U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO _______________
COMMISSION FILE NUMBER 0-9147
-----------
CANARGO ENERGY CORPORATION
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
-------------------------------------- --------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1580, 727 - 7th Avenue SW
Calgary, Alberta, Canada T2P 0Z5
-------------------------------------- --------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
403-777-1185
-------------------------------
(REGISTRANT'S TELEPHONE NUMBER)
--------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No
The number of shares of registrant's common stock outstanding on June 30, 2000
was 44,723,896. An additional 522,691 shares of common stock are issuable at
any time without additional consideration upon exercise of CanArgo Oil & Gas
Inc. Exchangeable Shares.
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
-----------------------------
JUNE 30, December 31,
2000 1999
------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . $ 5,299,752 $ 3,534,983
Accounts receivable . . . . . . . . . . . . . . . . . 438,852 464,435
Advances to operator. . . . . . . . . . . . . . . . . 810,973 -
Inventory . . . . . . . . . . . . . . . . . . . . . . 68,681 188,500
Other current assets. . . . . . . . . . . . . . . . . 30,717 94,174
------------- --------------
Total current assets . . . . . . . . . . . . . . . $ 6,648,975 $ 4,282,092
Property and equipment, net . . . . . . . . . . . . . 7,284,646 7,101,125
Oil and gas properties, net, full cost method
(including unevaluated amounts of $12,531,313
and $12,531,313 respectively). . . . . . . . . . . 31,090,534 30,707,037
Investments in and advances to oil and gas and other
ventures net. . . . . . . . . . . . . . . . . . . . 1,722,862 1,709,215
------------- --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . $ 46,747,017 $ 43,799,469
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . $ 1,160,011 $ 1,159,949
Accrued liabilities . . . . . . . . . . . . . . . . . 330,058 393,411
------------- --------------
Total current liabilities . . . . . . . . . . . . $ 1,490,069 $ 1,553,360
Provision for future site restoration . . . . . . . . 26,490 12,700
Minority interest in subsidiary . . . . . . . . . . . - 4,370,785
Stockholders' equity:
Preferred stock, par value $0.10 per share. . . . . . - -
Common stock, par value $0.10 per share . . . . . . . 4,524,658 3,735,292
Capital in excess of par value. . . . . . . . . . . . 112,973,922 106,216,164
Accumulated deficit . . . . . . . . . . . . . . . . . (72,268,122) (72,088,832)
------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . $ 45,230,458 $ 37,862,624
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY . . . . . . $ 46,747,017 $ 43,799,469
============= ==============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
---------------------------------------- --------------------------
Three Months Ended Six Months Ended
JUNE 30, June 30, JUNE 30, June 30,
2000 1999 2000 1999
-------------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and gas sales . . . . . . . . . . . . . . . . $ 1,346,495 $ 790,795 $ 3,231,171 $ 904,462
Other . . . . . . . . . . . . . . . . . . . . . . 168,600 - 364,900 -
-------------------- ------------------ ------------ ------------
1,515,095 790,795 3,596,071 904,462
-------------------- ------------------ ------------ ------------
Operating Expenses:
Lease operating expense . . . . . . . . . . . . . 259,532 433,332 632,128 500,050
Direct project costs. . . . . . . . . . . . . . . 247,220 118,337 383,529 403,537
General and administrative. . . . . . . . . . . . 392,145 419,550 766,019 1,104,384
Depreciation, depletion and amortization. . . . . 803,590 373,300 1,879,080 398,300
-------------------- ------------------ ------------ ------------
1,702,487 1,344,519 3,660,756 2,406,271
-------------------- ------------------ ------------ ------------
OPERATING LOSS. . . . . . . . . . . . . . . . . . . (187,392) (553,724) (64,685) (1,501,809)
-------------------- ------------------ ------------ ------------
Other Income (Expense):
Interest, net . . . . . . . . . . . . . . . . . . 67,128 (102,361) 101,463 (150,620)
Other . . . . . . . . . . . . . . . . . . . . . . 7,054 32,652 274 (8,233)
Loss on disposition of equipment. . . . . . . . . - (29,803) - (29,803)
Equity loss from investments in
unconsolidated subsidiaries . . . . . . . . . . (69,154) (20,000) (82,154) (41,581)
-------------------- ------------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE). . . . . . . . . . . . 5,028 (119,512) 19,583 (230,237)
-------------------- ------------------ ------------ ------------
Minority interest in loss (income) of consolidated
subsidiary. . . . . . . . . . . . . . . . . . . (97,388) 68,902 (134,188) 156,489
-------------------- ------------------ ------------ ------------
NET LOSS AND COMPREHENSIVE LOSS . . . . . . . . . . $ (279,752) $ (604,334) $ (179,290) $(1,575,557)
==================== ================== ============ ============
Weighted average number of
common shares outstanding . . . . . . . . . . . 40,467,113 21,297,844 38,944,248 21,217,799
-------------------- ------------------ ------------ ------------
NET LOSS PER COMMON SHARE BASIC . . . . . . . . . . $ (0.01) $ (0.03) $ (0.00) $ (0.07)
-------------------- ------------------ ------------ ------------
NET LOSS PER COMMON SHARE DILUTED . . . . . . . . . $ (0.01) $ (0.03) $ (0.00) $ (0.07)
-------------------- ------------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
--------------------------------
Six Months Ended
JUNE 30, June 30,
2000 1999
------------------ ------------
<S> <C> <C>
Operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (179,290) $(1,575,557)
Depreciation, depletion and amortization. . . . . . . . . . 1,879,080 398,300
Issuance of common stock for services . . . . . . . . . . . 112,700 -
Equity loss from investments in unconsolidated subsidiaries 82,154 41,581
Loss on disposition of equipment. . . . . . . . . . . . . . - 29,803
Minority interest in income (loss) of consolidated subsidiary 134,188 (156,489)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . 25,583 266,095
Advances to operator. . . . . . . . . . . . . . . . . . . (810,973) 86,552
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 119,819 (8,807)
Other current assets. . . . . . . . . . . . . . . . . . . 63,457 278,609
Accounts payable. . . . . . . . . . . . . . . . . . . . . 62 811,413
Accrued liabilities . . . . . . . . . . . . . . . . . . . (63,353) (444,348)
------------------ ------------
NET CASH GENERATED (USED) IN OPERATING ACTIVITIES . . . . . . 1,363,427 (272,848)
------------------ ------------
Investing activities:
Investments in oil and gas properties . . . . . . . . . . . (2,089,470) (416,059)
Purchase of property and equipment. . . . . . . . . . . . . (347,811) (306,916)
Proceeds from the disposition of assets . . . . . . . . . . - 68,000
Investments in and advances to oil and gas and other
ventures. . . . . . . . . . . . . . . . . . . . . . . . . (95,801) (539,439)
------------------ ------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . (2,533,082) (1,194,414)
------------------ ------------
Financing Activities:
Proceeds from sales of common stock . . . . . . . . . . . . 3,186,762 25,660
Share issue costs . . . . . . . . . . . . . . . . . . . . . (252,338) -
Deferred share issue costs. . . . . . . . . . . . . . . . . - (292,688)
------------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . 2,934,424 (267,028)
------------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 1,764,769 (1,734,290)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . 3,534,983 1,924,908
------------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . . . . . . $ 5,299,752 $ 190,618
------------------ ------------
Non cash investing and financing activities:
Issuance of common stock in connection with
acquisition of minority interest in subsidiaries. . . . . $ 4,500,000 $ 109,500
================== ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (UNAUDITED)
(1) Basis of Presentation - The interim consolidated condensed financial
statements and notes thereto of CanArgo Energy Corporation and its
subsidiaries (collectively, CanArgo) have been prepared by management
without audit. In the opinion of management, the consolidated condensed
financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results
for the interim period. The accompanying consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the CanArgo
Annual Report on Form 10-K for the year ended December 31, 1999 filed
with the Securities and Exchange Commission.
Certain items in the consolidated condensed 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.
Oil and Gas Properties - CanArgo and the unconsolidated entities for
which it accounts using the equity method account for oil and gas
properties and interests under the full cost method. Under this
accounting method, costs, including a portion of internal costs
associated with property acquisition and exploration for and development
of oil and gas reserves, are capitalized within cost centers established
on a country-by-country basis. Capitalized costs within a cost center,
as well as the estimated future expenditures to develop proved reserves
and estimated net costs of dismantlement and abandonment, are amortized
using the unit-of-production method based on estimated proved oil and
gas reserves. All costs relating to production activities are charged to
expense as incurred.
Capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, are
limited to, on an after-tax basis, 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.
(2) Need for Significant Additional Capital, Possible Impairment of Assets
Development of the oil and gas properties and ventures in which CanArgo
has interests involves multi-year efforts and substantial cash
expenditures. CanArgo had working capital of $5,158,906 at June 30,
2000, which is not sufficient to fully implement its current Ninotsminda
field development plan, explore existing acreage and pursue the rights
to new oil and gas licenses and opportunities in Georgia. CanArgo
believes that it will be able to generate funds from external sources
including quasi-governmental financing agencies, conventional lenders,
equity investors and other oil and gas companies that may desire to
participate in CanArgo's oil and gas projects.
Ultimate realization of the carrying value of CanArgo's oil and gas
properties 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, 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, CanArgo must mobilize drilling equipment
and personnel to initiate drilling, completion and production
activities. If one or more of the above factors, or other factors,
are different than anticipated, CanArgo may not recover its carrying
value.
CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures (see note 4 and 5)
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 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 CanArgo, such entities or their respective
stockholders or participants.
The consolidated financial statements of CanArgo do not give effect
to any additional impairment in the value of CanArgo's investment
in oil and gas properties and ventures or other adjustments that
would be necessary if financing cannot be arranged for the development
of such properties and ventures or if they are unable to achieve
profitable operations. 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 CanArgo.
(3) Property and Equipment, Net
Property and equipment, net of accumulated depreciation and impairment,
at June 30, 2000 and December 31, 1999 include the following:
<TABLE>
<CAPTION>
December 31,
JUNE 30, 2000 1999
------------------------------------------- -------------
ACCUMULATED
DEPRECIATION
COST AND IMPAIRMENT NET NET
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Oil and gas related
Equipment . . . . . . . $ 9,852,934 $ 2,833,372 $ 7,019,562 $ 6,794,473
Office furniture, fixtures
and equipment and other 648,172 383,088 265,084 306,652
------------- -------------- ------------ -------------
PROPERTY AND EQUIPMENT . . $ 10,501,106 $ 3,216,460 $ 7,284,646 $ 7,101,125
============= ============== ============ =============
</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 CanArgo in the
development of the Ninotsminda field.
(4) Oil and Gas Properties, Net
CanArgo has acquired interests in oil and gas properties through joint
ventures and other joint operating arrangements. Oil and gas properties,
net of accumulated depletion and impairment, at June 30, 2000 and
December 31, 1999 include the following:
<TABLE>
<CAPTION>
December 31,
JUNE 30, 2000 1999
--------------------------------------------------- ------------
REPUBLIC OF
GEORGIA CANADA USA TOTAL TOTAL
-------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Proved properties . $ 21,416,380 $ -- $ -- $21,416,380 $19,331,883
Unproved properties 12,517,905 13,408 1,174,734 13,706,047 13,706,047
Less: accumulated
depletion and
impairment . . . (2,857,159) -- (1,174,734) (4,031,893) (2,330,893)
-------------- ------- ------------ ------------ ------------
TOTAL OIL AND GAS
PROPERTIES, NET . . $ 31,077,126 $13,408 $ -- $31,090,534 $30,707,037
============== ======= ============ ============ ============
</TABLE>
Unproved properties and associated costs not currently being
amortized and included in oil and gas properties were $12,531,313
at June 30, 2000 and December 31, 1999. Unproved oil and gas properties
at June 30, 2000 include costs of $12,517,905 with respect to
properties in Eastern Europe. These properties are expected to be
evaluated over the next 54 months. Remaining costs of $13,408 relate to
the minor property interests in Western Canada which are expected to be
evaluated over the next 21 months. If no proved reserves are added,
these properties could experience additional impairment.
(5) Investments in and Advances to Oil and Gas and Other Ventures
CanArgo has acquired interests in oil and gas and other ventures
through less than majority interests in corporate and corporate-like
entities. A summary of CanArgo's net investment in and advances to oil
and gas ventures as of June 30, 2000 and December 31, 1999 is set out
below:
<TABLE>
<CAPTION>
JUNE 30, December 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 2000 1999
-------------------------------------------------------------------- ------------ --------------
<S> <C> <C>
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company. . . . . . . . . $ 6,086,254 $ 6,086,254
Republic of Georgia - Sartichala
Through 12.9% ownership of Georgian American Oil Refinery. . . . 1,008,845 1,008,845
Republic of Georgia - Ninotsminda
Through an effective 42.5% ownership Sagarego Power Corporation. 635,713 635,713
Republic of Georgia - Ninotsminda
Through an effective 50% ownership of East Georgian Pipeline Co. 40,000 --
Republic of Georgia - CanArgo Standard Oil Products J.V.
Through an effective 50% ownership. . . . . . . . . . . . . . . . 100,000 --
Uentech International Corporation
Through an effective 45% voting interest . . . . . . . . . . . . 230,111 274,310
------------ --------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,100,923 $ 8,005,122
============ ==============
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES
--------------------------------------------------------------------
Ukraine - Stynawske Field, Boryslaw. . . . . . . . . . . . . . . . . $ (626,461) $ (626,461)
Republic of Georgia - Sagarego Power Corporation . . . . . . . . . . (186,074) (186,074)
Uentech International Corporation. . . . . . . . . . . . . . . . . . (105,733) (23,579)
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES . . . . . . . . . . . . . . . . . . . . . . . . . $ (918,268) $ (836,114)
------------ --------------
IMPAIRMENT - STYNAWSKE FIELD . . . . . . . . . . . . . . . . . . . . (5,459,793) (5,459,793)
------------ --------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT. . . . . . . . $ 1,722,862 $ 1,709,215
============ ==============
</TABLE>
CanArgo's ventures are in the development stage. Accordingly,
realization of these investments is dependent upon successful
development of and ultimately cash flows from operations of the
ventures.
(6) Accrued Liabilities
Accrued liabilities at June 30, 2000 and December 31, 1999 include
the following:
<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
--------- -------------
<S> <C> <C>
Professional fees $ - $ 167,500
Share Issue Costs 191,121 -
Workovers . . . . 50,000 150,000
Other . . . . . . 88,937 75,911
--------- -------------
$ 330,058 $ 393,411
========= =============
</TABLE>
(7) Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
------------- ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
TOTAL, DECEMBER 31, 1999 . . . . 37,352,922 $ 3,735,292 $106,216,164 $ (72,088,832) $37,862,624
Less shares issuable at
beginning of period. . . . . . . (529,759) (52,976) (994,678) -- (1,047,654)
Issuance of common stock upon
exchange of CanArgo Oil &
Gas Inc. Exchangeable Shares . . 7,068 707 13,271 -- 13,978
Issuance of common stock for
services . . . . . . . . . . . . 140,000 14,000 98,700 -- 112,700
Issuance of common stock
pursuant to private placement. . 3,695,000 369,500 2,814,666 -- 3,184,166
Issuance of common stock to
purchase minority interest in
subsidiary . . . . . . . . . . . 4,054,054 405,405 4,094,595 -- 4,500,000
Exercise of stock options. . . . 4,611 461 2,135 -- 2,596
Share issue costs. . . . . . . . -- -- (252,338) -- (252,338)
Net loss . . . . . . . . . . . . -- -- -- (179,290) (179,290)
------------- ------------- ------------- --------------- ------------
BALANCE, JUNE 30, 2000 . . . . . 44,723,896 $ 4,472,389 $111,992,515 $ (72,268,122) $44,196,782
Shares issuable with respect to
private placement. . . . . . . . 15,660,916 1,566,091 14,342,288 -- 15,908,379
Less subscriptions receivable. . -- (1,566,091) (14,342,288) -- (15,908,379)
Shares issuable upon exchange
of CanArgo Oil & Gas Inc.
Exchangeable Shares without
receipt of further consideration 522,691 52,269 981,407 -- 1,033,676
------------- ------------- ------------- --------------- ------------
TOTAL, JUNE 30, 2000 . . . . . . 60,907,503 $ 4,524,658 $112,973,922 $ (72,268,122) $45,230,458
============= ============= ============= =============== ============
</TABLE>
On June 27, 2000 CanArgo completed a private placement of 15,660,916
new common shares at Norwegian Kroner (NOK) 9.00 per share
(approximately US$1.02 per share). Gross proceeds from the private
placement of $15,908,379, less share issue costs of approximately
$1,338,783, were received in July 2000. From the net proceeds, CanArgo
is required to pay subscribers to the private placement a cash fee of
3.33% of the purchase price of their shares for each full 30 day period
after closing until a registration statement registering such shares is
declared effective by the Securities Exchange Commission. The maximum
cash fee is 10% of the subscription price with the obligation to file
a registration statement and the commencement of the first full 30 day
period contingent upon receipt by CanArgo of all such information
required to file a registration statement. On August 3, 2000 CanArgo
filed a registration statement on Form S-3 to register the shares issued
in connection with the private placement. On August 14, 2000 the
registration statement had not yet been declared effective.
At June 30, 2000, 100 shares of Voting Preferred Shares were also
issued and outstanding. No other shares of the Company's preferred stock
have been issued.
(8) Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share for the periods
ended June 30, 2000 and June 30, 1999 are based on the weighted
average number of common shares outstanding during those periods. The
weighted average numbers of shares issued and issuable without receipt
of additional consideration for the six month periods ended June 30,
2000 and 1999 are 38,944,248 and 21,217,799 respectively. Options to
purchase CanArgo's common stock were outstanding at June 30, 2000 but
were not included in the computation of diluted net income (loss) per
common share because the effect of such inclusion would have been
anti-dilutive. The weighted average number of shares outstanding at
June 30, 2000 does not reflect the shares issuable with respect to the
private placement of 15,660,916 shares of common stock in June 2000.
(9) Commitments and Contingencies
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring and developing oil
and gas properties and ventures. At June 30, 2000, CanArgo had
the contingent obligation to issue an aggregate of 187,500 shares of
its common stock, subject to the satisfaction of conditions related
to the achievement of specified performance standards by the Stynawske
field project.
(10) Segment Information
For the six month periods ended June 30, 2000 and 1999, CanArgo operated
through one business segment, oil and gas exploration and production.
Operating revenues for the six month periods ended June 30, 2000 and
1999 by geographical area were as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 June 30, 1999
-------------- --------------
<S> <C> <C>
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe . . . . . . . . . . . . . . . . . $ 3,596,071 $ 707,171
Canada . . . . . . . . . . . . . . . . . . . . . -- 197,291
-------------- --------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $ 3,596,071 $ 904,462
============== ==============
</TABLE>
Operating income (loss) for the six month periods ended June 30, 2000 and 1999
by geographical area were as follows:
<TABLE>
<CAPTION>
JUNE 30, June 30,
2000 1999
---------- ------------
<S> <C> <C>
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe . . . . . . . . . . . . . . . . . $ 701,334 $ (324,090)
Canada . . . . . . . . . . . . . . . . . . . . . -- (73,335)
---------- ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $ 701,334 $ (397,425)
CORPORATE EXPENSES. . . . . . . . . . . . . . . . . $(766,019) $(1,104,384)
---------- ------------
TOTAL OPERATING LOSS. . . . . . . . . . . . . . . . $ (64,685) $(1,501,809)
========== ============
</TABLE>
Identifiable assets as of June 30, 2000 and December 31, 1999 by business
segment and geographical area were as follows:
<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
----------- -------------
<S> <C> <C>
CORPORATE
Eastern Europe . . . . . . . . . . . . . . . . . $ 68,681 $ 262,174
Canada . . . . . . . . . . . . . . . . . . . . . 6,541,839 3,981,274
Western Europe . . . . . . . . . . . . . . . . . 38,455 38,644
----------- -------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $ 6,648,975 $ 4,282,092
----------- -------------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe . . . . . . . . . . . . . . . . . $38,361,771 $ 37,794,754
Canada . . . . . . . . . . . . . . . . . . . . . 13,409 13,408
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $38,375,180 $ 37,808,162
----------- -------------
OTHER ENERGY INVESTMENTS
Eastern Europe . . . . . . . . . . . . . . . . . $ 1,598,484 $ 1,458,484
Canada . . . . . . . . . . . . . . . . . . . . . 124,378 250,731
----------- -------------
$ 1,722,862 $ 1,709,215
----------- -------------
IDENTIFIABLE ASSETS - TOTAL . . . . . . . . . . . . $46,747,017 $ 43,799,469
=========== =============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
The United States Private Securities Litigation Reform Act of 1995 provides
a "safe harbor" for certain forward looking statements. Such forward looking
statements are based upon the current expectations of CanArgo and speak only as
of the date made. These forward looking statements involve risks, uncertainties
and other factors. The factors discussed below under "Forward Looking
Statements" and elsewhere in this Quarterly Report on Form 10-Q are among those
factors that in some cases have affected CanArgo's historic results and could
cause actual results in the future to differ significantly from the results
anticipated in forward looking statements made in this Quarterly Report on Form
10-Q, future filings by CanArgo with the Securities and Exchange Commission, in
CanArgo's press releases and in oral statements made by authorized officers of
CanArgo. When used in this Quarterly Report on Form 10-Q, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe," "hope," "may" and
similar expressions, as well as "will," "shall" and other indications of future
tense, are intended to identify forward looking statements.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
In June 2000, CanArgo Energy Corporation completed a private placement of
15,660,916 shares at Norwegian Kroner (NOK) 9.00 per share (approximately
US$1.02 per share). Gross proceeds from the placement of NOK 141 million
(approximately US$15,909,000), less share issue costs of approximately
$1,339,000, were received in July 2000. In April 2000, CanArgo closed a private
placement resulting in the issuance of 3,695,000 shares at NOK 7.50 per share
for gross proceeds of $3,184,166. CanArgo's management believes that cash and
cash equivalents at June 30, 2000, augmented by net proceeds from the June 2000
private placement and cash generated from operations should be sufficient to
cover operating needs during the next twelve month period. However, no
assurances can be given that CanArgo's operations will generate positive cash
flow and that the funds provided by the sources noted above or from other
sources will be sufficient to satisfy CanArgo's operating needs during the next
twelve months.
While CanArgo's management believes that CanArgo should have sufficient
cash to cover operating expenses, CanArgo's cash balance at June 30, 2000 and
subsequent proceeds from its June private placement are not sufficient to fully
implement its current Ninotsminda field development plan, explore existing
acreage and pursue the rights to new oil and gas licenses and opportunities in
Georgia. Current development plans for the Ninotsminda field includes the
completion of well N97 to the Cretaceous, a horizontal sidetrack of well N98 and
seven major rehabilitations of existing wells, with a view towards increasing
oil and gas production. The development plan is scheduled to be implemented in
2000 and the first half of 2001, but that timing is dependent upon key supplies
and other equipment for the development being available promptly.
In December 1998, Ninotsminda Oil Company, a wholly owned subsidiary of
CanArgo, entered into a convertible loan agreement with International Finance
Corporation ("IFC"), an affiliate of the World Bank, under which IFC agreed
under specified conditions, to lend $6 million to Ninotsminda Oil Company
primarily to fund the Ninotsminda field current development program. IFC has the
right, upon notice to CanArgo, to terminate its loan commitment if, among other
things, the first disbursement under the loan agreement is not made by June 30,
1999, or such other date as IFC and CanArgo agree. IFC has no obligation to
disburse funds after June 29, 2000.
No funds have been disbursed under the loan agreement. If funds were
disbursed, IFC would have the right to convert all or part of the loan into
common shares of Ninotsminda Oil Company. IFC would also have the ability to
accept or reject joint venture or third party investment in the project. As a
result of these and other conditions, CanArgo does not intend to draw from this
loan.
<PAGE>
While a considerable amount of infrastructure for the Ninotsminda field has
been put in place, CanArgo cannot provide assurance that:
- funding of the Ninotsminda field current development plan will be timely,
- that the development plan will be successfully completed or 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 pursue all of CanArgo's projects and opportunities, CanArgo would
require additional capital. Potential sources of funds include additional
equity, project financing, debt financing and the participation of other oil and
gas entities in CanArgo's projects. Based on continuing discussions including
those with major stockholders, investment bankers and other 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.
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
also 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:
- mobilization of equipment and personnel to implement effectively drilling,
completion and production activities;
- achieving significant production at costs that provide acceptable margins;
- reasonable levels of taxation, or economic arrangements in lieu of
taxation in host countries; and
- 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. If a loan from IFC was drawn, until
Ninotsminda Oil Company repays the IFC loan, CanArgo will have the limited
ability to transfer funds from Ninotsminda Oil Company to CanArgo.
CHANGES IN FINANCIAL POSITION
As of June 30, 2000, CanArgo had working capital of $5,159,000, compared to
working capital of $2,729,000 as of December 31, 1999. The $2,430,000 increase
in working capital from December 31, 1999 to June 30, 2000 principally reflects
completion of private placements in April and June 2000 and a positive
contribution to working capital from operations in the period, less capital
expenditures.
Cash and cash equivalents increased $1,765,000 during the first six months
of 2000 from $3,535,000 at December 31, 1999 to $5,300,000 at June 30, 2000,
primarily as a result of the April 2000 private placement less operating and
capital expenditures. Cash and cash equivalents at June 30, 2000 included
$1,141,000 held by Ninotsminda Oil Company, to which CanArgo has limited access.
Accounts receivable decreased from $464,000 at December 31, 1999 to
$439,000 at June 30, 2000 primarily as a result of collection of accounts
receivable relating to equipment rentals and gas sales in the prior quarter.
Gas sales decreased in the second quarter of 2000 compared to the first quarter
of 2000 as a result of the unanticipated shut down and maintenance overhaul of
two generating units at the Gardabani power plant. In June 2000, deliveries
commenced to a second purchaser of gas.
Advances to operator increased from $nil at December 31, 1999 to $811,000
at June 30, 2000, as a result of advances to the operator of the Ninotsminda
field for future expenditures on behalf and at the direction of CanArgo.
Inventory decreased from $189,000 at December 31, 1999 to $69,000 at June
30, 2000, as result of the sale of oil from storage to the Georgian domestic and
regional market during the period. Depending on the demand and price for oil in
the Georgian domestic and regional market CanArgo may decide to place additional
production in storage. At June 30, 2000, approximately 20,000 barrels of oil
were held in storage. Oil inventories are valued at lower of cost or market.
Other current assets decreased from $94,000 at December 31, 1999 to $31,000 at
June 30, 2000, as a result of the amortization of prepaid expenses.
Property and equipment, net, increased from $7,101,000 at December 31,
1999, to $7,285,000 at June 30, 2000, primarily as a result of the acquisition
of gas production equipment, pipeline and other infrastructure.
Oil and gas properties, net, increased from $30,707,000 at December 31,
1999, to $31,091,000 at June 30, 2000 primarily as a result of workover and
capitalized general and administrative costs of $2,089,000 partially offset by
depletion charges of $1,701,000.
Investments in and advances to oil and gas and other ventures, net
increased slightly from $1,709,000 at December 31, 1999, to $1,723,000. The
increase reflects CanArgo's investment in CanArgo Standard Oil Products of
$100,000 and East Georgian Pipeline Company of $40,000, partially offset by
CanArgo's equity share of loss of Uentech International Corporation. CanArgo
Standard Oil will be the brand name of a chain of six stations in Tbilisi, the
capital city of Georgia. CanArgo has agreed to provide $200,000 in equity
funding to develop three additional stations for this chain. CanArgo will have
the option but not the obligation to participate in 50% of any future petrol
stations and to back in to ownership of 50% of the six existing stations. East
Georgian Pipeline Company leases from Georgian Oil the pipeline used to
transport natural gas from Sartichala to the Gardabani power plant.
At June 30, 2000, CanArgo held 45% of the voting common shares of Uentech
International Corporation and 78% of the total common shares outstanding.
Uentech International Corporation specializes in the exploitation of patented
downhole-heating technology. The core technology of the Reservoir Heating
System (RHS) heats the oil in the producing formation, lowering the viscosity
and improving the oil's preferential ability to flow. The technology has been
applied in the field with evidence showing flow rate increases typically in the
2 - 3 time's primary range. Uentech management believes this system, when fully
developed will be a viable economic alternative to other tertiary recovery
methods. Uentech International Corporation has developed relationships with
several strategic partnerships that will assist in the further exploitation of
the technology.
CanArgo has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring and developing oil and gas
properties and ventures. At June 30, 2000, 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.
Minority interest in subsidiaries decreased to $nil at June 30, 2000
compared to $4,371,000 at December 31, 1999 following the acquisition by CanArgo
in June 2000 of the minority shareholders 21.2% interest in Ninotsminda Oil
Company. Total consideration paid was 4,054,054 new common shares of CanArgo at
a price of $1.11 per share for total consideration of $4,500,000.
Subsequent to June 30, 2000 CanArgo received gross proceeds of approximately
$15,909,000, less share issue costs of approximately $1,339,000, from the
private placement of 15,660,916 shares of common stock in June 2000. From the
net proceeds, CanArgo is required to pay subscribers to the private placement a
cash fee of 3.33% of the purchase price of their shares for each full 30 day
period after closing until a registration statement registering such shares is
declared effective by the Securities Exchange Commission. The maximum cash fee
is 10% of the subscription price with the obligation to file a registration
statement and the commencement of the first full 30 day period contingent upon
receipt by CanArgo of all such information required to file a registration
statement. On August 3, 2000 CanArgo filed a registration statement on Form S-3
to register the shares issued in connection with the private placement. On
August 14, 2000 the registration statement had not yet been declared effective.
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. In 1999 CanArgo completed a review of its existing information
technology and non-information technology systems and upgraded its accounting
information systems to software that the developer represented to be Year 2000
compliant. Since January 1, 2000, CanArgo has had no report of issues with
respect to the Year 2000 problem although there can be no assurance that such
issues will not arise in the future.
CanArgo identified several significant suppliers of goods and services,
primarily in the banking, transportation, refining, utility and communication
sectors, whose inability or failure to become Year 2000 compliant in a timely
manner could have a material adverse effect on CanArgo's business, financial
condition, results of operations or cash flows. Since January 1, 2000, there has
been no report of issues with respect to the Year 2000 problem on CanArgo's
ability to produce, sell and receive payment for its crude oil on a timely
basis.
NEW ACCOUNTING STANDARDS
In 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities which will be adopted in the 2001 fiscal year. CanArgo
is currently evaluating the impact of SFAS No. 133 on its financial statements.
RESULTS OF OPERATIONS
Six Month Period Ended June 30, 2000 Compared to Six Month Period Ended June 30,
1999
In 1999, CanArgo completed its restructuring of the combined assets and
administration of Fountain Oil Incorporated and CanArgo Oil & Gas Inc. following
the business combination of the two companies in July 1998.
Since the business combination, CanArgo has focused primarily on the development
of the Ninotsminda field and the reduction of corporate overheads.
CanArgo recorded operating revenue of $3,596,000 during the six month
period ended June 30, 2000 compared with $904,000 for the six month period ended
June 30, 1999. The increase is primarily due to increases in gross crude oil
and natural gas production from the Ninotsminda field, higher crude oil prices
and service revenue.
Ninotsminda Oil Company generated $2,600,000 of oil revenue and $631,000 of
gas revenue in the six month period ended June 30, 2000 compared to $707,000 of
oil revenue and $nil gas revenue for the six month period ended June 30, 1999.
Its net share of the 244,787 barrels (1,352 barrels per day) of gross oil
production from the Ninotsminda field in the period amounted to 126,590 barrels.
An additional 9,800 barrels of oil were removed from storage and sold in the
period. For the six month period ended June 30, 1999, Ninotsminda Oil Company's
net share of the 205,700 barrels (1,136 barrels per day) of gross production was
71,300 barrels. During the six month period ended June 30, 1999, 7,700 barrels
of oil were removed from storage and sold. Ninotsminda Oil Company's net share
of the 791,000 thousand cubic feet (mcf) of gas delivered in the six month
period ended June 30, 2000 was 514,000 mcf.
All of Ninotsminda Oil Company's share of production was sold 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. The net oil
sales price for Ninotsminda oil sold during the first half of 2000 averaged
$19.06 per barrel as compared with an average of $8.95 per barrel in the first
half of 1999. The net gas sales price during the first half of 2000 averaged
$1.23 per mcf ($43.66 per thousand cubic meter).
CanArgo recorded in the six months ended June 30, 2000, other revenue of
$365,000 with respect to equipment rentals. There were no equipment rentals for
the corresponding period in 1999.
The operating loss for the six month period ended June 30, 2000 amounted to
$65,000 compared with an operating loss of $1,502,000 for the corresponding
period in 1999. The decrease in the operating loss is attributable primarily to
increased oil production and sales, higher oil prices, the addition of gas sales
and a significant reduction in general and administrative costs.
Lease operating expenses increased to $632,000 for the six month period
ended June 30, 2000 as compared to $500,000 for the six month period ended June
30, 1999. The increase is primarily a result of increased oil and gas production
in the period.
Direct project costs decreased to $384,000 for the six month period ended
June 30, 2000, from $404,000 for the six month period ended June 30, 1999,
reflecting efforts initiated in early 1999 to reduce Ninotsminda project
expenses.
General and administrative costs decreased to $766,000 for the six month
period ended June 30, 2000, from $1,104,000 for the six month period ended June
30, 1999. The decrease is primarily attributable to higher legal costs in 1999
as part of the Fountain restructuring and reduction in involvement in
development of the Stynawske field.
The increase in depreciation, depletion and amortization expense from
$398,000 for the six month period ended June 30, 1999 to $1,879,000 for the six
month period ended June 30, 2000 is attributable principally to depletion
related to Ninotsminda field oil production and depreciation of drilling
equipment.
CanArgo recorded net other income of $20,000 for the six months ended June
30, 2000, as compared to other loss of $147,000 during the six months ended June
30, 1999. The principal reason for the increase is interest income during the
six months ended June 30, 2000 on cash balances and the payment of facility fees
in the six months ended June 30, 1999 related to Ninotsminda Oil Company's Loan
Agreement with the International Finance Corporation.
The net loss of $179,000 or $0.00 per share for the six month period ended
June 30, 2000 compares to a net loss of $1,576,000, or $0.07 per share for the
six month period ended June 30, 1999. The weighted average number of common
shares outstanding was substantially higher during the six month period ended
June 30, 2000 than during the six month period ended June 30, 1999, due in large
part to a registered public offering in August 1999 and private placements in
late 1999, April 2000 and June 2000.
Three Month Period Ended June 30, 2000 Compared to Three Month Period Ended June
30, 1999
CanArgo recorded operating revenue of $1,515,000 during the three month period
ended June 30, 2000 compared with $791,000 for the three month period ended June
30, 1999. The increase is primarily due to increases in gross crude oil and
natural gas production from the Ninotsminda field, higher crude oil prices and
service revenue.
Ninotsminda Oil Company generated $1,164,000 of oil revenue and $182,000 of
gas revenue in the three month period ended June 30, 2000 compared to $639,000
of oil revenue and $nil gas revenue for the three month period ended June 30,
1999. Ninotsminda Oil Company's net share of the 117,655 barrels (1,293 barrels
per day) of gross oil production from the Ninotsminda field in the period
amounted to 60,200 barrels. An additional 270 barrels of oil were placed into
storage in the period. For the three month period ended June 30, 1999,
Ninotsminda Oil Company's net share of the 97,900 barrels (1,076 barrels per
day) of gross production was 32,200 barrels. An additional 39,000 barrels of
oil was sold from storage in the three month period ended June 30, 1999.
Ninotsminda Oil Company's net share of the 238,000 mcf of gas delivered in the
three month period ended June 30, 2000 was 154,700 mcf. No gas was delivered in
the three month period ended June 30, 1999. Gas revenue decreased to $182,000
in the second quarter of 2000 compared to $449,000 in the first quarter of 2000
as a result of the unanticipated shut down and maintenance overhaul of two
generating units at the Gardabani power plant. In June 2000, deliveries
commenced to a second purchaser of gas.
All of Ninotsminda Oil Company's share of production was sold 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. The net oil
sales price for Ninotsminda oil sold during the second quarter of 2000 averaged
$19.42 per barrel as compared with an average of $8.99 per barrel in the three
month period ended June 30, 1999. The net gas sales price during the second
quarter of 2000 averaged $1.18 per mcf ($41.88 per thousand cubic meter).
CanArgo recorded other revenue of $169,000 in the three months ended June
30, 2000 with respect to equipment rentals. There were no equipment rentals for
the corresponding period in 1999.
The operating loss for the three month period ended June 30, 2000 amounted
to $187,000 compared with an operating loss of $554,000 for the corresponding
period in 1999. The decrease in the operating loss is attributable primarily to
increased oil production and sales, higher oil prices and the addition of gas
sales.
Lease operating expenses decreased to $260,000 for the three month period ended
June 30, 2000 as compared to $433,000 for the three month period ended June 30,
1999. The decrease is primarily a result of operating costs related to oil
removed from storage and sold in the three months ended June 30, 1999.
Direct project costs increased to $247,000 for the three month period ended
June 30, 2000, from $118,000 for the three month period ended June 30, 1999,
reflecting increased activity related to development of the Ninotsminda field
and settlement of all potential claims in relation to the Maykop project.
General and administrative costs decreased to $392,000 for the three month
period ended June 30, 2000, from $420,000 for the three month period ended June
30, 1999.
The increase in depreciation, depletion and amortization expense from
$373,000 for the three month period ended June 30, 1999 to $804,000 for the
three month period ended June 30, 2000 is attributable principally to depletion
related to Ninotsminda field oil production and depreciation of drilling
equipment.
CanArgo recorded net other income of $5,000 for the three months ended June
30, 2000, as compared to other loss of $120,000 during the three months ended
June 30, 1999. The principal reason for the increase is interest income during
the three months ended June 30, 2000 on cash balances and the payment of
facility fees in the three months ended June 30, 1999 related to Ninotsminda
Oil Company's Loan Agreement with the International Finance Corporation. The
equity loss from investments in unconsolidated subsidiaries increased to $69,000
for the three month period ended June 30, 2000, from $20,000 for the three month
period ended June 30, 1999 as a result as a result of greater activity by
Uentech International Corporation, partially offset by the termination of
CanArgo's involvement in the development activities of some Eastern European oil
and gas ventures conducted through unconsolidated subsidiaries.
The net loss of $280,000 or $0.01 per share for the three month period
ended June 30, 2000 compares to a net loss of $604,000, or $0.03 per share for
the three month period ended June 30, 1999. The weighted average number of
common shares outstanding was substantially higher during the six month period
ended June 30, 2000 than during the six month period ended June 30, 1999, due in
large part to a registered public offering in August 1999 and private placements
in late 1999, April 2000 and June 2000.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 2 and elsewhere in
this Form 10-Q are subject to various risks, uncertainties and other factors
that could cause actual results to differ materially from the results
anticipated in such forward looking statements. Included among the important
risks, uncertainties and other factors are those hereinafter discussed.
Few of such forward looking statements deal with matters that are within
the unilateral control of CanArgo. Joint venture, acquisition, financing and
other agreements and arrangements must be negotiated with independent third
parties and, in some cases, must be approved by governmental agencies. Such
third parties generally have interests that do not coincide with those of
CanArgo and may conflict with CanArgo's interests. Unless CanArgo and such
third parties are able to compromise their respective objectives in a mutually
acceptable manner, agreements and arrangements will not be consummated.
Operating entities in various foreign jurisdictions must be registered by
governmental agencies, and production licenses for development of oil and gas
fields in various foreign jurisdictions must be granted by governmental
agencies. These governmental agencies generally have broad discretion in
determining whether to take or approve various actions and matters. In
addition, the policies and practices of governmental agencies may be affected or
altered by political, economic and other events occurring either within their
own countries or in a broader international context.
CanArgo does not have a majority of the equity in the entity that is the
licensed developer of some projects that CanArgo may pursue in Eastern Europe
such as the Stynawske field project, even though CanArgo may be the designated
operator of the oil or gas field. In such circumstances, the concurrence of
co-venturers may be required for various actions. Other parties influencing the
timing of events may have priorities that differ from those of CanArgo, even if
they generally share CanArgo's objectives. As a result of all of the foregoing,
among other matters, the forward looking statements regarding the occurrence and
timing of future events may well anticipate results that will not be realized.
The availability of equity or debt financing to CanArgo or to the entities
that are developing projects in which CanArgo has interests is affected by many
factors including:
- world economic conditions;
- international relations;
- the stability and policies of various governments;
- fluctuations in the price of oil and gas and the outlook for the oil and
gas industry;
- competition for funds; and
- 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:
- legal uncertainties regarding the enforceability of contracts;
- currency convertibility and transferability;
- unexpected changes in tax rates;
- political instability;
- sudden or unexpected changes in demand for crude oil and or natural gas;
- availability of trained personnel; and
- availability of equipment and services and other factors that could
significantly change the economics of production.
Production estimates are subject to revision as prices and costs change.
Production, even if present, may not be recoverable in the amount and at the
rate anticipated and may not be recoverable in commercial quantities or on an
economically feasible basis. World and local prices for oil and gas can
fluctuate significantly, and a reduction in the revenue realizable from the sale
of production can affect the economic feasibility of an oil and gas project.
World and local political, economic and other conditions could affect CanArgo's
ability to proceed with or to effectively operate projects in various foreign
countries.
Demands by or expectations of governments, co-venturers, customers and
others may affect CanArgo's strategy regarding the various projects. Failure to
meet such demands or expectations could adversely affect CanArgo's participation
in such projects or its ability to obtain or maintain necessary licenses and
other approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CanArgo had no interest in investments subject to market risk during the
period covered by this report.
<PAGE>
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of stockholders was held on June 14, 2000. Stockholders
voted (1) to elect five directors to serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified, (2) to
ratify the selection of PricewaterhouseCoopers LLP as independent public
accountants of CanArgo for the year ending December 31, 2000, and (3) to approve
a proposed increase in CanArgo's authorized Common Stock from 50,000,000 to
150,000,000 shares. On the record date, May 2, 2000, there were 40,664,263
shares of the voting securities of CanArgo outstanding and entitled to vote.
With respect to the election of the five directors, the tabulation of votes was
as follows:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR WITHHELD BROKER NON-VOTES
---------------- --------- -------- ----------------
<S> <C> <C> <C>
Michael Binnion 28,049,379 19,741 -
Russell Hammond 28,049,379 19,741 -
Peder Paus 28,049,379 19,741 -
David Robson 28,049,379 19,741 -
Nils N. Trulsvik 28,049,379 19,741 -
</TABLE>
With respect to the ratification of the selection of PricewaterhouseCoopers LLP
as CanArgo's independent public accountant, the tabulation of votes was
28,052,039 in favor, 15,910 against, 1,161 abstentions and no broker non-votes.
With respect to the proposal to increase CanArgo's authorized Common Stock from
50,000,000 to 150,000,000 shares, the tabulation of votes was 27,954,679 in
favor, 104,552 against, 9.959 abstentions and no broker non-votes.
No other matters were submitted to a vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
<C> <S>
1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated herein by reference
from Form S-1 Registration Statement, File No. 333-72295 filed on June 9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities Limited, David Williamson
Associates Limited, and Orkla Finans (Fondsmegling) ASA (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295 filed on June 9,
1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295 filed on June 9,
1999).
1(4) Selling Agent Agreement with National Securities Corporation (Incorporated herein by
reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File
No. 333-72295 filed on July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust Company (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share Capital of Gastron
International Limited dated August 10, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All the Issued Share Capital
of Gastron International Limited dated November 3, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard
Tate as Warrantor (Incorporated herein by reference from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the Issued Share Capital of
Gastron International Limited dated May 29, 1996 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from June 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services Pty, Ltd., A.C.N. 005
506 123 and Fountain Oil Incorporated dated May 16, 1995 (Incorporated herein by
reference from December 31, 1997 Form 10-K/A).
2(5) Amended and Restated Combination Agreement between Fountain Oil Incorporated and
CanArgo Energy Inc. dated as of February 2, 1998 (Incorporated herein by reference from
Form S-3 Registration Statement, File No. 333-48287 filed on June 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated herein by reference as
Annex G from Form S-3 Registration Statement, File No. 333-48287 filed on June 9,
1998).
3(1) Registrant's Certificate of Incorporation and amendments thereto (Incorporated herein by
reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from Post-Effective Amendment
No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX Nederland B.V. dated June
28, 2000, relating to purchase of 21.2% interest in Ninotsminda Oil Company
(Incorporated herein by reference from July 20, 2000 Form 8-K).
*10(1) Form of Option Agreement for options granted to certain persons, including Directors
(Incorporated herein by reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., the Company's predecessor).
*10(2) Employment Agreement between Fountain Oil Incorporated and Susan E. Palmer
(Incorporated herein by reference from August 31, 1995 Form 10-KSB).
*10(3) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated herein by reference
from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-
72295 filed on July 29, 1999).
*10(4) Fee Agreement dated November 15, 1995 between Fountain Oil Incorporated and Robert
A. Halpin (Incorporated herein by reference from August 31, 1996 Form 10-KSB).
*10(5) Amended Fee Agreement dated December 10, 1996 between Fountain Oil Incorporated
and Robert A. Halpin (Incorporated herein by reference from December 31, 1996 Form
10-K).
*10(6) Amended and Restated CanArgo Energy Inc. Stock Option Plan (Incorporated herein by
reference from September 30, 1998 Form 10-Q).
*10(7) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as Consultant
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(8) Consultancy Agreement between CanArgo Energy Corporation and Fincom AS, Norway
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(9)
Employment Contract between CanArgo Energy Inc. and Anthony J. Potter (Incorporated
herein by reference from September 30, 199
*10(10) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as Consultant
(Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-
72295 filed on February 12, 1999).
10(11) Convertible Loan Agreement between Ninotsminda Oil Company (NOC) and International
Finance Corporation (IFC) dated December 17, 1998 (Incorporated herein by reference
from Form S-1 Registration Statement, File No. 333-72295 filed on February 12, 1999).
10(12) Put Option Agreement between CanArgo Energy Corporation, JKX Oil & Gas PLC. and
IFC dated December 17, 1998 (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February 12, 1999).
10(13) Guarantee Agreement between CanArgo Energy Corporation and IFC dated December 17,
1998 (Incorporated herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on February 12, 1999).
10(14) Agreement between Georgian Oil Refinery Company and CanArgo Petroleum Products
Ltd. dated September 26, 1998 (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February 12, 1999).
10(15) Terrenex Acquisition Corporation Option regarding CanArgo (Nazvrevi) Limited
(Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-
72295 filed on February 12, 1999).
10(16) Production Sharing Contract between (1) Georgia and (2) Georgian Oil and JKX Navtobi
Ltd. dated February 12, 1996 (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on June 7, 1999).
10(17) Agreement and Promissory Note dated July 19, 1999, with Terrenex Acquisition
Corporation (Incorporated herein by reference from Post-Effective Amendment No. 1 to
Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999).
10(18) Agreement between CanArgo Energy Corporation, Ninotsminda Oil Company and IFC
dated October 19, 1999 (Incorporated herein by reference from September 30, 1999 Form
10-Q).
10(19) Agreement on Financial Advisory Services between CanArgo Energy Corporation, Orkla
Finans (Fondsmegling) A.S and Sundal Collier & Co. ASA dated December 8, 1999
(Incorporated herein by reference from December 28, 1999 Form 8-K).
10(20) Form of Subscription Agreement (Incorporated herein by reference from December 28,
1999 Form 8-K).
10(21) Agreement between CanArgo Energy Corporation and JKX Nederland BV dated January
19, 2000 (Incorporated herein by reference from December 31, 1999 Form 10-K).
*10(22) Employment Agreement between CanArgo Energy Corporation and Paddy Chesterman
dated February 24, 2000 (Incorporated herein by reference from December 31, 1999 Form
10-K).
10(23) Agreement between Ninotsminda Oil Company and AES Gardabani dated March 10, 2000
(Incorporated herein by reference from December 31, 1999 Form 10-K).
10(24) Term Sheet dated June 27, 2000 relating to sale of 15,660,916 shares of Registrant's
common stock (Incorporated herein by reference from July 20, 2000 Form 8-K).
10(25) Form of Subscription Agreement relating to sale of 15,660,916 shares of the Registrant's
common stock (Incorporated herein by reference from July 20, 2000 Form 8-K).
10(26) Subscription Agreement between Registrant and JKX Nederland B.V. dated June 15, 2000
relating to purchase of 21.2% interest in Ninotsminda Oil Company (Incorporated herein
by reference from July 20, 2000 Form 8-K).
21 List of Subsidiaries (Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on February 12, 1999).
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
On June 16, 2000, CanArgo filed a Form 8-K dated June 6, 2000
reporting Item 5. Other Events and Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits, regarding a press release dated June 6, 2000
announcing its initiatives for the Caspian region.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
Date: August 14, 2000 By: /s/Anthony Potter
-------------------
Anthony Potter
VP Finance & Group Controller
