligent misrepresentation, civil conspiracy, breach of
trust, unjust enrichment and rescission. Zhoda is seeking more than
$7,500,000 in damages, return of the shares transferred to the Company,
and other relief. The Company believes it has meritorious defenses to
Zhoda's claims which it intends to assert vigorously. The Harris County
District Court has stayed the litigation pending completion of
arbitration proceedings, which are being held in Calgary, Alberta.
F-18
<PAGE> 66
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 24, 1998, the Company filed an action against Zhoda in the
Court of Queen's Bench of Alberta, Judicial Centre of Calgary, in which the
Company seeks to recover $190,000, plus interest, which the Company asserts
Zhoda owes the Company pursuant to promissory notes and loan agreements. On
March 31, 1998, Zhoda filed a statement of defense and a counterclaim in which
it asserted essentially the same claims as were asserted in the Texas action
described above. On the basis of its counterclaim, Zhoda seeks relief similar to
that sought in the Texas action. The Company's claim against Zhoda in the
Alberta action is not within the scope of the arbitration proceeding being
conducted in Calgary.
A judgement in favor of Zhoda on its claims could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to the
Company shares in a subsidiary through which the Company acquired most of its
interest in the Maykop field project, filed suit against the Company in the
Third Judicial District Court of Salt Lake County, Utah. Ribalta, however, has
not yet served the complaint on the Company.
In its complaint, Ribalta alleges breach by the Company of the contract
governing the sale of the shares it transferred to the Company and failure of a
condition in that contract that should have resulted in the termination of the
contract. Ribalta seeks the return of all benefits conferred on the Company
pursuant to the contract or damages equal to the value of such benefits, as well
as other relief. Under that contract, as amended, the maximum consideration to
which Ribalta might have been entitled was $800,000 and 350,000 shares of
Company Common Stock. The Company believes that no consideration is payable
under that contract because conditions to payment specified in the contract were
not satisfied. An outcome of this proceeding unfavorable to the Company could
have a material adverse impact on the Company's financial condition, results of
operations and cash flows. The Company believes it has meritorious defenses to
Ribalta's claims which it intends to assert vigorously.
As a result of the Company's decision to cease active development of
the Lelyaki, Maykop and Gorisht-Kocul projects, the Company may be subject to
contingent liabilities in the form of claims from the joint ventures developing
such projects or from others participating in those projects. The Company was
advised during the first quarter of 1998 that Intergas and another shareholder
of Intergas were considering asserting such claims in relation to the Maykop
project, but no such claims have yet been asserted. The Company is unable to
estimate the range that such claims, if made, might total. However, if one or
more such claims were asserted and determined to be valid, they could have a
material adverse effect on the Company's financial position, results of
operations and cash flows. Such claims may be adjudicated in the host country
forum under host country laws.
LEASE COMMITMENTS -- The Company leases office space under non-cancellable
operating lease agreements. Rental expense for the years ended December 31, 1998
and 1997 and August 31, 1996 and for the four months ended December 31, 1996 and
1995 was $170,795, $293,855, $186,444, $119,133 and $87,872 respectively.
Future minimum rental payments for the Company's lease obligations as
of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 ............. $119,800
2000 ............. 57,600
2001 ............. 28,800
--------
$206,200
--------
</TABLE>
The Company has sublet office space representing $76,800 and $59,000
of the future minimum rental payments in 1999 and 2000, respectively.
F-19
<PAGE> 67
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. CONCENTRATIONS OF CREDIT RISK -- The Company's financial instruments
that are exposed to concentrations of credit risk consist primarily of
cash and cash equivalents, accounts receivable and advances to oil and
gas and other ventures. The Company places its temporary cash
investments with high credit quality financial institutions. Accounts
receivable relates primarily to other entities active in the oil and
gas industry. The concentration of credit risk associated with accounts
receivable is limited as the Company's debtors are spread across
several countries.
13. STOCKHOLDERS' EQUITY
On July 8, 1998, at a Special Meeting of Stockholders, the
stockholders of the Company approved the acquisition of all of the
common stock of CAOG for Common Stock of the Company pursuant to the
terms of an Amended and Restated Combination Agreement between those
two companies (the "Combination Agreement"). Upon completion of the
acquisition on July 15, 1998, CAOG became a subsidiary of the Company,
and each previously outstanding share of CAOG common stock was
converted into the right to receive 0.8 shares (the "Exchangeable
Shares") of CAOG which are exchangeable generally at the option of the
holders for shares of the Company's Common Stock on a share-for-share
basis. The stockholders of the Company also approved the issuance of
100 shares (the "Voting Preferred Shares") of Series Voting Preferred
Stock to the Montreal Trust Company of Canada (the "Trustee") under the
Voting, Support and Exchange Trust Agreement entered into among the
Company, CAOG and the Trustee. The Voting Preferred Shares embody the
right to (i) the voting power the holders of unexchanged Exchangeable
Shares would have following the exchange thereof for shares of the
Company's Common Stock and (ii) the right to receive an aggregate of
$100 upon redemption at the rate of $1.00 per Voting Preferred Share
following the exchange of all outstanding Exchangeable Shares. The
Voting Preferred Shares are stripped of their voting power
proportionately as Exchangeable Shares are exchanged for shares of the
Company's Common Stock. When fully divested of voting rights through
the exchange of all Exchangeable Shares, the Voting Preferred Shares
can be redeemed by the Company for nominal consideration. The
stockholders also approved a 1-for-2 reverse stock split of the
outstanding shares of Common Stock which took effect on July 15, 1998
and has been given effect through restatement in these Consolidated
Financial Statements and notes thereto.
As of December 31, 1998, 15,157,168 shares of Common Stock,
5,856,775 Exchangeable Shares and 100 shares of Voting Preferred Shares
were issued and outstanding. No other shares of the Company's preferred
stock have been issued.
On February 12, 1996, at an Annual Meeting of Stockholders,
the stockholders of the Company approved an increase in the number of
authorized shares of Common Stock from 25,000,000 to 50,000,000 having
$0.10 par value per share. The number of authorized shares of preferred
stock of 5,000,000, also having a par value of $0.10 per share,
remained unchanged.
During the year ended August 31, 1996, the four-month period
ended December 31, 1996 and the years ended December 31, 1997 and 1998,
the following transactions regarding the Company's Common Stock and
warrants and options to purchase the Company's Common Stock were
consummated pursuant to authorization by the Company's Board of
Directors or duly constituted committees thereof.
FISCAL YEAR ENDED AUGUST 31, 1996
o The issuance to investors of 2,500,000 shares for aggregate
proceeds of $20,960,354 net of $1,539,646 of related offering
costs.
o The following are included in the issuance of Common Stock for
purchase of interests in oil and gas ventures:
F-20
<PAGE> 68
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
oo The issuance of 75,000 shares at a price of $9.125
per share, along with other consideration, in
exchange for 10% of the equity of UK-RAN Oil
Corporation and 33% of the equity of UK-RAN Energy
Corporation
oo The issuance of 150,000 shares at a price of $11.125
per share in exchange for 6% of the equity of
Intergas JSC, a joint stock company incorporated in
the Russian Federation.
o The following are included in the issuance of Common Stock
upon conversion of debentures:
oo The issuance of 498,662 shares in a series of
conversions of an aggregate of $3,450,000 principal
amount of debentures convertible at various prices
based on 82 1/2% of market price at the time of
conversion.
oo The adjustment to capital in excess of par in the
amount of $311,088 related to deferred costs incurred
in the issuance of debentures and $795,500 related to
the discount feature of the debentures.
o The following are included in the issuance of Common Stock
upon warrant and option exercises:
oo The issuance of 26,000 shares at a price of $3.00 per
share in a series of option exercises.
oo The issuance of 21,611 shares at a price of $3.00 per
share in a series of warrant exercises.
o The issuance of options exercisable at $7.6875 per share to
purchase 15,000 shares granted to non-employee directors at
February 12, 1996 pursuant to the Company's 1995 Long-Term
Incentive Plan.
FOUR MONTH PERIOD ENDED DECEMBER 31, 1996
o The following are included in the issuance of Common Stock
upon conversion of debentures:
oo The issuance of 29,563 shares upon conversion of
$300,000 principal amount of debentures convertible
at 82 1/2% of market price at the time of conversion.
oo The adjustment to capital in excess of par in the
amount of $19,599 related to deferred costs incurred
in the issuance of debentures.
o The following are included in the issuance of Common Stock
upon warrant and option exercises:
oo The issuance of 6,000 shares at a price of $3.00 per
share in a series of option exercises.
oo The issuance of 243,334 shares at a price of $3.00
per share in a series of warrant exercises.
oo The issuance of 7,143 shares at a price of $3.50 per
share in a warrant exercise.
oo The issuance of 569,900 shares at a price of $10.20
per share in a series of warrant exercises.
oo The issuance of 1,540,000 shares at a price of $12.00
per share in a series of warrant exercises.
F-21
<PAGE> 69
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The issuance of options exercisable at $14.50 per share to
purchase 190,750 shares granted to employees at December 31,
1996 pursuant to the Company's 1995 Long-Term Incentive Plan.
o The issuance of options exercisable at $17.98 per share to
purchase 222,500 shares granted to employees at December 31,
1996 pursuant to the Company's 1995 Long-Term Incentive Plan.
YEAR ENDED DECEMBER 31, 1997
o The issuance of 87,500 shares at a price of $12.125 per share
in connection with the acquisition of an interest in the
Stynawske field, Ukraine.
o The issuance of 52,000 shares at a price of $3.00 per share in
a series of option exercises.
o The issuance of options exercisable at $9.00 per share to
purchase 15,000 shares granted to non-employee directors at
June 3, 1997 pursuant to the Company's 1995 Long-Term
Incentive Plan.
o The issuance of options exercisable at $8.50 per share to
purchase 3,500 shares granted to employees at June 30, 1997
pursuant to the Company's 1995 Long-Term Incentive Plan.
o The issuance of options exercisable at $10.54 per share to
purchase 77,500 shares granted to employees at June 30, 1997
pursuant to the Company's 1995 Long-Term Incentive Plan.
o The cancellation of options to purchase an aggregate 63,084
shares which had been granted to employees pursuant to the
Company's 1995 Long-Term Incentive Plan. Of the options
cancelled, 59,584 were exercisable at $14.50, 2,500 were
exercisable at $17.98, and 1,000 were exercisable at $8.50.
YEAR ENDED DECEMBER 31, 1998
o The issuance of 3,934,124 shares upon exchange by holders of
Exchangeable Shares.
o The issuance of options exercisable at $1.00 per share to
purchase 7,500 shares granted to non-employee directors at
July 15, 1998 pursuant to the Company's 1995 Long-Term
Incentive Plan.
o The conversion at July 15, 1998 of options granted to
employees of CAOG under its stock option plan to purchase
shares of CAOG into options exercisable at $1.85 per share to
purchase 988,000 shares of Company Common Stock. The Company
has adopted CAOG's Stock Option Plan covering the existing
converted options and providing for additional grants under
the plan.
o The conversion of CAOG Stock Purchase Warrants into warrants
to purchase an aggregate 1,097,511 Exchangeable Shares that
are exchangeable at the option of the holder for shares of the
Company's Common Stock on a share-for-share basis. Of the
1,097,511 warrants, 164,008 are exercisable at C$2.75, 32,000
are exercisable at C$2.875 and 901,503 are exercisable at
C$3.25.
o The issuance of options exercisable at $1.25 per share to
purchase 440,000 shares granted to employees at July 17, 1998
pursuant to the Company's 1995 Long-Term Incentive Plan.
o The cancellation at July 31, 1998 of options to purchase
140,000 shares of Company Common Stock which had been granted
pursuant to the CAOG Stock Option Plan exercisable at $1.85
per share.
F-22
<PAGE> 70
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The issuance of options exercisable at $0.688 per share to
purchase 192,000 shares of Company Common Stock granted to
employees on October 7, 1998 pursuant to the Company's 1995
Long-Term Incentive Plan.
o The issuance of options exercisable at $0.563 per share to
purchase 21,834 shares of Company Common Stock granted to
employees on November 17, 1998 pursuant to the Company's 1995
Long-Term Incentive Plan.
o The issuance of options exercisable at $0.563 per share to
purchase 90,000 shares of Company Common Stock granted to
employees at November 17, 1998 pursuant to the CAOG Stock
Option Plan.
o The issuance of options exercisable at $0.70 per share to
purchase 25,000 shares of Company Common Stock granted to a
consultant at November 17, 1998 pursuant to the Company's 1995
Long-Term Incentive Plan.
o The issuance of options exercisable at $0.70 per share to
purchase 50,000 shares of Company Common Stock granted to a
consultant at November 17, 1998 pursuant to the CAOG Stock
Option Plan.
o The issuance of options exercisable at $0.313 per share to
purchase 3,750 shares of Company Common Stock granted to a
non-employee director at December 31, 1998 pursuant to the
Company's 1995 Long-Term Incentive Plan.
o The cancellation of options to purchase an aggregate 42,000
shares of Company Common Stock exercisable at $3.00 which had
been granted to various individuals in August 1994 who were
serving or were expected in the future to serve the Company as
officers, directors, employees, consultants and advisors.
o The cancellation of options to purchase an aggregate 414,834
shares of Company Common Stock which had been granted to
employees pursuant to the Company's 1995 Long-Term Incentive
Plan. Of the options cancelled, 1,667 were exercisable at
$8.50, 75,000 were exercisable at $10.54, 118,167 were
exercisable at $14.50 and 220,000 were exercisable at $17.98.
o The cancellation of options at December 31, 1998 to purchase
80,000 shares of Company Common Stock which had been granted
pursuant to the CAOG Stock Option Plan exercisable at $1.85
per share.
Pursuant to the terms of the Combination Agreement, holders of
CAOG Stock Purchase Warrants have the right to purchase Exchangeable
Shares which are exchangeable generally at the option of the holder for
shares of the Company's Common Stock on a share-for-share basis.
F-23
<PAGE> 71
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes warrants to purchase the
Company's Common Stock, which were outstanding:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
OUTSTANDING AT : WARRANTS PRICE DATE
---------------- ---------- -------------- -------------------
<S> <C> <C> <C>
AUGUST 31, 1995 2,463,988 $3.00 - $12.00 2/28/97 to 11/3/97
----------
Exercised (21,611) $3.00 11/3/97
----------
AUGUST 31, 1996 2,442,377 $3.00 - $12.00 2/28/97 to 11/3/97
----------
Exercised (2,360,377) $3.00 - $12.00 2/28/97 to 11/3/97
Redeemed (82,000) $12.00 2/28/97 to 11/3/97
----------
DECEMBER 31, 1997 AND 1996 0
----------
CAOG Stock Purchase Warrants 1,097,511 $C2.75 - $C3.25 4/30/99 to 11/1/99
----------
----------
DECEMBER 31, 1998 1,097,511 $C2.75 - $C3.25 4/30/99 to 11/1/99
----------
</TABLE>
During the four month period ended December 31, 1996, an
aggregate of 2,191,900 warrants were called for redemption by the
Company. If the average closing price of the Company's Common Stock
exceeded $12.20 and $14.00 per share for 10 consecutive trading days,
upon election of the Company and notice to the warrant holders, the
holders of 569,900 warrants and 1,622,000 warrants, respectively, were
required either to exercise their warrants within a specified period or
to have the warrants redeemed by the Company for a nominal redemption
price. All but 82,000 of the 2,191,900 warrants called for redemption
were exercised during the four month period ended December 31, 1996;
the 82,000 warrants were redeemed. During the same period, an
additional 250,477 warrants were also exercised by their holders. There
were no outstanding warrants at December 31, 1996 and 1997. As of
December 31, 1998, there were outstanding 164,008 CAOG Stock Purchase
Warrants exercisable at $C2.75 expiring April 30, 1999, 32,000 CAOG
Stock Purchase Warrants exercisable at $C2.875 expiring July 31, 1999
and 901,503 CAOG Stock Purchase Warrants exercisable at $C3.25 expiring
November 1, 1999.
14. NET LOSS PER COMMON SHARE
Effective December 31, 1997 the Company adopted SFAS No. 128
Earnings Per Share, for all periods presented. Basic and diluted net
loss per common share for the years ended December 31, 1998 and 1997,
the year ended August 31, 1996 and the four month periods ended
December 31, 1996 and 1995 were based on the weighted average number of
common shares outstanding during those periods. The weighted average
number of shares used was 15,783,889, 11,206,586, 6,247,568, 9,348,106
and 5,417,032 respectively. The Debentures, which were convertible into
a maximum of 154,750 shares of the Company's Common Stock per
$1,000,000 principal amount of the Debentures, were not included in the
computation of diluted net loss per common share for the four month
period ended December 31, 1996 and the fiscal year ended August 31,
1996 because the effect of such inclusion would have been
anti-dilutive. Additionally, options to purchase the Company's Common
Stock were outstanding during the years ended December 31, 1998 and
1997, the four month period ended December 31, 1996 and the fiscal year
ended August 31, 1996 and warrants to purchase the Company's Common
Stock were outstanding during the year ended December 31, 1998, the
four month period ended December 31, 1996, and the fiscal year ended
August 31, 1996 but were not included in the computation of diluted net
loss per common share because the effect of such inclusion would have
been anti-dilutive.
F-24
<PAGE> 72
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
The Company and its domestic subsidiaries file U.S.
consolidated income tax returns. No benefit for U.S. income taxes has
been recorded in these consolidated financial statements because of the
Company's inability to recognize deferred tax assets under provisions
of SFAS 109. Due to the implementation of the quasi-reorganization as
of October 31, 1988, future reductions of the valuation allowance
relating to those deferred tax assets existing at the date of the
quasi-reorganization, if any, will be allocated to capital in excess of
par value. The provision for income taxes for the year ended August 31,
1995 consisted of taxes applicable to foreign operations.
A reconciliation of the differences between income taxes
computed at the U.S. federal statutory rate (34%) and the Company's
reported provision for income taxes is as follows:
<TABLE>
<CAPTION>
FOUR MONTH FOUR MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income tax benefit at
statutory rate ........ $(2,077,510) $(9,412,203) $(885,515) (490,342) $(2,207,808)
Benefit of losses not
recognized ............ 2,077,510 9,412,203 876,629 490,342 2,197,879
Foreign tax provision ... -- -- -- -- --
Other, net .............. -- -- 8,886 -- 9,929
----------- ----------- ----------- ----------- -----------
Provision for income
taxes ................. $ 0 $ 0 $ 0 $ 0 $ 0
----------- ----------- ----------- ----------- -----------
Effective tax rate ...... 0% 0% 0% 0% 0%
</TABLE>
The components of the deferred tax assets as of December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- --------------
<S> <C> <C>
Net operating loss carryforwards ................. 13,105,000 $ 13,372,000
Foreign net operating loss carryforwards ......... 5,892,000 4,972,000
Impairments ...................................... 7,161,000 6,817,000
Patent rights and related equipment .............. 180,378 225,473
------------- --------------
26,338,378 25,386,473
Valuation allowance .............................. (26,338,378) (25,386,473)
------------- --------------
Net deferred tax asset recognized in balance sheet $ -- $ --
------------- --------------
</TABLE>
F-25
<PAGE> 73
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 1991, and subsequently on August 17, 1994, the
Company experienced changes in the Company's ownership as defined in
Section 382 of the Internal Revenue Code ("IRC"). The effect of these
changes in ownership is to limit the utilization of certain existing
net operating loss carryforwards for income tax purposes to
approximately $1,375,000 per year on a cumulative basis. As of December
31, 1997, total U.S. net operating loss carryforwards were
approximately $38,543,000. Of that amount, approximately $17,208,000
was incurred subsequent to the ownership change in 1994, $16,635,000
was incurred prior to 1994 and therefore is subject to the IRC Section
382 limitation and $4,700,000 is subject to the separate return
limitation rules. See Note 1 of Notes to Consolidated Financial
Statements.
The net operating loss carryforwards expire from 1999 to 2013.
The net operating loss carryforwards limited under the separate return
limitation rules may only be offset against the separate income of the
respective subsidiaries. The Company has also generated approximately
$17,330,000 of foreign net operating loss carryforwards. A significant
portion of the foreign net operating loss carryforwards are subject to
limitations similar to IRC Section 382.
The Company's available net operating loss carryforwards may
be used to offset future taxable income, if any, prior to their
expiration. The Company may experience further limitations on the
utilization of net operating loss carryforwards and other tax benefits
as a result of additional changes in ownership.
16. SEGMENTS
During the years ended December 31, 1998 and 1997 and the four
months ended December 31, 1996, the Company operated through one
business segment, oil and gas exploration and production, reflecting
its decision to use its electrically enhanced oil recovery ("EEOR")
technology primarily internally as a competitive advantage to obtain
and exploit interests in heavy oil fields and not to pursue external
sales of goods and services related to the EEOR technology. Since oil
and gas exploration and production activities were at a preliminary
stage, revenues for the periods ended December 31, 1997 and 1996 were
minimal. For the fiscal year ended August 31, 1996, EEOR activities
were reported as a separate business segment. For the fiscal year ended
August 31, 1996, EEOR revenues related to a contract with one customer
in Canada.
Operating revenues for the years ended December 31, 1998 and
1997, the year ended August 31, 1996 and the four months ended December
31, 1996 by business segment and geographical area were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1998 1997 1996 1996
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe ........... $602,724 $ -- $ -- $ --
United States ............ -- -- 2,624 --
Canada ................... 201,828 313,301 23,938 16,980
-------- -------- -------- --------
TOTAL .................... $804,552 $313,301 $ 26,562 $ 16,980
-------- -------- -------- --------
EEOR PROCESS SALES AND
SERVICE
United States ............ $ -- $ -- $ -- $ --
Canada ................... -- -- 8,615 --
-------- -------- -------- --------
TOTAL .................... $ 0 $ 0 $ 8,615 $ 0
-------- -------- -------- --------
</TABLE>
F-26
<PAGE> 74
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1998, the Company sold its production in Eastern Europe to
two customers. Sales to each customer represented 57% and 43% of
operating revenue, respectively.
Operating profit (loss) for the years ended December 31, 1998
and 1997, the year ended August 31, 1996 and the four months ended
December 31, 1996 by business segment and geographical area were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1998 1997 1996 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OIL AND GAS
EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe ................. $(2,408,968) $(24,831,798) $(1,770,434) $(1,712,924)
United States .................. -- (257,407) (3,262) --
Canada ......................... (1,258,506) (97,541) 18,836 11,378
----------- ------------ ----------- -----------
TOTAL .......................... $(3,667,474) $(25,186,746) $(1,754,860) $(1,701,546)
----------- ------------ ----------- -----------
EEOR PROCESS SALES AND
SERVICE
United States .................. $ -- $ -- $ -- $ --
Canada ......................... -- -- (30,857) --
----------- ------------ ----------- -----------
TOTAL .......................... $ -- $ -- $ (30,857) $ --
----------- ------------ ----------- -----------
CORPORATE EXPENSES.............. $(2,820,284) $(3,903,446) $ (3,853,972) $(1,281,821)
----------- ------------ ----------- -----------
TOTAL .......................... $(6,487,758) $(29,090,192) $(5,639,689) $(2,983,367)
----------- ------------ ----------- -----------
</TABLE>
The Company's loss from investments in unconsolidated
subsidiaries pertains primarily to operations in Eastern Europe.
Identifiable assets as of December 31, 1998, 1997 and 1996 by
business segment and geographical area were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
CORPORATE
United States ........ $ 3,319 $ 212,536 $ 7,580,219
Canada ............... 2,304,690 -- --
Western Europe ....... 196,304 24,263,223 29,049,022
----------- ----------- -----------
TOTAL ..................... $ 2,504,313 $24,475,759 $36,629,241
----------- ----------- -----------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe ....... $41,644,701 $ 5,386,707 $11,127,176
United States ........ -- -- 6,786,714
Canada ............... 1,001,733 2,067,257 831,930
Western Europe ....... 13,769 5,504,312 --
----------- ----------- -----------
TOTAL ..................... $42,660,203 $12,958,276 $18,745,820
----------- ----------- -----------
OTHER ENERGY PROJECTS
Eastern Europe ........ 1,403,013 -- --
----------- ----------- -----------
IDENTIFIABLE ASSETS -- TOTAL $46,567,529 $37,434,035 $55,375,061
----------- ----------- -----------
</TABLE>
F-27
<PAGE> 75
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The percentage of operating revenues for the years ended
December 31, 1998 and 1997, the year August 31, 1996 and the four
months ended December 31, 1996 by business segment and geographical
area are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31,
1998 1997 1996 1996
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe ...... 75% -- -- --
United States ....... -- -- 10% --
Canada .............. 25% 100% 90% 100%
EEOR PROCESS SALES
AND SERVICE
United States ....... -- -- 100% --
Canada .............. -- -- -- --
</TABLE>
17. SUPPLEMENTAL CASH FLOW INFORMATION AND NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information
for the years ended December 31, 1998 and 1997, the year ended August
31, 1996 and for the four-month periods ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
All amounts in 000'$
YEARS ENDED 4 MONTHS ENDED
-------------------------------- ---------------------
12/31/98 12/31/97 8/31/96 12/31/96 12/31/95
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid during the year ............. $ -- $ -- $ 146 $ 17 $ 3
--------- ---------- --------- --------- ---------
Supplemental schedule of non-cash activities:
Acquisition of common stock of subsidiaries
resulting in elimination upon consolidation
and cancellation of notes receivable of
$2,450,000 and $530,000, respectively ...... $ -- $ -- $ 2,980 $ -- $ 2,450
--------- ---------- --------- --------- ---------
Issuance of Common Stock upon conversion of
convertible debentures and notes ........... $ -- $ -- $ 3,934 $ 280 $ --
--------- ---------- --------- --------- ---------
Issuance of Common Stock in connection with
investments in oil and gas ventures ........ $ -- $ 1,060 $ 2,353 $ -- $ --
--------- ---------- --------- --------- ---------
</TABLE>
F-28
<PAGE> 76
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
Issuance of Common Stock in connection with compensation
earned and third party services provided ............... $ -- $ -- $ -- $ --
--------- --------- --------- ---------
Accruals recorded applicable to effective guaranty of
Kashtan obligation and Lelyaki field close-down costs.... $ -- $ 8,971 $ -- $ 678
--------- --------- --------- ---------
</TABLE>
18. STOCK-BASED COMPENSATION PLANS
On August 17, 1994, options to purchase 200,000 shares of the
Company's Common Stock were issued to various individuals who were
serving or were expected in the future to serve the Company as
officers, directors, employees, consultants and advisors (the "1994
Plan"). The options are exercisable at an exercise price of $3.00 and
are only exercisable at the time or within six months after services
are rendered by such individuals. All of these options expire August
16, 1999. Under the 1994 Plan, 74,000 options were outstanding at
December 31, 1998.
Pursuant to the 1995 Long-Term Incentive Plan (the "1995
Plan") adopted by the Company in February 1996, 750,000 shares of the
Company's Common Stock have been authorized for possible issuance under
the 1995 Plan. Stock options granted under the 1995 Plan may be either
incentive stock options or non-qualified stock options. Options expire
on such date as is determined by the committee administering the 1995
Plan, except that incentive stock options may expire no later than 10
years from the date of grant. Pursuant to the 1995 Plan, a specified
number of stock options exercisable at the then market price are
granted annually to non-employee directors of the Company, which become
100% vested six months from the date of grant. Stock appreciation
rights entitle the holder to receive payment in cash or Common Stock
equal in value to the excess of the fair market value of a specified
number of shares of Common Stock on the date of exercise over the
exercise price of the stock appreciation right. No stock appreciation
rights have been granted through December 31, 1998. The exercise price
and vesting schedule of stock appreciation rights are determined at the
date of grant. Under the 1995 Plan, 736,416 options were outstanding at
December 31, 1998.
Pursuant to the terms of the Combination Agreement, on July
15, 1998 each stock option granted under CAOG's existing Stock Option
Plan (the "CAOG Plan") to purchase a CAOG common share was converted
into an option to purchase 0.8 shares of the Company's Common Stock.
Pursuant to the CAOG Plan, which has been adopted by the Company, a
total of 988,000 shares of the Company's Common Stock have been
authorized for issuance. Stock options granted under the CAOG Plan
expire on such date as is determined by the committee administering the
CAOG Plan, except that the term of stock options may not exceed 10
years from the date of grant. Under the CAOG Plan, 908,000 options were
outstanding at December 31, 1998.
The purpose of the Company's stock option plans is to further
the interest of the Company by enabling officers, directors, employees,
consultants and advisors of the Company to acquire an interest in the
Company by ownership of its stock through the exercise of stock options
and stock appreciation rights granted under its various stock option
plans.
F-29
<PAGE> 77
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of stock options granted under the
1994 Plan, the 1995 Plan and the CAOG Plan is as follows:
<TABLE>
<CAPTION>
SHARES SHARES ISSUABLE WEIGHTED
AVAILABLE UNDER OUTSTANDING AVERAGE
FOR ISSUE OPTIONS EXERCISE PRICE
--------- ---------------- --------------
<S> <C> <C> <C>
BALANCE AT AUGUST 31, 1995 ....... 0 200,000 $ 3.00
1995 Plan Authorization ...... 750,000
Options (1994 & 1995 Plans):
Granted at market ......... (15,000) 15,000 $ 7.68
Exercised (1994 Plan) ..... -- (26,000) $ 3.00
-------- ---------
BALANCE AT AUGUST 31, 1996 ....... 735,000 189,000 $ 3.38
Options (1994 & 1995 Plans):
Granted at market ......... (190,750) 190,750 $ 14.50
Granted at a premium ...... (222,500) 222,500 $ 17.98
Exercised (1994 Plan) ..... -- (6,000) $ 3.00
-------- ---------
BALANCE AT DECEMBER 31, 1996 ..... 321,750 596,250 $ 12.38
Options (1994 & 1995 Plans):
Granted at market ......... (18,500) 18,500 $ 8.90
Granted at a premium ...... (77,500) 77,500 $ 10.54
Exercised (1994 Plan) ..... -- (52,000) $ 3.00
Canceled .................. 63,084 (63,084) $ 14.54
-------- ---------
BALANCE AT DECEMBER 31, 1997 ..... 288,834 577,166 $ 12.64
-------- ---------
Options (1994 & 1995 Plans):
Granted at market ......... (665,084) 665,084 $ 1.06
Granted at a premium ...... (25,000) 25,000 $ 0.70
Canceled (1994 Plan) ...... -- (42,000) $ 3.00
Canceled .................. 414,834 (414,834) $ 15.59
CAOG Plan Authorization: ..... 988,000
Converted Options ......... (988,000) 988,000 $ 1.85
Granted at market ......... (90,000) 90,000 $ 0.563
Granted at a premium ...... (50,000) 50,000 $ 0.70
Canceled .................. 220,000 (220,000) $ 1.85
-------- ---------
BALANCE AT DECEMBER 31, 1998 ..... 93,584 1,718,416 $ 1.70
-------- ---------
</TABLE>
The shares issuable upon exercise of vested options and the
corresponding weighted average exercise price are as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE
UNDER WEIGHTED
EXERCISABLE AVERAGE
OPTIONS EXERCISE PRICE
--------------- --------------
<S> <C> <C>
August 31, 1995 ....... 172,000 $ 3.00
August 31, 1996 ....... 171,000 $ 3.42
December 31, 1996...... 165,000 $ 3.42
December 31, 1997...... 177,832 $ 7.12
December 31, 1998...... 413,661 $ 2.82
</TABLE>
F-30
<PAGE> 78
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of options granted at market
was $0.61, $2.92, $7.30 and $2.02 for the years ended December 31, 1998
and 1997, the four month period ended December 31, 1996 and the fiscal
year ended August 31, 1996, respectively. The weighted average fair
value of options granted at a premium was $0.13, $1.85 and $3.46 for
the years ended December 31, 1998 and 1997 and the four month period
ended December 31, 1996, respectively; no options were granted at a
premium for the fiscal year ended August 31, 1996. The weighted average
fair value of all options granted during the years ended December 31,
1998 and 1997, the four month period ended December 31, 1996 and the
fiscal year ended August 31, 1996 was $0.59, $2.05, $5.04 and $2.02,
respectively.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------- -----------------------------
NUMBER WEIGHTED NUMBER
OF SHARES AVERAGE WEIGHTED OF SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 TERM EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
------------------- ------------ ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.31 to $1.85 ..... 1,598,084 9.64 $ 1.39 299,997 $ 1.85
$3.00 to $7.69 ..... 89,000 8.31 $ 3.79 89,000 $ 3.79
$9.00 to $14.50..... 31,332 7.84 $ 11.55 24,664 $ 11.16
-------------------- --------- -------
$0.31 to $14.50 .... 1,718,416 413,661
-------------------- --------- -------
</TABLE>
As discussed in Note 2, Summary of Significant Accounting
Policies, under "Stock-Based Compensation Plans," of Notes to
Consolidated Financial Statements, the Company accounts for its
stock-based compensation plans under APB Opinion 25. Accordingly, no
compensation cost has been recognized for those stock options with
exercise prices equal to or greater than the market price of the stock
on the date of grant. Under SFAS No. 123, compensation cost is measured
at the grant date based on the fair value of the awards and is
recognized over the service period, which is usually the vesting
period. Had compensation cost for those stock options been determined
consistent with SFAS No. 123, the Company's net loss and net loss per
common share after plan forfeitures would have been approximately
$5,750,000 and $0.36, respectively, for the year ended December 31,
1998, $28,600,000 and $2.56, respectively, for the year ended December
31, 1997 and approximately $6,500,000 and $1.04, respectively, for the
fiscal year ended August 31, 1996. Stock options had no effect on net
loss for the four months ended December 31, 1996. This effect is not
likely to be representative of future pro forma amounts because of the
exclusion of costs of grants before 1995 and the addition of awards to
be granted in future years.
The fair value of each stock option granted by the Company was
calculated using the Black-Scholes option-pricing model applying the
following weighted-average assumptions for the years ended December 31,
1998 and 1997, the four month period ended December 31, 1996 and the
fiscal year ended August 31, 1996: dividend yield of 0.00%; risk-free
interest rates are different for each grant and range from 5.69% to
5.72% for the year ended December 31, 1998, 6.08% to 6.36% for the year
ended December 31, 1997, 5.79% to 6.16% for the four month period ended
December 31, 1996, and during the fiscal year ended August 31, 1996,
only one grant was made with a risk-free interest rate of 4.79%; the
average expected lives of options of 4.0 years, 2.1 years, 3.1 years
and 1.5 years, respectively; and volatility of 44.8% for the year ended
December 31, 1998, 44.7% for the year ended December 31, 1997 and 49%
for the four month period ended December 31, 1996 and the fiscal year
ended August 31, 1996.
F-31
<PAGE> 79
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. RELATED PARTY TRANSACTIONS
The Company is a 50% shareholder of CanArgo Power Corporation,
which in turn owns 85% of a Georgian private power company. The other
50% of CanArgo Power Corporation is owned by Terrenex Acquisition
Corporation, an entity that is affiliated with two of the Company's
directors and is itself a principal stockholder of the Company. During
the first half of 1998, Terrenex, on behalf of both itself and the
Company, provided all of the funds required by CanArgo Power. After the
July 1998 business combination with CAOG was completed, the Company
reimbursed Terrenex $398,000, representing half of the amount that had
been advanced through that time.
In May 1998, Terrenex agreed to lend CAOG up to $1,000,000
through August 31, 1998 and subsequently advanced the $1,000,000. CAOG
paid Terrenex a $10,000 commitment fee, $50,000 in draw down fees and
interest at the rate of 1/2% per month. In addition, CAOG granted
Terrenex options exercisable until December 31, 1998 to acquire 12 1/2%
of the stock of the subsidiary holding the Nazvrevi/Block XIII
production sharing contract and 15% of CAOG's position in any license
received as a result of a consortium submission in response to the
Dagestan tender for offshore drilling and production rights. The terms
of the loan were negotiated and approved by directors of CAOG who had
no affiliation with Terrenex. The Company subsequently extended the
options through March 31, 1999 in consideration of the efforts of
Terrenex in attempting to arrange financing for the Company. Terrenex
can exercise either option by paying the percentage of the amounts
expended on such projects through the exercise date as equals the
percentage of the project being acquired through the exercise of the
option. The Company repaid the Terrenex loan following completion of
the business combination July 1998.
20. SUBSEQUENT EVENTS
On February 12, 1999, the Company filed, subject to
completion, a Registration Statement on Form S-1 with the Securities
and Exchange Commission with respect to the offering of 21,264,643
shares of its Common Stock.
On March 29, 1999, CanArgo was advised by The Nasdaq Stock
Market that it had delisted CanArgo's common stock effective with the
close of business on March 29, 1999. On March 30, 1999, CanArgo's
common stock commenced trading on the OTC Bulletin Board.
F-32
<PAGE> 80
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES
Users of this information should be aware that the process of
estimating quantities of "proved" and "proved developed" natural gas
and crude oil reserves is very complex, requiring significant
subjective decisions in the evaluation of all available geological,
engineering and economic data for each reservoir. The data for a given
reservoir may also change substantially over time as a result of
numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur
from time to time. Although every reasonable effort is made to ensure
that reserve estimates reported represent the most accurate assessments
possible, the significance of the subjective decisions required and
variances in available data for various reservoirs make these estimates
generally less precise than other estimates presented in connection
with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude
oil and condensate that geological and engineering data demonstrate,
with reasonable certainty, to be recoverable in future years from known
reservoirs with existing equipment under existing economic and
operating conditions.
Proved developed reserves are proved reserves that can be
expected to be recovered through existing wells with existing equipment
and under existing economic and operating conditions.
No major discovery or other favorable or adverse event
subsequent to December 31, 1998 is believed to have caused a material
change in the estimates of proved or proved developed reserves as of
that date.
The following table sets forth the Company's net proved
reserves, including the changes therein, and proved developed reserves
at December 31, 1998, as estimated by the independent petroleum
engineering firm, AMH Group Ltd.:
<TABLE>
<CAPTION>
REPUBLIC OF
NET PROVED RESERVES -- OIL GEORGIA CANADA TOTAL
----------- ------- ------
<S> <C> <C> <C>
(In Thousands of Barrels)
DECEMBER 31, 1996
Purchase of properties ................ -- 116 116
Revisions of previous estimates ....... -- (33) (33)
Extension, discoveries, other additions -- 267 267
Production ............................ -- (16) (16)
----------- -------- ------
DECEMBER 31, 1997 ............................ -- 334 334
Purchase of properties ................ 6,050 -- 6,050
Revisions of previous estimates 198 (155) 43
Extension, discoveries, other additions 1,388 -- 1,388
Production ............................ (92) (21) (113)
----------- -------- ------
DECEMBER 31, 1998 ............................ 7,544 158 7,702
----------- -------- ------
NET PROVED DEVELOPED RESERVES
DECEMBER 31, 1998 ..................... 1,528 158 1,686
----------- -------- ------
</TABLE>
F-33
<PAGE> 81
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
Net proved reserves in the Republic of Georgia as at December
31, 1998 were as follows:
<TABLE>
<CAPTION>
OIL RESERVES PSC ENTITLEMENT VOLUMES (1)
-------------------- --------------------------
Company
NOC Share of NOC
(In Thousands of Barrels) Gross Net (2) Entitlement Entitlement
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed Producing ... 2,404 1,647 1,340 918
Proved Developed Non-Producing 1,379 945 890 610
Proved Undeveloped ........... 15,200 10,412 8,783 6,016
------ ------ ------ -----
TOTAL PROVEN ................. 18,983 13,004 11,013 7,544
------ ------ ------ -----
</TABLE>
(1) PSC (production sharing contract) Entitlement Volumes are
those produced volumes which, through the production sharing
contract, accrue to the benefit of NOC and, as a result of the
Company's interest in NOC, accrue to the benefit of the
Company for the recovery of capital, repayment of operating
costs and share of profit.
(2) Net Oil Reserves represent the Company's 68.5% share of NOC's
interest under the production sharing contract in the gross
reserves, before taking into account the interest of Georgian
Oil.
Costs incurred for oil and gas property acquisition,
exploration and development activities for the years ended December 31,
1998 and 1997, the four months ended December 31, 1996 and the year
ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
EASTERN
EUROPE CANADA TOTAL
----------- --------- ----------
<S> <C> <C> <C>
December 31, 1998
------------------
Property Acquisition
Unproved* ............ $ -- $ -- $ --
Proved ............... -- -- --
Exploration ............... 684,056 136,715 820,771
Development ............... 4,390,495 4,390,495
----------- ---------- ----------
Total costs incurred.. $ 5,074,551 $ 136,715 $5,211,266
----------- ---------- ----------
December 31, 1997
-----------------
Property Acquisition
Unproved* ............ $ -- $ 324,500 $ 324,500
Proved ............... -- 684,500 684,500
Exploration ............... -- -- --
Development ............... -- 680,974 680,974
----------- ---------- ----------
Total costs incurred.. $ -- $1,689,974 $1,689,974
----------- ---------- ----------
December 31, 1996 United States
------------------ -------------
Property acquisition:
Unproved* ............ $ -- $ 259,338 $ 259,338
Proved ............... -- -- --
Exploration ............... -- -- --
Development ............... -- -- --
----------- ---------- ----------
Total costs incurred.. $ -- $ 259,338 $ 259,338
----------- ---------- ----------
</TABLE>
F-34
<PAGE> 82
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
<TABLE>
<CAPTION>
August 31, 1996 United States
--------------- -------------
<S> <C> <C> <C>
Property acquisition:
Unproved* ........... $ -- $ 287,788 $ 287,788
Proved ............... -- -- --
Exploration ............... -- -- --
Development ............... -- -- --
----------- --------- ---------
Total costs incurred.. $ -- $ 287,788 $ 287,788
----------- --------- ---------
</TABLE>
*These amounts represent costs incurred by the Company and
excluded from the amortization base until proved reserves are
established or impairment is determined.
F-35
<PAGE> 83
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES
The following information has been developed utilizing
procedures prescribed by SFAS No. 69 Disclosure about Oil and Gas
Producing Activities ("SFAS 69") and based on crude oil reserve and
production volumes estimated by the Company's engineering staff. It may
be useful for certain comparative purposes, but should not be solely
relied upon in evaluating the Company or its performance. Further,
information contained in the following table should not be considered
as representative of realistic assessments of future cash flows, nor
should the Standardized Measure of Discounted Future Net Cash Flows be
viewed as representative of the current value of the Company.
The Company believes that the following factors should be
taken into account in reviewing the following information: (1) future
costs and selling prices will probably differ from those required to be
used in these calculations; (2) actual rates of production achieved in
future years may vary significantly from the rate of production assumed
in the calculations; (3) selection of a 10% discount rate is arbitrary
and may not be reasonable as a measure of the relative risk inherent in
realizing future net oil and gas revenues; and (4) future net revenues
may be subject to different rates of income taxation.
Under the Standardized Measure, future cash inflows were
estimated by applying period-end oil prices adjusted for fixed and
determinable escalations to the estimated future production of
period-end proven reserves. Future cash inflows were reduced by
estimated future development, abandonment and production costs based on
period-end costs in order to arrive at net cash flow before tax. Future
income tax expenses has been computed by applying period-end statutory
tax rates to aggregate future pre-tax net cash flows, reduced by the
tax basis of the properties involved and tax carryforwards. Use of a
10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information
in making investment and operating decisions. Such decisions are based
upon a wide range of factors, including estimates of probable as well
as proven reserves and varying price and cost assumptions considered
more representative of a range of possible economic conditions that may
be anticipated.
The standardized measure of discounted future net cash flows
relating to proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
REPUBLIC OF
DECEMBER 31, 1998 (IN THOUSANDS) GEORGIA CANADA TOTAL
----------- ------- ------
<S> <C> <C> <C>
Future cash inflows ................................ $70,464 $ 1,905 $ 72,369
Less related future:
Production costs .............................. 15,051 1,176 16,227
Development and abandonment costs ............. 26,304 37 26,341
Income taxes .................................. -- -- --
------- ------- -------
Future net cash flows .............................. 29,109 692 29,801
10% annual discount for estimating timing of
cash flows .................................... 13,838 255 14,093
------- ------- -------
Standardized measure of discounted future net
cash flows before income taxes ..................... $15,271 $ 437 $ 15,708
------- ------- --------
</TABLE>
F-36
<PAGE> 84
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
A summary of the changes in the standardized measure of
discounted future net cash flows applicable to proved oil and gas
reserves is as follows:
Year ended December 31, 1998 (in thousands)
<TABLE>
<S> <C>
Beginning of period.................................... $ 1,243
Purchase of reserves in place.......................... 14,088
Revisions of previous estimates........................ 115
Development costs incurred during the period........... 4,642
Sales of oil and gas, net of production costs.......... 38
Production timing and other............................ (4,418)
-------
Net increase........................................... 14,465
-------
End of the period...................................... $15,708
-------
</TABLE>
F-37
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT FILED WITH
NUMBER EXHIBIT THIS REPORT
<S> <C> <C>
2(1) Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited
dated August 10, 1995 by and among Ribalta Holdings, Inc.
as Vendor and Fountain Oil Incorporated as Purchaser, and
John Richard Tate as Warrantor (Incorporated herein by
reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase
of All the Issued Share Capital of Gastron International
Limited dated November 3, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995
Form 8-K).
2(3) 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).
2(6) Voting, Support and Exchange Trust Agreement
(Incorporated herein by reference as Annex G from Form
S-3 Registration Statement, File No. 333-48287 filed on
June 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15,
1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference
from December 31, 1996 Form 10-K).
4 Form of 8% Convertible Subordinated Debenture
(Incorporated herein by reference from February 29, 1996
Form 10-QSB).
*10(1) Securities Compensation Plan (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., the Company's
predecessor).
*10(2) Form of Certificate for Common Stock Purchase Warrants
issued pursuant to the Securities Compensation Plan
(Incorporated herein by reference from Form S-8
Registration Statement, File No. 33-82944 filed on August
17, 1994, filed by Electromagnetic Oil Recovery, Inc.,
the Company's predecessor).
</TABLE>
<PAGE> 86
<TABLE>
<S> <C> <C>
*10(3) Form of Option Agreement for options granted to certain persons,
including Directors (Incorporated herein by reference from August 31,
1994 Form 10-KSB, filed by Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
*10(4) Form of Certificate for Common Stock Purchase Warrants issued to
certain investors in August 1994, including Directors (Incorporated
herein by reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., the Company's predecessor).
*10(5) Restated Employment Agreement between Fountain Oil Incorporated and
Nils N. Trulsvik (Incorporated herein by reference from December 31,
1997 Form 10-K/A).
*10(6) Employment Agreement between Fountain Oil Incorporated and Ravinder S.
Sierra (Incorporated herein by reference from August 31, 1995 Form
10-KSB).
*10(7) Employment Agreement between Fountain Oil Incorporated and Susan E.
Palmer (Incorporated herein by reference from August 31, 1995 Form
10-KSB).
*10(8) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated
herein by reference from September 30, 1998 Form 10-Q).
*10(9) 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(10) Fee Agreement between Fountain Oil Incorporated and Eugene J. Meyers
(Incorporated herein by reference from August 31, 1996 Form 10-KSB).
*10(11) 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(12) Employment Agreement between Fountain Oil Incorporated and Alfred
Kjemperud (Incorporated herein by reference from March 31, 1997 Form
10-Q).
*10(13) Employment Agreement between the Company Oil Norway AS and Rune
Falstad (Incorporated herein by reference from December 31, 1997 Form
10-K/A).
*10(14) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(15) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September 30, 1998
Form 10-Q).
*10(16) Consultancy Agreement between CanArgo Energy Corporation and FinCom
AS, Norway (Incorporated herein by reference from September 30, 1998
Form 10-Q).
</TABLE>
2
<PAGE> 87
<TABLE>
<S> <C> <C>
*10(17) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30, 1998
Form 10-Q).
*10(18) 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(19) 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(20) 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(21) 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(22) 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(23) 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).
21 List of Subsidiaries (Incorporated herein by reference from Form
S-1 Registration Statement, File No. 333-72295 filed on February
12, 1999).
23 Consent of PricewaterhouseCoopers LLP. X
27 Financial Data Schedule. X
</TABLE>
3
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of CanArgo Energy Corporation on Form S-8, as amended in Post-Effective
Amendment No. 1 (File No. 33-82944), the registration statement on Form S-8
(File No. 333-02651) and the registration statement on Form S-8 (File No.
333-59367) of our report which includes a paragraph regarding the Company's
ability to continue as a going concern, dated March 5, 1999 (except for note 20
which is as of March 29, 1999, on our audits of the consolidated financial
statements of CanArgo Energy Corporation as of December 31, 1998 and 1997 and
for the years ended December 31, 1998, 1997 and August 31, 1996 and the four
month period ended December 31, 1996, which report is included in this Annual
Report on Form 10-K.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,924,908
<SECURITIES> 0
<RECEIVABLES> 424,367
<ALLOWANCES> 0
<INVENTORY> 170,405
<CURRENT-ASSETS> 3,350,046
<PP&E> 10,016,810
<DEPRECIATION> 704,850
<TOTAL-ASSETS> 46,567,529
<CURRENT-LIABILITIES> 1,983,811
<BONDS> 0
0
0
<COMMON> 2,101,464
<OTHER-SE> 37,929,969
<TOTAL-LIABILITY-AND-EQUITY> 46,567,529
<SALES> 804,552
<TOTAL-REVENUES> 820,952
<CGS> 7,888
<TOTAL-COSTS> 2,000,332
<OTHER-EXPENSES> 1,413,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 479,932
<INCOME-PRETAX> (6,110,323)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,110,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,110,323)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
