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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, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 - 7 AVENUE SW
CALGARY, ALBERTA, CANADA T2P 0Z5
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (403) 777-1185
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO 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, 1999, was $22,972,983.
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,
36,897,463 shares outstanding as of February 29, 2000. An additional 525,469
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.
PART I
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 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.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
CanArgo Energy Corporation was formed in 1994 to continue, through
re-incorporation 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, including Ninotsminda
Oil Company.
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 completion of the
business combination, CanArgo's resources have been focused on the development
of the producing Ninotsminda field and in 1999, CanArgo wrote-down the fourth
and last significant project that was being developed by Fountain Oil
Incorporated prior to the business combination.
CanArgo's principal activity is the rehabilitation and development of oil
and gas fields with a productive history that indicate the potential for
increased production through the application of modern production techniques.
CanArgo is currently directing most of its efforts and resources to the
development of the Ninotsminda field. CanArgo also has additional exploratory
and developmental oil and gas properties and prospects in Georgia and Ukraine,
and owns interests in other Eastern European oil and gas projects which CanArgo
is not actively pursuing. 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 forty kilometers north east of the Georgian capital,
Tbilisi. It is adjacent to and west of the Samgori oil field, which was
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 eleven are
currently classified as producing. Three of the eleven wells classified as
producing are presently shut-in while undergoing or awaiting rehabilitation, and
production from the remaining eight wells currently is approximately 1,590
barrels of oil and six million cubic feet of gas per day. In November 1999,
CanArgo entered into a gas sales contract with AES-Telasi. In December 1999,
CanArgo commenced delivery of natural gas to the Gardabani power plant pursuant
to that contract.
BUSINESS STRUCTURE
CanArgo's activities at the Ninotsminda oil field are conducted through
Ninotsminda Oil Company, a 78.8% owned subsidiary. In November 1999, CanArgo
increased its percentage ownership of Ninotsminda Oil Company from 68.5% to
78.8% when the other shareholder chose not to subscribe for its pro rata portion
of shares being offered to increase Ninotsminda Oil Company capital. This
follows an increase in the percentage ownership from 55.9% to 68.5% in November
1998 when the other shareholder similarly chose not to subscribe for its pro
rata portion of shares being offered to increase Ninotsminda Oil Company's
capital. During 1999 and 1998, CanArgo invested cash of $2,000,050 and
$6,394,000 respectively in Ninotsminda Oil Company. In addition, in 1998
CanArgo 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. Subject to formal
documentation, regulatory and board approvals, CanArgo has agreed to purchase
from the other shareholder and the other shareholder has agreed to sell to
CanArgo, the other shareholder's remaining shares in Ninotsminda Oil Company
for $4.5 million. This would be payable by issuance of common stock. This
would be payable by CanArgo to the other shareholder by issuance of common
stock, par value $0.10 per share having a value of $4.5 million based on the 10
day moving average trading price calculated in accordance with NASDAQ rules.
The boards of CanArgo and the other shareholder have not approved this
transaction at this time.
Ninotsminda Oil Company obtained its rights to the Ninotsminda field,
including all existing wells, 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, Ninotsminda Oil Company 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 December 1999. In 1998, CanArgo received a deferral of the initial
relinquishment to 2006 and a reduction in the area to be relinquished at each
interval from 50% to 25%.
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:
- - 542 barrels of oil per day during 1999;
- - 280 barrels of oil per day during 2000; and
- - 93 barrels of oil per day during 2001;
- - none thereafter.
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. After recovery of its cumulative capital and operating costs,
Ninotsminda Oil Company will receive 30% of production after Georgian Oil's
priority allocation. The allocation of a share of production to Georgian Oil
relieves Ninotsminda Oil Company of all 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 Georgian
not-for-profit 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
currently has eighty-four 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 on field development issues allocated to Ninotsminda Oil Company.
If Georgian Oil believes that action proposed by Ninotsminda Oil Company with
which Georgian Oil disagrees would result in permanent damage to a field or
reservoir or in a material reduction in production over the life of a field or
reservoir, it may refer the disagreement to a western independent expert for
binding resolution.
OIL 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.
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 and has been producing
at the rate of 120 barrels of oil per day. The drilling of the third well was
suspended in December 1998 at a depth of 700 meters as a result of undependable
electrical supply. Drilling and completion of the well in 1999 was postponed
while Ninotsminda Oil Company sought to raise additional capital. Drilling is
expected to resume in the spring of 2000 when the electrical supply is expected
to improve. The lack of a reliable power supply has also caused delays 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." There can be no assurance as to when or if the electrical supply
problem will be resolved. See "Risks Related to Conditions in Eastern
Europe."
During 1998 and 1999, Ninotsminda Oil Company acquired additional seismic
data about the Ninotsminda field, which CanArgo believes will be useful in
selecting additional drilling sites. Drilling sites tentatively selected by
Ninotsminda Oil Company must be approved by Georgian regulatory authorities
before drilling may commence.
To date, oil exploration and production at the Ninotsminda field has
focused on one zone. There is, however, a second zone, from which oil has been
produced in one well, Ninotsminda Oil Company intends to examine this zone. In
addition, the Ninotsminda field has a gas cap above the principal producing
zone. In December 1999 Ninotsminda Oil Company began commercial production
from the gas cap following regulatory approval from the Georgian government.
This production was sold pursuant to a one year gas contract with AES - Telasi,
a subsidiary of AES Corporation, for delivery to the Gardabani thermal power
plant. Under terms of the gas contract, AES-Telasi has agreed to purchase all
the gas produced by Ninotsminda Oil Company in priority to all other suppliers
with no maximum or minimum volume.
CanArgo has not yet fully evaluated the reserves and economics of
production relating to the gas cap and has not entered into any other gas supply
contracts. As production from the gas cap can both aid and hinder the
production of crude oil, any evaluation as to the feasibility of sustained
production from the gas cap would have to take into consideration the expected
impact of natural gas production on the production of crude oil.
INTERNATIONAL FINANCE CORPORATION
In December 1998, Ninotsminda Oil Company entered into a convertible loan
agreement with International Finance Corporation ("IFC"), an affiliate of the
World Bank. Pursuant to the loan agreement, IFC agreed under specified
conditions to lend up to $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.
Pursuant to an agreement dated October 19, 1999, IFC agreed to an initial
$1.5 million disbursement under the loan agreement provided:
- - the shareholders of Ninotsminda Oil Company make a $2 million capital
contribution to Ninotsminda Oil Company. This contribution was made by
CanArgo to Ninotsminda Oil Company in November 1999.
- - CanArgo grants to IFC of a first ranking security interest over one of the
drilling rigs currently in Georgia.
In addition to the above terms, both the initial and each subsequent
disbursement are also subject to a large number of further conditions including:
- - performance by Ninotsminda Oil Company and its shareholders of their
respective obligations under the loan agreement;
- - the maintenance of specified financial ratios by Ninotsminda Oil Company
including:
--- a debt to equity ratio that does not exceed 1:1; and
--- a ratio of the present value of projected future cash flows from
proved reserves to outstanding long-term indebtedness that
exceeds 1.6:1;
- - the absence of any material adverse changes in Ninotsminda Oil Company's
financial position or business prospects;
- - evidence that Ninotsminda Oil Company has received at least $10 million
from its shareholders since the beginning of 1998 in the form of
equity contributions, which either has been expended on the Ninotsminda
field current development program or is held in a cash account.
- - receipt by the IFC of favorable legal opinions on a variety of matters
related to the loan.
After the initial disbursement, subsequent disbursement will only be made
by IFC if, in addition to all other conditions of disbursement:
- - Well N97 has been completed and is producing to IFC's satisfaction;
- - Total production of the Ninotsminda field has averaged at least 2,500
barrels of oil per day for at least 30 days immediately prior to the date
of any subsequent disbursement;
- - IFC is satisfied that the Ninotsminda field has adequate supplies of
electrical power to carry out its operations without material delays or
interruptions; and
- - IFC has approved Ninotsminda Oil Company's arrangements for the sale of
crude oil and natural gas.
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%. In addition,
Ninotsminda Oil Company has paid to IFC a facility fee of $60,000 as well as a
commitment fee equal to 1/2 of 1% per annum on the portion of the $6 million
that has not been disbursed. No assurance can be given that the conditions to
disbursement will be satisfied or, if not satisfied, waived, or that the IFC
will fund all or any part of the $6 million loan. See "Risks Related to
CanArgo's Oil and Gas Activities."
In addition to the above terms, on November 5, 1999, the other shareholder
of Ninotsminda Oil Company advised IFC that a guarantee and pledge it had
previously provided IFC under the loan agreement would not apply to any advances
made by IFC to Ninotsminda Oil Company. As a result, IFC advised both the
other shareholder and CanArgo that should the other shareholder fail to retract
its notice to IFC, it would not be prepared to disburse under the loan
agreement. Subsequent to December 31, 1999, CanArgo and the other shareholder
have reached an agreement pursuant to which the other shareholder has retracted
its notice to the IFC in exchange for the consideration by both parties of a
possible purchase, by CanArgo, of the other shareholders interest in Ninotsminda
Oil Company. Should the matter ultimately not be resolved to the satisfaction
of CanArgo or the IFC, CanArgo may be required to reduce its development plans
for the Ninotsminda field or seek alternative financing.
If all of the above conditions are either satisfied or waived and IFC makes
the initial $1.5 million disbursement under the loan agreement with Ninotsminda
Oil Company, CanArgo intends to use the first draw of $1.5 million together with
internally generated cash flow to fund its current development plan for the
Ninotsminda field including 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 total budgeted
cost of the current development plan is $6,650,000. The development plan is
scheduled to be implemented in 2000 and the first half of 2001, 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. There can be no assurance
that CanArgo will receive the required funds in time to meet such schedule.
While it is highly speculative and will depend significantly upon the
results of the current development program, CanArgo currently estimates that the
second phase in the Ninotsminda field 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.
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 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.
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 78.8% to 63.0% but would leave
Ninotsminda Oil Company as a consolidated subsidiary of CanArgo. The conversion
right remains in effect until approximately three months after:
- - the completion of the current development program for the Ninotsminda
field;
- - the achievement of sustained production of at least 4,500 barrels of oil
per day; and
- - the completion of various procedural requirements.
CanArgo has provided a partial guarantee 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 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, SALES 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. Those infrastructure improvements, including
initial processing equipment, are now used by Ninotsminda Oil Company.
The mixed oil, gas 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
either flared or piped 34 kilometers to the Gardabani thermal power plant.
At Sartichala, the water is separated from the oil. Ninotsminda Oil
Company then sells oil in this state to buyers at Sartichala, and typically
buyers at that point assume responsibility for the oil. Depending on the
location of the buyer, 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. In 1999, Ninotsminda Oil Company sold its production to five customers.
Of these customers, three customers represented sales greater than 10% of
operating revenue:
CUSTOMER PERCENT OF PRODUCTION
- ------------------------------ ---------------------
Petrotrade 38.0%
Georgian American Oil Refinery 34.0%
Sinan Madenchilik 11.0%
In 1998, Ninotsminda Oil Company sold its production to three customers as
follows:
CUSTOMER PERCENT OF PRODUCTION
- ------------------------------ ---------------------
Sis Plus 7 Ltd. 35.9%
Glencore International AG 34.4%
Navtobi Ltd. 29.7%
In 1997 Ninotsminda Oil Company sold all of its 1997 production to one
buyer, Glencore International AG.
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
$6.00 per barrel. In 1998 buyers began to purchase oil from Ninotsminda Oil
Company for use in Georgia and neighboring countries and have accordingly faced
smaller transportation costs. Despite lower transportation costs, the price
received by Ninotsminda Oil Company on local sales has not increased to the same
extent as recent increases in Brent as demand for raw crude within Georgia may
have been negatively impacted by illegal import of prepared oil products into
the country. Despite the lower price, opportunities for domestic sales remain
and 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 $5.80 at the
present time.
Prices for oil and natural gas are subject to wide fluctuations in response
to a number of factors including:
- - changes in the supply and demand for oil and natural gas;
- - actions of the Organization of Petroleum Exporting Countries
- - weather conditions;
- - domestic and foreign governmental regulations;
- - the price and availability of alternative fuels;
- - political conditions in the Middle East and elsewhere; and
- - overall economic conditions.
OIL AND GAS PRODUCTION
Production History
The Ninotsminda field was discovered and initial development began in 1979.
The Ninotsminda field is currently producing approximately 955 barrels of oil
per day plus associated gas primarily from five oil wells. In addition, three
gas wells are producing approximately 250,000 cubic meters of natural gas and
635 barrels of oil and condensate per day. Gross production from the Ninotsminda
field for the past three years was as follows:
YEAR ENDED DECEMBER 31, OIL - GROSS BARRELS
- ----------------------- -------------------
1999 415,390
1998 554,633
1997 639,910
Productive Wells and Acreage
The following table summarizes the number of productive oil and gas 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
78.8% interest in Ninotsminda Oil Company.
GROSS NET
------------------------ ------------------------
NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE
------------------------ ------------------------
Ninotsminda field (1) 11 2,500 8.6 1,970
On December 31, 1999, 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
field, which are the only significant reserves for CanArgo. This information
is derived from a report as of December 31, 1999 prepared by Ashton Jenkins
Mann, independent petroleum consultants. This report is available for inspection
at CanArgo's principal executive offices during regular business hours.
THOUSAND BARRELS (MSTB) OIL RESERVES PSC ENTITLEMENT VOLUMES (1)
------------------- ---------------------------
COMPANY SHARE
NINOTSMINDA OF NINOTSMINDA
OIL COMPANY OIL COMPANY
GROSS NET(2) ENTITLEMENT ENTITLEMENT
--------- -------- ----------- --------------
Proved Developed Producing 3,600 2,836 1,996 1,572
Proved Undeveloped 15,200 11,978 7,804 6,146
--------- -------- ----------- --------------
TOTAL PROVEN 18,800 14,814 9,800 7,718
--------- -------- ----------- --------------
MILLION CUBIC FEET (MMCF) GAS RESERVES PSC ENTITLEMENT VOLUMES (1)
------------------- ---------------------------
COMPANY SHARE
NINOTSMINDA OF NINOTSMINDA
OIL COMPANY OIL COMPANY
GROSS NET(2) ENTITLEMENT ENTITLEMENT
--------- -------- ----------- --------------
Proved Developed Producing 17,425 13,731 5,228 4,117
Proved Undeveloped 17,850 14,066 5,354 4,217
--------- -------- ----------- --------------
TOTAL PROVEN 35,275 27,797 10,852 8,334
--------- -------- ----------- --------------
___________
(1) PSC Entitlement Volumes are those produced volumes which, through the
production sharing contract, accrue to the benefit of Ninotsminda Oil
Company and, 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 and gas reserves represent CanArgo's 78.8% 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.
1999 production was 415,390 barrels.
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 be given that the projections included in
the report by Ashton Jenkins Mann will be realized. The evaluation by Ashton
Jenkins Mann represents the efforts of Ashton Jenkins Mann 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 under the 1996 production sharing contract, in
addition to the Ninotsminda field, rights to one other field, West Rustavi, and
one prospect, Manavi. In addition to the producing Middle Eocene horizon at
Ninotsminda, both the Ninotsminda and West Rustavi fields have two prospective
horizons being the Upper Eocene and the Cretaceous. The Cretaceous horizon of
the Ninotsminda field has been defined on seismic. CanArgo's management ranks
this horizon very highly. CanArgo is actively seeking companies to participate
in the drilling of N97 to the deeper Cretaceous horizon. On March 10, 2000,
Ninotsminda entered into a non-binding letter of intent with a subsidiary of AES
Corporation relating to exploration and potential future development of gas
prospects in Ninotsminda Oil Company's acreage in Georgia. The letter of intent
contemplates AES earning a 50% interest in identified prospects at the
Cretaceous stratigraphic level, by funding a portion of the cost of three
exploration wells. The program would be implemented by CanArgo's existing
operations unit in Georgia, directed jointly by CanArgo and AES. Final
agreement is subject to negotiation of satisfactory formal agreements, board
approvals and any necessary regulatory approvals. In addition the letter of
intent covers the general terms of a long term gas sales contract which would be
entered into in the event of a successful development.
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. One of the ten wells was drilled to the deeper Cretaceous
horizon. This well was tested and produced one million cubic feet of gas and
3,500 barrels of water per day. Further geo-technical work is required on this
horizon to determine its prospectivity. 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
In 1998 CanArgo established an effective 42.5% interest in a Georgian stock
company with a plan to install and operate a pilot 3.0 megawatt gas fired power
plant to be located adjacent to the Ninotsminda field. The principal fuel gas
for the plant was intended to be gas produced in conjunction with oil from
Ninotsminda field wells, which prior to December 1999 was mostly being flared
with no economic benefit to Ninotsminda Oil Company. Electricity generated by
the power plant would be sold to Ninotsminda Oil Company for the Ninotsminda
field project and to other local purchasers.
CanArgo has experienced technical difficulties in converting the turbine
unit to gas from diesel fuel supply. It is currently considering a sale of the
existing unit as a diesel unit and a purchase of an existing converted unit.
Ninotsminda Oil Company expects that electricity generated by the power plant
will supply Ninotsminda field operations on a priority basis. If this happens,
Ninotsminda Oil Company hopes to avoid or mitigate the electrical supply
problems it has encountered, which forced a suspension of drilling activity on
its third well and interfers with other operations in winter. With the use of
CanArgo's diesel powered drilling rigs, this problem has already been partially
mitigated.
Georgian American Oil Refinery
In September 1998, CanArgo purchased for $1,000,000 a 12.9% equity interest
in a company which owns a small refinery located at Sartichala, Georgia. The
proceeds were used to upgrade and expand the refinery. CanArgo had through
September 30, 1999 a right to purchase a further 11.1% interest in the refinery
for $860,000. This right expired in 1999 unexercised.
The refinery, which utilizes primarily refurbished American equipment,
began operations in July 1998 and has a current capacity of approximately 4,000
barrels per day. It is the only refinery in Georgia employing western
technology. It is able to produce naphtha, diesel fuel, fuel oil and kerosene.
Further capacity expansion and product extension is possible in the future.
Sartichala is the primary processing center for east Georgian oil
production, including production from Ninotsminda. Refined products are sold on
both the local and export markets. Although the refinery receives some revenue
from the sale of its products in the Georgian currency, the Lari, most pricing
is related to dollar based world market prices. To mitigate the currency
exchange risk, the refinery has established some export sales contracts
denominated in United States dollars. 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. In 1999, Ninotsminda Oil Company sold approximately 58,500 barrels
of oil to the refinery.
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.
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 was approximately $1,200,000.
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
In 1999 CanArgo wrote-down its investment in the Stynawske field being the
fourth and last significant project that was being developed by Fountain Oil
Incorporated prior to the business combination between Fountain Oil Incorporated
and CanArgo Oil & Gas Inc. Since completion of the business combination,
CanArgo's resources have been focused on the development of CanArgo's producing
Ninotsminda oil field and some associated activities.
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.
Under the terms of the license Boryslaw Oil Company holds in the Stynawske
field, field operations were to be transferred to Boryslaw Oil Company
effective January 1, 1999. While negotiations continue on the transfer of the
field, the length and difficulty of the negotiations have created significant
uncertainty as to CanArgo's ability to raise funds for the project or enter into
a satisfactory farm-out agreement on a timely basis. Accordingly, CanArgo
cannot be reasonably assured that development of the Stynawske project will
proceed. As such, CanArgo recorded in the year ended December 31, 1999 an
impairment charge of $5,459,793 against its investment in and advances to
Boryslaw Oil Company.
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. During 1999 CanArgo concluded that it did
not have the resources to progress this project. Accordingly, in November 1999,
CanArgo sold all but a 10% interest in its subsidiary to private investors in
exchange for $250,000 to be paid to CanArgo should additional financing or an
equity partner be found for the project.
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 in December 1999, CanArgo entered into an
agreement to, subject to various conditions, transfer its entire right and
interest in the Gorisht-Kocul project to a third party in exchange for 31,000
British Pounds and a 15% share of any future profits earned under the Joint
Operating Agreement governing the project. One of the conditions of the
agreement is confirmation that the license governing the project remains in
force. As confirmation of the satisfaction of this condition has not yet been
received, no sales proceeds have been recognized for the year ended December 31,
1999.
Lelyaki Field, Pryluki Region, Ukraine
Prior to July 1999, CanArgo held 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 was 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. In July 1999, CanArgo transferred its 45% interest in the joint
venture company to Zhoda Corporation.
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 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 resources have been focused on the development of the Ninotsminda
oil field. Pursuant to an agreement dated October 19, 1999, IFC agreed under
specific conditions to an initial $1.5 million disbursement under the loan.
CanArgo's current development plan for the Ninotsminda field and the terms of
The proposed loan from the IFC to finance it are described in Item 1 "Business."
While a considerable amount of infrastructure for the Ninotsminda field has been
put in place, CanArgo cannot provide assurance that :
- - funding for 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.
Should Ninotsminda Oil Company not receive the initial disbursement from the
IFC, CanArgo may be required to reduce its development plans for the Ninotsminda
field or seek alternative financing.
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:
- - unexpected or unusual geological conditions.
- - the recoverability of the oil and gas on an economic basis.
- - the availability of infrastructure and personnel to support operations.
- - local and global prices.
- - government regulation.
CanArgo's activities can also be affected by a number of hazards, such as:
- - labour disputes.
- - natural phenomena, such as bad weather and earthquakes;
- - operating hazards, such as fires, explosions, blow-outs, pipe failures and
casing collapses; and
- - environmental hazards, such as oil spills, gas leaks, ruptures and
discharges of toxic gases.
Any of these 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
does not purchase insurance covering all the risks and hazards that are involved
in oil and gas exploration, development and production.
RISKS RELATED TO CONDITIONS IN EASTERN EUROPE
CanArgo's principal oil and gas properties, including the Ninotsminda
field, are located in Eastern Europe. Development of these fields is subject to
a number of conditions endemic to Eastern European countries, including:
- - Political Instability - The present governmental arrangements in the
Eastern European countries in which CanArgo operates were established
relatively recently, when they replaced Communist regimes. If they
fail to maintain the support of their citizens, these governments
could themselves be replaced by other institutions, including a possible
reversion to a totalitarian form of government. CanArgo's operations
typically involve joint ventures or other participatory arrangements with
the national government or state-owned companies. As a result, CanArgo's
operations could be adversely affected by political instability, changes
in government institutions, personnel or policies, or shifts in political
power. There is also a risk that new governments could seek to
nationalize, expropriate or otherwise take control of CanArgo's oil
and gas properties.
- - Social and Economic Instability - The political institutions in Eastern
Europe have recently become more fragmented, and the economic institutions
of Eastern European countries have recently converted to a market economy
from a planned economy. Social and economic instability have accompanied
these changes due to many factors which include:
- low standards of living;
- outmoded technology;
- immature legal, social and economic institutions; and
- conflicts with neighboring countries.
This instability can make continued operations difficult or impossible.
- - 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
during the 1998-1999 winter season.
- - 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 in the future.
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:
- - one or more of the risks specified above or other risks thwart CanArgo's
efforts to develop such properties and ventures;
- - financing cannot be arranged for the development of such properties and
ventures; or
- - 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.
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.
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:
- - the acquisition of producing properties;
- - obtaining scarce resources and services including oil field services; and
- - 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:
- - development of information;
- - analysis of available information;
- - ability to pay for productive oil and gas properties and exploratory
prospects; and
- - 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.
GOVERNMENTAL AUTHORIZATIONSAUTHORIZATIONS
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 MATTERSAND 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. In addition, CanArgo expects the trend
towards more burdensome regulation of its business to result in increased costs
and operational delays. 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 December 31, 1999, CanArgo had 12 full time employees. The entity
acting as operator of the Ninotsminda oil field for Ninotsminda Oil Company has
84 full time employees, and substantially all of that company's activities
relate to the production and development of the Ninotsminda field.
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 78.8% interest in Ninotsminda Oil Company. The information is presented as
at December 31, 1999.
GROSS NET
------------------------ ------------------------
NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE
------------------------ ------------------------
Ninotsminda field 11 2,500 8.6 1,970
On December 31, 1999, 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.
The following table summarizes the gross and net undeveloped acreage held
under the Ninotsminda and Nazvrevi/Block XIII production sharing contracts on
December 31, 1999. 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 78.8% interest in Ninotsminda Oil Company and its
anticipated 88.5% interest in the subsidiary holding the Nazvrevi/Block XIII
contract.
GROSS ACREAGE NET ACREAGE
------------- -----------
Ninotsminda field 24,000 18,912
Nazvrevi/Block XIII 518,500 458,873
------------- -----------
Total 542,500 477,715
============= ===========
The Company leases office space in Calgary, Alberta, Tbilisi, Republic of
Georgia, and Maidenhead, England. The leases having remaining terms varying
from one to five years. The Company has subleased its Maidenhead offices.
ITEM 3. LEGAL PROCEEDINGS
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 December 31, 1999, CanArgo had the contingent
obligation to issue an aggregate of 187,500 shares of its common stock, subject
to the satisfaction of conditions related to the achievement of specified
performance standards by the Stynawske field project. CanArgo believes that it
has no further obligation to fund operations of Kashtan Petroleum Ltd. or
Intergas JSC.
POTENTIAL CLAIMS RELATING TO PREVIOUSLY IMPAIRED PROJECTS
As a result of 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.
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, 1999.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CanArgo'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. On March 30, 1999, CanArgo's common stock
commenced trading on the OTC Bulletin Board.
As a result of the shift in the principal domestic market for CanArgo
common stock from the Nasdaq National Market System to the OTC Bulletin Board,
stockholders may:
- - find it more difficult to obtain accurate and timely quotations regarding
the bid and asked prices for common stock;
- - experience greater spreads between bid and asked prices;
- - be charged relatively higher transactional costs when buying or selling
common stock; and
- - encounter more difficulty in effecting sales or purchases of common stock.
In addition, while securities listed on The Nasdaq National Market System
are exempt from the registration requirements of state securities laws,
securities traded on the OTC Bulletin Board must comply with the registration
requirements of state securities laws, which increases the time and costs
associated with complying with state securities laws when raising capital. The
listing of CanArgo common stock on the Oslo Stock Exchange has been a secondary
listing, with the primary listing being on The Nasdaq Stock Market. CanArgo is
currently considering seeking a primary listing on the Oslo Stock Exchange. No
assurances can be given that should CanArgo apply for a primary listing on the
Oslo Stock Exchange, that such a listing will be received.
The following table sets forth the high and low sales prices of the common
stock on The Nasdaq National Market System and the Oslo Stock Exchange for the
periods indicated, and the high and low bid prices on the OTC Bulletin Board for
the period after March 29, 1999. Average daily trading volume on these markets
during these periods is also provided. Nasdaq National Market data is provided
by The Nasdaq Stock Market; OTC Bulletin Board data is provided by Nasdaq
Trading and Market Services; and Oslo Stock Exchange data is derived from
published financial sources. The over-the-counter quotations reflect
inter-dealer prices, without retail markup, mark-down or commissions, and may
not represent actual transactions. Sales prices on the Oslo Stock Exchange were
converted from Norwegian kroner into United States dollars on the basis of the
daily 10:00 am exchange rate for buying United States dollars with the Norwegian
kroner announced by the central bank of Norway. Prices in Norwegian kroner are
denominated in "NOK". During July 1998, CanArgo effected a 1-for-2 reverse
stock split of CanArgo'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.
NASDAQ/OTC OSE
------------------------ ------------------------
AVERAGE AVERAGE
DAILY DAILY
HIGH LOW VOLUME HIGH LOW VOLUME
----- ---- ------- ----- ---- -------
FISCAL QUARTER ENDED
March 31, 1997 . . . 14.25 8.75 49,338 14.22 8.96 210,918
June 30, 1997. . . . 10.13 7.81 21,109 9.52 7.92 103,931
September 30, 1997 . 9.13 4.84 23,603 8.86 4.96 157,173
December 31, 1997. . 7.00 1.19 62,684 6.46 1.66 284,036
March 31, 1998 . . . 2.63 1.44 27,015 2.38 1.60 153,177
June 30, 1998. . . . 2.25 1.00 15,220 2.13 1.20 65,617
September 30, 1998 . 1.81 0.47 10,266 1.60 0.53 24,924
December 31, 1998. . 0.81 0.22 34,570 0.67 0.20 27,493
March 31, 1999 . . . 0.47 0.19 25,642 0.57 0.23 16,412
June 30, 1999. . . . 0.50 0.19 23,872 0.41 0.23 18,137
September 30, 1999 . 1.02 0.25 83,591 0.71 0.27 143,689
December 31, 1999. . 0.91 0.38 117,872 0.96 0.39 174,042
On December 31, 1999 the number of holders of record of the common stock of
CanArgo was approximately 2,969. CanArgo has not paid any cash dividends on its
common stock. CanArgo 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 CanArgo's results of operations and
financial condition and on such other factors as CanArgo's Board of Directors
may, in its discretion, consider relevant. Under a loan agreement, the ability
of CanArgo's principal, majority-owned, operating subsidiary, Ninotsminda Oil
Company, to transfer funds to CanArgo and its other affiliates is severely
restricted. In addition, CanArgo 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.
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.
FOUR
Reported in $1,000 except YEAR YEAR YEAR MONTHS YEAR YEAR
for per common share ENDED ENDED ENDED ENDED ENDED ENDED
Amounts 12/31/99 12/31/98 12/31/97 12/31/96 8/31/96 8/31/95
---------- --------- ---------- ---------- --------- ---------
FINANCIAL PERFORMANCE
Total revenue 2,783 821 313 17 35 625
Operating loss (8,339) (6,488) (29,090) (2,983) (5,640) (7,882)
Other income (expense) (316) 196 1,202 361 (854) 312
Net loss (8,473) (6,110) (27,683) (2,604) (6,494) (7,600)
Net loss per common share --
basic and diluted (0.32) (0.39) (2.47) (0.28) (1.04) (1.82)
Cash used in operations (1,116) (14,718) (4,176) (1,230) (5,146) (1,958)
Cash flow per share - basic
and fully diluted (0.04) (0.93) (0.37) (0.13) (0.82) (0.47)
Working capital 2,729 1,366 13,971 30,382 16,926 4,188
Total assets 43,799 46,568 37,434 55,375 32,089 10,710
Notes payable &
long-term debt --- --- --- --- 300 ---
Stockholders' equity 37,863 40,031 26,779 53,245 30,505 9,608
Cash dividends per
common share --- --- --- --- --- ---
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
In December 1999, CanArgo closed a private placement resulting in the
issuance of 3,300,000 shares at $0.86 per share for gross proceeds of
$2,837,630. On August 6, 1999, CanArgo also closed its registered public
offering, resulting in the issuance of 11,850,362 shares at $0.30 per share for
gross proceeds of $3,555,109. CanArgo's management believes that net proceeds
from these offerings, augmented by 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 December 31, 1999 is
not sufficient to fully implement its current Ninotsminda field development
plan. 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 total budgeted cost of the current development plan
is $6,650,000. The development plan is scheduled to be implemented in 2000 and
the first half of 2001, 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.
In December 1998, Ninotsminda Oil Company 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.
Pursuant to an agreement dated October 19, 1999, IFC agreed under specified
conditions to an initial $1.5 million disbursement under the loan. CanArgo's
current development plan for the Ninotsminda field and the terms of the proposed
loan from the IFC to finance it are described in Item 1. "Business". 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 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 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.
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. 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.
On March 29, 1999, CanArgo was advised that its common stock had been
delisted from The Nasdaq Market System effecitve at the close of business on
March 29, 1999. On March 30, 1999, CanArgo's common stock commenced trading on
the OTC Bulletin Board. At the annual meeting of stockholders held on June 16,
1999, stockholders approved an amendment to CanArgo's Certificate of
Incorporation to effect a 1-for-25 reverse stock split of the outstanding common
stock, subject to implementation at the discretion of the Board of Directors.
The purpose of the reverse split was to attempt to establish a common stock
structure that might achieve a bid price in excess of $5.00 per share so that
CanArgo can seek readmission to the Nasdaq National Market System. Recent
developments, including a growing shareholder base and active market for its
shares in Norway, resulted in CanArgo being able to seek a primary listing on
the Oslo Stock Exchange. As a result, CanArgo has decided not to re-apply for a
National Market listing, and accordingly, has chosen not to effect the 1-for-25
reverse split. The decision to not proceed with the reverse split resulted in
CanArgo not maintaining a minimum bid price that would allow it to meet the
requirements of a National Market or Small Cap Market Listing. On October 13,
1999, CanArgo received formal notification from the NASDAQ Listing and Hearing
Review Council that its appeal has been rejected. See "Item 5. Market for
Common Equity and Related Stockholder Matters" for a discussion of some of the
effects of the delisting.
CHANGES IN FINANCIAL POSITION
As of December 31, 1999, CanArgo had working capital of $2,729,000,
compared to working capital of $1,366,000 as of December 31, 1998. The
$1,363,000 increase in working capital from December 31, 1998 to December 31,
1999 principally reflects the completion of a registered public offering and
private placement in 1999 less operating and capital expenditures.
Cash and cash equivalents increased $1,610,000 during 1999 from $1,925,000 at
December 31, 1998 to $3,535,000 at December 31, 1998, primarily as a result of
completion of a registered public offering and private placement in 1999 for net
proceeds of $5,564,000, proceeds from the disposition of oil and gas property
and equipment of $1,166,000 less operating and investment activities. Cash and
cash equivalents at December 31, 1999 included $451,000 held by Ninotsminda Oil
Company, to which CanArgo has limited access. The utilization of cash during
1999 involved principally the following:
- - the investment of $3,505,000 in oil and gas properties and equipment,
principally related to the Ninotsminda field;
- - the net loss of $8,473,000 in 1999 less non cash expenditures of
$5,460,000 related to the impairment in 1999 of CanArgo's interest in
Boryslaw Oil Company, $234,000 related to the impairment of unproved
properties and depreciation and depletion expense of $1,145,000
principally related to the Ninotsminda field
Accounts receivable increased from $424,000 at December 31, 1998 to
$464,000 at December 31, 1999. The increase is primarily as a result of
accounts receivable relating to equipment rentals and gas sales in late 1999
partially offset by an allowance for doubtful accounts of $77,000 relating to
prior years oil sales.
Advances to operator decreased from $377,000 at December 31, 1998 to nil at
December 31, 1999 as a result of expenditures by the entity performing the
operations at the Ninotsminda field on behalf and at the direction of CanArgo.
Inventory increased from $170,000 at December 31, 1998 to $189,000 at
December 31, 1999 as result of placing a portion of CanArgo's oil produced at
the Ninotsminda field in November and December 1999 in storage to be available
for sale in the Georgian domestic and regional market. At December 31, 1999,
approximately 30,000 barrels of oil were held in storage for sale in the
Georgian domestic and regional market or in the international market. Depending
on the demand and price for oil in the Georgian domestic and regional market
CanArgo may decide to place, as a strategic initiative, additional production in
storage.
Other current assets decreased from $453,000 at December 31, 1998 to
$94,000 at December 31, 1999, primarily as a result of the amortization of
prepaid expenses of $190,000 and reduction in deposits of $169,000.
Property and equipment, net, increased from $6,202,000 at December 31, 1998
to $7,101,000 at December 31, 1999, primarily as a result of capitalized costs
associated with moving two drilling rigs and related equipment to the Republic
of Georgia from Cyprus, the acquisition of gas production equipment, pipeline
and other infrastructure and testing of one of the rigs.
Oil and gas properties, net increased from $30,138,000 at December 31, 1998
to $30,707,000 at December 31, 1999, as a result of oil and gas well workovers,
the evaluation of seismic data with respect to the Ninotsminda and Nazvrevi
fields, capitalization of $1,132,000 of Ninotsminda Oil Company general and
administrative expenses related to exploration and development activities and
acquisition of certain interests with respect to the Ninotsminda field for
$441,000. These expenditures were partially offset by the sale effective
September 1, 1999 of CanArgo's interest in the Sylvan Lake project for gross
proceeds of $800,000 and depletion expense of $975,000.
Investments in and advances to oil and gas and other ventures, net
decreased from $6,878,000 at December 31, 1998 to $1,709,000 at December 31,
1999. The decrease reflects principally an impairment charge of $5,460,000
against CanArgo's investment in and advances to Boryslaw Oil Company. Under
the terms of the license Boryslaw Oil Company holds in the Stynawske field,
field operations were to be transferred to Boryslaw Oil Company effective
January 1, 1999. While negotiations continue on the transfer of the field, the
length and difficulty of the negotiations have created significant uncertainty
as to CanArgo's ability to raise funds for the project or enter into a
satisfactory farm-out agreement on a timely basis. Accordingly, CanArgo cannot
be reasonably assured that development of the Stynawske project will proceed and
as such, CanArgo recorded in the year ended December 31, 1999 an impairment
charge of $5,460,000 against its investment and advances.
Partially offsetting the decrease in investments in and advances to oil and
gas and other ventures is a restructuring by CanArgo of its electrically
enhanced oil recovery ("EEOR") assets whereby CanArgo placed its EEOR assets
into Uentech International Corporation, a Canadian controlled private
corporation, with the objective of Uentech International Corporation raising
additional third party capital specifically for development of the EEOR
technology. Following the restructuring and the raising of additional capital
by Uentech International Corporation, CanArgo held at December 31, 1999, 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. This system is a viable economic
alternative to other tertiary recovery methods with competing technologies
significantly more capital and infrastructure intensive. Uentech International
Corporation has developed relationships with several strategic partnerships that
will assist in the further exploitation of the technology. When fully developed,
this technology is anticipated to provide CanArgo with a competitive advantage
in developing heavy and medium weight oil fields.
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, 1999, 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.
Accounts payable increased from $822,000 at December 31, 1998 to $1,160,000
at December 31, 1999 as seismic acquisition costs previously included in accrued
liabilities were reclassified to accounts payable.
Minority interest in subsidiaries at December 31, 1999 of $4,371,000
relates to the 21.2% (prior to November 30, 1999 and 1998 - 31.5% and 44.1%
respectively) 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. 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. Except for a limited number of desktop computers utilized by CanArgo
which CanArgo intends to replace, CanArgo believes that the software and
hardware currently used by CanArgo including oilfield production equipment is
Year 2000 compliant. Since December 31, 1999, 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 December 31, 1999, 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 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 2001 annual financial
statements. CanArgo is currently evaluating the impact of SFAS No. 133 on its
financial statements.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
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. These initiatives, together
with increased oil prices, led to a significant increase in revenue over the
prior year. Field operating and general and administrative costs were also
closely monitored, resulting in further significant improvements to cash flow.
CanArgo anticipates, based on current world oil prices and the commencement of
commercial gas deliveries, further improvement in cash flow in 2000.
CanArgo recorded operating revenue of $2,783,000 during the year ended
December 31, 1999, compared with $821,000 for the year ended December 31, 1998.
Ninotsminda Oil Company generated $2,291,000 of revenue in the year ended
December 31, 1999 compared to $603,000 of revenue for the year ended December
31, 1998 following the acquisition on July 15, 1998 of CanArgo Oil & Gas Inc.
and its subsidiary Ninotsminda Oil Company. Its net share of the 415,400
barrels of gross production from the Ninotsminda field in the year ended
December 31, 1999 amounted to 142,900 barrels. During the year ended December
31, 1999, 50,000 barrels of oil in storage at December 31, 1998 were sold. In
November and December 1999, 30,000 barrels of oil were placed back into storage.
Net sale prices for Ninotsminda oil sold during the year ended December 31, 1999
averaged $13.17 per barrel compared to $10.63 per barrel in 1998. Oil
production from the Sylvan Lake property in Alberta, Canada accounted for
$219,000 of revenue in the year ended December 31, 1999 and $202,000 of revenue
for the year ended December 31, 1998.
CanArgo recorded in the year ended December 31, 1999, other revenue of
$289,000 including revenue of $230,000 with respect to equipment rentals
compared to $16,400 in the year ended December 31, 1998 with respect to the sale
of electrically enhanced oil recovery equipment.
The operating loss for 1999 amounted to $8,339,000, compared with
$6,488,000 for 1998. The increase in the operating loss is attributable
primarily to the impairment in 1999 of CanArgo's investment in and advances to
Boryslaw Oil Company of $5,460,000. The increase caused by the impairment is
partially offset by 1998 costs associated with CanArgo's involvement in some
Eastern European oil and gas ventures which involvement CanArgo has effectively
terminated, 1998 costs associated with CanArgo's business combination with
CanArgo Oil & Gas Inc., and the impairment of oil and gas properties which
amounted to $900,000 in 1998.
Lease operating expenses increased to $885,000 during 1999, as compared to
$843,000 for 1998, as a result of the inclusion of an additional six months of
Ninotsminda field operating expenses in the 1999 period partially offset by the
sale effective September 1, 1999 of the Sylvan Lake property. Operating
expenses did not increase significantly despite three additional months of costs
as a result of a field operating cost reduction program undertaken by
Ninotsminda Oil Company in late 1998 and early 1999.
Direct project costs decreased to $944,000 in 1999 from $1,157,000 for
1998, reflecting 1998 costs associated with CanArgo's involvement in some
Eastern European oil and gas ventures which involvement CanArgo has effectively
terminated, partially offset by activity related to the Ninotsminda field.
General and administrative expenses decreased to $2,193,000 in 1999 from
from $3,887,000 for 1998, reflecting the restructuring of CanArgo since the
combination of Fountain Oil Incorporated with CanArgo Oil & Gas Inc. and a focus
on reducing overhead costs.
The increase in depreciation, depletion and amortization expense from
$239,000 for 1998 to $1,145,000 during 1999 is 1999 is attributable principally
to depletion related to Ninotsminda field oil production and depreciation of
drilling equipment in use in the 1999 period. Partially offsetting this
increase is the sale of the Sylvan Lake property in 1999.
The equity loss from investments in unconsolidated subsidiaries increased
to $261,000 for the year ended December 31, 1999 from $161,000 for the year
ended December 31, 1998 as a result of increased activity by Uentech
International Corporation developing the EEOR technology and a write-down of
property and equipment in the year by the company developing the gas powered
turbine. These increases were partially offset by the substantially lower level
of activity conducted through unconsolidated subsidiaries in 1999, reflecting
the termination of CanArgo's involvement in the development activities of some
Eastern European oil and gas ventures conducted through unconsolidated
subsidiaries.
Impairment of oil and gas properties decreased to $234,000 in 1999 from
$900,000 for 1998 following the write-down in 1999 by CanArgo of its interest in
the Caspian project. During the year ended December 31, 1998, CanArgo wrote
down its oil and gas properties in the Sylvan Lake project by an aggregate
$900,000 as a result of a substantial decline of heavy oil prices and the
quarterly application of the full cost ceiling limitation.
CanArgo recorded net other expense of $316,000 for 1999, as compared to net
other income of $196,000 during 1998. The principal reason for the decrease is
lower interest income as a result of lower cash balances during the year ended
December 31, 1999, the payment of facility and commitment fees pursuant to
Ninotsminda Oil Company's $6,000,000 Loan Agreement with the International
Finance Corporation and the loss in 1999 from the sale of property and equipment
not considered essential to ongoing operations.
The net loss of $8,473,000, or $0.32 per share for 1999, compares to a net
loss of $6,110,000, or $0.39 per share for 1998. As a result of the issuance of
shares in connection with the business combination, the weighted average number
of common shares outstanding was substantially higher during 1999 than during
1998.
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 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 revenues 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.
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 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.
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.
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:
- - enforceability of contracts;
- - currency convertibility and transferability;
- - unexpected changes in tax rates;
- - 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CanArgo had no interest in investments subject to market risk during the
period covered by this report.
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
There were no changes in or disagreements between CanArgo and its principal
accountants during the two most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE OFFICE OR OFFICES
- ------------------------ --- --------------------------------------------------
David Robson 42 Chairman of the Board and Chief Executive Officer
Michael R. Binnion 39 Director, President and Chief Financial Officer
J.F. Russell Hammond (2) 58 Director
Peder Paus (1) (2) 54 Director
Nils N. Trulsvik (1) (2) 51 Director
Ron Gerlitz 45 Vice President, Technology
Anthony J. Potter 35 Vice President, Finance
Niko Tevzadze 35 Vice President, (Significant Employee)
---------
(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 Fintech Services Ltd. Prior to
April 1997, he served as Chief Financial Officer and a Director of Trans-
Dominion Energy Company, a Toronto Stock Exchange listed international oil and
gas exploration and production company, for four years.
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, from 1989 to
Jan 1999.
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.
ANTHONY J. POTTER, CA 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 PricewaterhouseCoopers Chartered Accountants. In 1986, he graduated from
the University of Calgary with a Bachelor of Commerce degree in Accounting.
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.
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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all compensation paid or accrued by the Company
and its subsidiaries during the years ended December 31, 1999, 1998 and 1997 to
certain executive officers of the Company (the "Named Officers").
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
----------------------------
SECURITIES
NAME AND YEAR UNDERLYING ALL OTHER
PRINCIPAL POSITION ENDED SALARY ($) OPTIONS/SARS (#) COMPENSATION($) (6)
- ----------------------------------------------------------------------------------------
David Robson (1) 12/99 144,000 1,000,000 ---
12/98 82,500 390,000 ---
Michael R. Binnion (2) 12/99 127,200 750,000 2,458
Nils N. Trulsvik (3) 12/98 87,376 --- 3,681
12/97 140,333 --- 6,653
Rune Falstad (4) 12/98 112,852 25,000 3,786
12/97 82,952 15,000 3,825
Alfred Kjemperud (5) 12/98 133,338 50,000 3,124
12/97 101,296 5,000 5,014
(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. Binnion has served as President and Chief Financial Officer since
July 15, 1998.
(3) 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."
(4) 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."
(5) 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."
(6) Represents the Company's contributions to or accruals with respect to
individual retirement and pension plans.
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999
The following table sets forth information concerning options granted to
the Named Officers during the year ended December 31, 1999.
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT DATE
UNDERLYING GRANTED TO PRESENT VALUE (2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
NAME GRANTED(1) IN FY 12/99 PRICE DATE PER SHARE TOTAL
- -----------------------------------------------------------------------------------------
David Robson 30,000 1.17% $ 0.275 7/20/04 $ 0.17 $ 5,100
David Robson 400,000 15.54% $ 0.36 8/22/04 $ 0.22 88,000
David Robson 570,000 22.15% $ 0.36 8/25/04 $ 0.22 125,400
Michael R. Binnion 18,000 0.70% $ 0.275 7/20/04 $ 0.17 3,060
Michael R. Binnion 350,000 13.60% $ 0.36 8/22/04 $ 0.22 77,000
Michael R. Binnion 382,000 14.84% $ 0.36 8/25/04 $ 0.22 84,040
- -------------
(1) The options granted to both Mr. Robson and Mr. Binnion 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.
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:
RISK-FREE
EXERCISE PRICE DIVIDEND YIELD VOLATILITY INTEREST RATE EXPECTED TERM
$0.275 0% 79.98% 5.63% 4 years
$0.36 0% 79.98% 5.94% 4 years
$0.36 0% 79.98% 5.82% 4 years
These values are not intended to forecast future appreciation of the Company's
stock price. The actual value, if any, that an executive officer may realize
from his options (assuming that they are exercised) will depend solely on the
increase in the market price of the shares acquired through option exercises
over the exercise price, measured when the shares are sold.
OPTION VALUES AT DECEMBER 31, 1999
The following table sets forth information concerning the number and
hypothetical value of stock options held by the Named Officers at December 31,
1999.
NUMBER OF SHARES
UNDERLYING UNEXERCISED
OPTIONS HELD AT FISCAL VALUE OF UNEXERCISED IN-THE-MONEY
YEAR END OPTIONS AT FISCAL YEAR END
---------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
- -----------------------------------------------------------------------------------------
David Robson 265,000 1,305,000 0 278,890
Michael R. Binnion 105,000 785,000 0 268,090
DIRECTORS COMPENSATION
The Company pays directors' fees on a quarterly basis at a rate of $12,000 per
year, as of July 1999. The Company will also reimburses ordinary out-of-pocket
expenses for attending Board and Committee meeting.
The Company provided automatic grants 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 (I) the date of each meeting of stockholders at
which such non-employee is elected or re-elected as a director or, it 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 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 ore 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 of the director ceases to be a director for
any reason. Non-employee directors are not eligible to receive other options
pursuant to the 1995 Long-Term Incentive Plan. The Company terminated the
Automatic Grant Sub-Plan for Outside Directors as of July 16, 1999. The Company
amended the Plan to permit outside directors to participate generally in the
Plan, with such amendment to be subject to ratification by the stockholders of
this Company at the next annual special meeting of stockholders of this Company.
The exercise of any grants to outside directors made pursuant to the amended
Plan contemplated herein shall be conditioned upon stockholder approval.
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, 1999:
DIRECTORS FEES
AND OTHER CONSULTING OPTIONS
NAME COMPENSATION PAYMENTS GRANTED
- ---------------------------------------------------------------
J.F. Russell Hammond (1) $ 6,000 $ -- 100,000
Peder Paus (2) $ 6,000 $ -- 300,000
Nils N. Trulsvik (3) $ 6,000 $ -- 100,000
- ---------------
(1) Options were granted on June 16, 1999 3,750 at an exercise price of
$0.31, expire on June 16, 2002 and will be 100% vested on December
16 1999. Options were granted on July 21, 1999 7,500 at an exercise
price of $0.275, expire on July 20, 2004 and will be 100% vested
on July 20, 2002. Options granted on August 23, 1999, 25,000 at an
exercise price of $0.36, expire on August 22, 2004 and will be 100%
vested on August 22, 2002. Options granted on August 26, 1999, 63,750
at an exercise price of $0.36, expire on August 25, 2004 and will be
100% vested on August 25, 2002.
(2) Options were granted on June 16, 1999 3,750 at an exercise price of
$0.31, expire on June 16, 2002 and will be 100% vested on December
16 1999. Options were granted on July 21, 1999 67,500 at an exercise
price of $0.275, expire on July 20, 2004 and will be 100% vested
on July 20, 2002. Options granted on August 23, 1999, 25,000 at an
exercise price of $0.36, expire on August 22, 2004 and will be 100%
vested on August 22, 2002. Options granted on August 26, 1999 3,750 at
an exercise price of $0.36, expire on August 25, 2004 and will be 100%
vested on August 25, 2002. Options granted on September 23, 1999,
200,000 at an exercise price of $0.45, expire on September 22, 2004 and
will be 100% vested on September 22, 2002.
(3) Options were granted on June 16, 1999 3,750 at an exercise price of
$0.31, expire on June 16, 2002 and will be 100% vested on December
16 1999. Options were granted on July 21, 1999 71,250 at an exercise
price of $0.275, expire on July 20, 2004 and will be 100% vested
on July 20, 2002. Options granted on August 23, 1999, 25,000 at an
exercise price of $0.36, expire on August 22, 2004 and will be 100%
vested on August 22, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1999 with
respect to aggregate beneficial ownership of outstanding shares of Common Stock
and shares of Common Stock that would be issued upon exchange of Exchangeable
Shares either outstanding or issuable for no additional consideration, by each
person known by the Company to be the beneficial owner of more than 5% of the
aggregate of such shares, by each Director and Named Officer of the Company and
by all Directors and executive officers of the Company as a group.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------------------------------------------------------------
Terrenex Acquisition Corporation
1580, 727 - 7th Avenue SW
Calgary, AB, Canada T2P 0Z5 3,712,546 9.94%
Michael R. Binnion 766,051 (1) 2.03%
Peder Paus 620,929 (2) 1.66%
David Robson 385,000 (3) 1.02%
Nils N. Trulsvik 73,450 (4) *
J.F. Russell Hammond 52,500 (5) *
All executive officers and
Directors as a group (7 persons) 1,687,206 (6) 4.46%
- ------------
* Less than 1%.
(1) Includes 105,000 shares underlying presently exercisable options
beneficially owned by Mr. Binnion. Also includes 268,417 shares
representing Mr. Binnion's proportionate interest in shares beneficially
owned by Terrenex Acquisition Corporation of which Mr. Binnion is
President, a director and an approximately 7.23% shareholder. Mr.
Binnion disclaims beneficial ownership of all shares beneficially
owned by Terrenex, other than the 268,417 shares represent his 7.23%
proportionate interest.
(2) Includes 7,500 share underlying presently exercisable options.
(3) Includes 265,000 share underlying presently exercisable options.
(4) Includes 3,750 share underlying presently exercisable options.
(5) Includes 52,500 share underlying presently exercisable options.
Excludes 3,712,546 shares owned by Terrenex Acquisition Corporation of
Which Mr. Hammond is Chairman.
(6) See Notes 1-5; also includes 47,277 shares underlying presently
exercisable options held by executive officers 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 % per month. In addition, CanArgo Oil &
Gas Inc. granted Terrenex options exercisable until December 31, 1998 to acquire
12 % of the stock of CanArgo's subsidiary that holds a production sharing
contract for the Nazvrevi and Block XIII areas in the Republic of Georgia and
15% of CanArgo Oil & Gas Inc.'s position in any license received as a result of
a consortium submission in certain offshore drilling and production rights that
CanArgo might acquire in the Russian Republic of Dagestan. Either option could
be exercised by Terrenex paying CanArgo that percentage of all amounts expended
by CanArgo through the exercise date on the relevant project equal to the
percentage of the project being acquired by Terrenex through exercise of the
option. The terms of the loan, including the option terms, were negotiated and
approved by the directors of CanArgo Oil & Gas Inc. who had no affiliation with
Terrenex. CanArgo subsequently extended the options through March 31, 1999 in
consideration of the efforts of Terrenex in attempting to arrange financing for
CanArgo. CanArgo repaid the Terrenex loan following completion of the business
combination in July 1998. In light of the relationship between Terrenex and
CanArgo, Terrenex decided that any investment related to CanArgo that it would
make at this time should be in the entity CanArgo Energy Corporation and not in
specific CanArgo projects, and accordingly, Terrenex permitted the options to
expire unexercised.
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.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295 filed on June
9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities Limited, David
Williamson Associates Limited, and Orkla Finans (Fondsmegling) ASA (Incorporated
herein by reference from Form S-1 Registration Statement, File No. 333-72295
filed on June 9, 1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295 filed on June
9, 1999).
1(4) Selling Agent Agreement with National Securities Corporation (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 333-72295 filed on July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust Company (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share Capital of
Gastron International Limited dated August 10, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference from October 19,
1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated November 3, 1995 by and among
Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and
John Richard Tate as Warrantor (Incorporated herein by reference from October
19, 1995 Form 8-K).
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 Post-Effective
Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on
July 29, 1999).
*10(1) Form of Option Agreement for options granted to certain persons, including
Directors (Incorporated herein by reference from August 31, 1994 Form 10-KSB,
filed by Electromagnetic Oil Recovery, Inc., the Company's predecessor).
*10(2) Employment Agreement between Fountain Oil Incorporated and Susan E. Palmer
(Incorporated herein by reference from August 31, 1995 Form 10-KSB).
*10(3) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated herein by
reference from Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
*10(4) Fee Agreement dated November 15, 1995 between Fountain Oil Incorporated and
Robert A. Halpin (Incorporated herein by reference from August 31, 1996 Form 10-
KSB).
*10(5) Amended Fee Agreement dated December 10, 1996 between Fountain Oil Incorporated
and Robert A. Halpin (Incorporated herein by reference from December 31, 1996
Form 10-K).
*10(6) Amended and Restated CanArgo Energy Inc. Stock Option Plan (Incorporated herein
by reference from September 30, 1998 Form 10-Q).
*10(7) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as Consultant
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(8) Consultancy Agreement between CanArgo Energy Corporation and Fincom AS,
Norway (Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(9) Employment Contract between CanArgo Energy Inc. and Anthony J. Potter
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(10) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as Consultant
(Incorporated herein by reference from Form S-1 Registration Statement, File No.
333- 72295 filed on February 12, 1999).
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.
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.
*10(22) Employment Agreement between CanArgo Energy Corporation and Paddy Chesterman
dated February 24, 2000.
10(23) Agreement between Ninotsminda Oil Company and AES Gardabani dated March 10,
2000.
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.
(B) REPORTS ON FORM 8-K:
During the year ended December 31, 1999, the Company filed the following
current reports on Form 8-K:
1. Form 8-K dated June 10, 1999, reporting Item 5. Other Events announcing that its
Registration Statement relating to a public offering of a minimum 11,500,000 shares and a
maximum 21,264,643 shares of Common Stock of the Registrant had been declared
effective by the U.S. Securities and Exchange Commission.
2. Form 8-K dated December 8, 1999, reporting Item 5. Other Events that CanArgo had sold
3,300,000 shares of Common Stock at NOK 6.90 per share based on the closing price of
the Registrant's stock on the Oslo Stock Exchange on December 8, 1999.
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)
By: /s/Michael Binnion Date: March 24, 2000
-------------------
Michael Binnion, President and
Chief Financial Officer
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.
By: /s/Michael Binnion Date: March 24, 2000
-------------------
Michael Binnion, Director, President and
Chief Financial Officer
By: /s/Anthony J. Potter Date: March 24, 2000
----------------------
Anthony J. Potter, Vice President
(Principal Accounting Officer)
By: /s/David Robson Date: March 24, 2000
----------------
David Robson, Chief Executive Officer and
Chairman of the Board
By: /s/Russell Hammond Date: March 24, 2000
-------------------
Russell Hammond, Director
By: /s/Peder Paus Date: March 24, 2000
--------------
Peder Paus, Director
By: /s/Nils N. Trulsvik Date: March 24, 2000
---------------------
Nils N. Trulsvik, Director
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.
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
President and Chief Financial Officer
March 24, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Directors and Shareholders of CanArgo Energy Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of CanArgo
Energy Corporation and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended 1999 in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Notes 5 and 6 to the consolidated financial statements recovery
of the carrying value of the company's oil and gas properties, unevaluated oil
and gas properties, and certain of its investments in oil and gas ventures will
require the company to arrange significant additional financing from external
sources, discover adequate quantities of proved reserves, achieve significant
production at oil and gas prices that provide acceptable margins, incur
reasonable levels of taxation from local authorities, and market the oil and gas
produced at or near world prices. If one or more of the above factors, or other
factors, are different than anticipated, the Company may not recover its
carrying value of these assets which could result in a significant impairment
charge to operations.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Calgary, Alberta
March 10, 2000
CANARGO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- -------------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 3,534,983 $ 1,924,908
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 464,435 424,367
Advances to operator . . . . . . . . . . . . . . . . . . . . . -- 376,890
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 188,500 170,405
Other current assets . . . . . . . . . . . . . . . . . . . . . 94,174 453,476
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . $ 4,282,092 3,350,046
Property and equipment, net. . . . . . . . . . . . . . . . . . 7,101,125 6,201,936
Oil and gas properties, net, full cost method
(including unevaluated amounts of $12,531,313
and $13,266,368 respectively). . . . . . . . . . . . . . . 30,707,037 30,137,573
Investments in and advances to oil and gas and other
ventures - net. . . . . . . . . . . . . . . . . . . . . . 1,709,215 6,877,974
-------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,799,469 46,567,529
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 1,159,949 $ 882,761
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 393,411 1,101,050
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . $ 1,553,360 $ 1,983,811
Provision for future site restoration. . . . . . . . . . . . . 12,700 --
Minority interest in subsidiaries. . . . . . . . . . . . . . . 4,370,785 4,552,285
Commitments and contingencies (Note 8) . . . . . . . . . . . . -- --
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:
36,823,163 and 15,157,868 shares issued and
outstanding respectively;
529,759 additional shares issuable on demand at
December 31, 1999 without receipt
of further consideration. . . . . . . . . . . . . . . . . . 3,735,292 2,101,464
Capital in excess of par value. . . . . . . . . . . . . . . . 106,216,164 101,545,941
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (72,088,832) (63,615,972)
-------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . $ 37,862,624 $ 40,031,433
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . $ 43,799,469 $ 46,567,529
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ -------------
Operating Revenues:
Oil and gas sales . . . . . . . . . . . . . . . . . . $ 2,493,612 $ 804,552 $ 313,301
Other . . . . . . . . . . . . . . . . . . . . . . . . 289,321 16,400 --
------------ ------------ -------------
TOTAL REVENUES . . . . . . . . . . . . . . . . . . . . 2,782,933 820,952 313,301
------------ ------------ -------------
Operating expenses:
Lease operating expenses. . . . . . . . . . . . . . . 884,925 843,169 200,321
Cost of sales . . . . . . . . . . . . . . . . . . . . -- 7,888 --
Direct project costs. . . . . . . . . . . . . . . . . 944,109 1,157,163 1,753,166
General and administrative. . . . . . . . . . . . . . 2,192,728 3,887,386 3,903,446
Depreciation, depletion and amortization. . . . . . . 1,145,029 238,924 344,666
Equity loss from investments in unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . 261,234 161,180 3,778,287
Impairment of notes receivable. . . . . . . . . . . . -- -- 186,611
Impairment of property and equipment. . . . . . . . . -- 113,000 3,243,997
Impairment of oil and gas properties. . . . . . . . . 233,957 900,000 257,407
Impairment of oil and gas ventures. . . . . . . . . . 5,459,793 -- 15,735,592
------------ ------------ -------------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 11,121,775 7,308,710 29,403,493
------------ ------------ -------------
OPERATING LOSS . . . . . . . . . . . . . . . . . . . . (8,338,842) (6,487,758) (29,090,192)
------------ ------------ -------------
Other (expense) income:
Interest income . . . . . . . . . . . . . . . . . . . -- 782,596 1,615,066
Interest expense. . . . . . . . . . . . . . . . . . . (199,604) (479,932) (69,286)
Other expense . . . . . . . . . . . . . . . . . . . . (74,172) (76,540) (72,714)
Loss on disposition of equipment and property . . . . (41,742) (30,333) (271,205)
------------ ------------ -------------
TOTAL OTHER (EXPENSE) INCOME . . . . . . . . . . . . . (315,518) 195,791 1,201,861
------------ ------------ -------------
Net loss before income tax expense . . . . . . . . . . (8,654,360) (6,291,967) (27,888,331)
Income tax expense . . . . . . . . . . . . . . . . . . -- -- --
------------ ------------ -------------
NET LOSS BEFORE MINORITY INTEREST. . . . . . . . . . . (8,654,360) (6,291,967) (27,888,331)
Minority interest in loss of consolidated subsidiaries 181,500 181,644 205,380
------------ ------------ -------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . $(8,472,860) $(6,110,323) $(27,682,951)
============ ============ =============
NET LOSS PER COMMON SHARE - BASIC. . . . . . . . . . . $ (0.32) $ (0.39) $ (2.47)
------------ ------------ -------------
NET LOSS PER COMMON SHARE - DILUTED. . . . . . . . . . $ (0.32) $ (0.39) $ (2.47)
------------ ------------ -------------
Weighted average number of common
shares outstanding. . . . . . . . . . . . . . . . . . 26,370,235 15,783,889 11,206,506
------------ ------------ -------------
The accompanying notes are an integral part of the consolidated financial
statements
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON STOCK
-------------------------
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
------------- ----------- ------------- --------------- -------------
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
------------- ----------- ------------- --------------- -------------
Less issuable shares at beginning
of year . . . . . . . . . . . . . . (5,856,775) (585,678) (10,996,692) -- (11,582,370)
Issuance of common stock upon
exchange of CanArgo Oil & Gas
Inc. Exchangeable Shares . . . . . . 5,327,016 532,702 10,002,014 -- 10,534,716
Issuance of common stock in
connection with acquisition of oil
and gas properties . . . . . . . . . 650,000 65,000 375,740 -- 440,740
Issuance of common stock for
services . . . . . . . . . . . . . . 537,917 53,792 245,080 -- 298,872
Issuance of common stock
pursuant to registration statement . 11,850,362 1,185,036 2,370,073 -- 3,555,109
Issuance of common stock
pursuant to private placement. . . . 3,300,000 330,000 2,507,630 -- 2,837,630
Share issue costs. . . . . . . . . . -- -- (828,300) -- (828,300)
Net loss . . . . . . . . . . . . . . -- -- -- (8,472,860) (8,472,860)
------------- ----------- ------------- --------------- -------------
BALANCE, DECEMBER 31, 1999 . . . . . 36,823,163 $ 3,682,316 $105,221,486 $ (72,088,832) $ 36,814,970
------------- ----------- ------------- --------------- -------------
Common shares issuable upon
exchange of CanArgo Oil & Gas
Inc. Exchangeable Shares without
receipt of further consideration. . 529,759 52,976 994,678 -- 1,047,654
------------- ----------- ------------- --------------- -------------
TOTAL, DECEMBER 31, 1999 . . . . . . 37,352,922 $ 3,735,292 $106,216,164 $ (72,088,832) $ 37,862,624
------------- ----------- ------------- --------------- -------------
The accompanying notes are an integral part of the consolidated financial
statements
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------- -------------
Operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,472,860) $ (6,110,323) $(27,682,951)
Depreciation, depletion and amortization. . . . . . . . . . . . . 1,145,029 238,924 344,666
Loss on disposition of equipment and property . . . . . . . . . . 41,742 30,333 271,205
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . 76,921 -- --
Issuance of common stock for services . . . . . . . . . . . . . . 298,872 -- --
Impairment of notes receivable. . . . . . . . . . . . . . . . . . -- -- 186,611
Impairment of property and equipment. . . . . . . . . . . . . . . -- 113,000 3,243,997
Impairment of oil and gas properties. . . . . . . . . . . . . . . 233,957 900,000 257,407
Impairment of oil and gas ventures. . . . . . . . . . . . . . . . 5,459,793 -- 15,735,592
Equity loss in investments in unconsolidated subsidiaries . . . . 261,234 161,180 3,778,287
Minority interest in loss of unconsolidated subsidiaries. . . . . (181,500) (181,644) (205,380)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . (116,989) 649,671 259,040
Advance to operator . . . . . . . . . . . . . . . . . . . . . . 376,890 665,358 --
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,095) (150,000) --
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 359,302 331,936 (139,493)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 277,188 (2,202,203) (471,814)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . (857,639) (9,164,558) 246,920
------------ ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . (1,116,155) (14,718,326) (4,175,913)
------------ ------------- -------------
Investing activities:
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . -- 9,700,000 (4,300,000)
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . -- (1,214,948) --
Investments in oil and gas properties . . . . . . . . . . . . . . (2,030,880) (5,727,029) (1,318,492)
Purchase of property and equipment. . . . . . . . . . . . . . . . (1,473,960) -- (1,573,507)
Investments in and advances to oil and gas and other ventures . . (649,603) (1,652,447) (6,280,613)
Proceeds from disposition of assets . . . . . . . . . . . . . . . 1,166,234 438,033 232,638
Change in non-cash working capital items. . . . . . . . . . . . . 150,000 -- --
------------ ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . . . . (2,838,209) 1,543,609 (13,239,974)
------------ ------------- -------------
Financing activities:
Proceeds from sales of common stock . . . . . . . . . . . . . . . 6,392,739 -- --
Share issue costs . . . . . . . . . . . . . . . . . . . . . . . . (828,300) -- --
Cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . -- 935,448 --
Proceeds from exercise of options . . . . . . . . . . . . . . . . -- -- 156,000
------------ ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . 5,564,439 935,448 156,000
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . 1,610,075 (12,239,269) (17,259,887)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . . 1,924,908 14,164,177 31,424,064
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . $ 3,534,983 $ 1,924,908 $ 14,164,177
============ ============= =============
The accompanying notes are an integral part of the consolidated financial
statements
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
in certain cases 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 owns majority and less than majority
interests in entities developing or seeking to develop oil and gas properties
in Eastern Europe including the Russian Federation.
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, 1999 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, 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, 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 in which the Company exercises significant influence are
accounted for using the equity method. Entities in which the Company does
not have significant influence are accounted for using the cost method.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers all liquid investments with an original maturity of
three months or less to be cash equivalents. The carrying amount of cash and
other current assets and liabilities approximates fair value because of the
short term maturity of these items. The Company does not hold or issue
financial instruments for trading purposes.
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.
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 five years for office furniture and
equipment to three to fifteen years for oil and gas related equipment.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS PROPERTIES - The Company and the unconsolidated entities for
which it accounts using the equity method account for oil and gas properties and
interests under the full cost method. Under this accounting method, costs,
including a portion of internal costs associated with property acquisition and
exploration for and development of oil and gas reserves, are capitalized within
cost centers established on a country-by-country basis. Capitalized costs within
a cost center, as well as the estimated future expenditures to develop proved
reserves and estimated net costs of dismantlement and abandonment, are amortized
using the unit-of-production method based on estimated proved oil and gas
reserves. All costs relating to production activities are charged to expense as
incurred.
Capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, are limited to an
amount (the ceiling limitation) equal to (a) the present value (discounted at
10%) of estimated future net revenues from the projected production of proved
oil and gas reserves, calculated at prices in effect as of the balance sheet
date (with consideration of price changes only to the extent provided by fixed
and determinable contractual arrangements), plus (b) the lower of cost or
estimated fair value of unproved and unevaluated properties, less (c) income tax
effects related to differences in the book and tax basis of the oil and gas
properties.
Estimated future site restoration, dismantlement and abandonment costs of
$720,000 are amortized on a unit of production basis and reflected with
accumulated depreciation, depletion and amortization. The Company identifies
and estimates such costs based upon its assessment of applicable regulatory
requirements, its operating experience and oil and gas industry practice in the
areas in which its properties are located. To date the Company has not been
required to expend any material amounts to satisfy such obligations.
REVENUE RECOGNITION - The Company recognizes revenues when goods have been
delivered, when services have been performed, or when hydrocarbons have been
produced and delivered and payment is reasonably assured.
FOREIGN OPERATIONS - The Company's future operations and earnings will
depend upon the results of the Company's operations in the Republic of Georgia.
There can be no assurance that the Company will be able to successfully conduct
such operations, and a failure to do so would have a material adverse effect on
the Company's financial position, results of operations and cash flows. Also,
the success of the Company's operations will be subject to numerous
contingencies, some of which are beyond management control. These contingencies
include general and regional economic conditions, prices for crude oil and
natural gas, competition and changes in regulation. Since the Company is
dependent on international operations, specifically those in the Republic of
Georgia, the Company will be subject to various additional political, economic
and other uncertainties. Among other risks, the Company's operations may be
subject to the risks and restrictions on transfer of funds, import and export
duties, quotas and embargoes, domestic and international customs and tariffs,
and changing taxation policies, foreign exchange restrictions, political
conditions and regulations.
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, 1999, 1998 and 1997 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.
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 method of accounting.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998, FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities which will be
adopted in the 2001 annual financial statements. The Company is currently
evaluating the impact of SFAS No. 133 on its financial statements.
3. 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.
The purchase price was allocated to the net assets of CAOG as follows:
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
============
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 78.8% (prior to November 30, 1999
and 1998 - 68.5% and 55.9% respectively) 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.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA (UNAUDITED)
-------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
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
============== ==============
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, 1999, 9,261,141 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, 1999 would be 37,352,922.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net of accumulated depreciation and impairment, at
December 31, 1999 include the following:
ACCUMULATED
DEPRECIATION
COST AND IMPAIRMENT NET
------------- ---------------- ----------
Oil and gas related equipment. . . 9,618,508 (2,824,035) 6,794,473
Office furniture, fixtures and
Equipment and other . . . . . . 717,212 (410,560) 306,652
------------- ---------------- ----------
PROPERTY AND EQUIPMENT, NET. . . . $ 10,335,720 $ (3,234,595) $7,101,125
============= ================ ==========
Property and equipment, net of accumulated depreciation and impairment, at
December 31, 1998 include the following:
ACCUMULATED
DEPRECIATION
COST AND IMPAIRMENT NET
------------- ---------------- ----------
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 (813,995) 276,357
------------- ---------------- ----------
PROPERTY AND EQUIPMENT, NET. . . . $ 10,016,810 $ (3,814,874) $6,201,936
============= ================ ==========
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. In 1999, the EEOR property and
equipment is held by a subsidiary that became an unconsolidated subsidiary.
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, in 1997 the Company recorded an impairment of
$400,000 to reduce the carrying value of furniture, fixtures and equipment to
their estimated fair value.
5. OIL AND GAS PROPERTIES
The Company 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 December 31, 1999 include the
following:
DECEMBER 31, 1999
-----------------------------------------------------------
REPUBLIC OF
GEORGIA CANADA USA OTHER TOTAL
------------- ------- ------------ ------ ------------
Proved properties. . . . . . $ 19,331,883 $ -- $ 1,174,734 $ -- $20,506,617
Unproved properties. . . . . 12,517,905 13,408 -- -- 12,531,313
Less: accumulated
depletion and impairment (1,156,159) -- (1,174,734) -- (2,330,893)
------------- ------- ------------ ------ ------------
TOTAL OIL AND GAS
PROPERTIES, NET. . . . . . . $ 30,693,629 $13,408 $ -- $ -- $30,707,037
============= ======= ============ ====== ============
Oil and gas properties, net of accumulated depletion and impairment, at
December 31, 1998 include the following:
DECEMBER 31, 1998
------------------------------------------------------------------
REPUBLIC OF
GEORGIA CANADA USA OTHER TOTAL
------------- ------------ ------------ --------- ------------
Proved properties. . . . . . $ 16,743,816 $ 1,612,308 $ 1,174,734 $ -- $19,530,858
Unproved properties. . . . . 12,707,912 342,500 -- 233,956 13,266,368
Less: accumulated
depletion and impairment (174,421) (1,310,498) (1,174,734) -- (2,659,653)
------------- ------------ ------------ --------- ------------
TOTAL OIL AND GAS
PROPERTIES, NET. . . . . . . $ 29,277,307 $ 626,310 $ -- $ -- $30,137,573
============= ============ ============ ========= ============
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 eleven 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.
During the year ended December 31,1997 the Company recognized impairment of
$257,407 on oil and gas properties in the United States and Canada as a result
of applying the full cost ceiling limitation. The impairments related to
previously unproved properties. 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. Effective September 1, 1999, CanArgo
sold its interest in the Sylvan Lake project for gross proceeds of $800,000.
Unproved properties and associated costs not currently being amortized and
included in oil and gas properties were $12,531,313 and $13,266,368 at December
31, 1999 and 1998 respectively. Unproved oil and gas properties at December 31,
1999 include costs of $12,517,905 (December 31, 1998 - $12,941,868) with respect
to properties in Eastern Europe. These properties are expected to be evaluated
over the next four years. Remaining costs of $13,408 relate to the minor
property interests in Western Canada which are expected to be evaluated over the
next 36 months. If no proved reserves are added, these properties could result
in additional impairment.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2,728,732 at December 31, 1999, which it
considered inadequate to proceed with full implementation of its program of
developing its oil and gas properties. Full development of these properties
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.
Ultimate realization of the carrying value of the Company'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
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. If one or more of the above factors, or other factors, are
different than anticipated, the Company may not recover its carrying value.
The Company generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures (see note 6) 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.
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. 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.
6. 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 at December 31, 1999 and 1998 is set out below:
DECEMBER 31, December 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 1999 1998
- ------------------------------------------------------------------- ------------- -------------
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company. . . . . . . . . $ 6,086,254 $ 5,980,613
Republic of Georgia - Sartichala
Through 12.9% ownership of Georgian American Oil Refinery . . . 1,008,845 1,004,445
Republic of Georgia - Ninostminda
Through an effective 42.5% ownership Sagarego Power Corporation 635,713 467,796
Uentech International Corporation
Through an effective 45% voting interest. . . . . . . . . . . . . . 274,310 --
Ukraine - Lelyaki Field, Pryluki Region
Through an effective 40.5% ownership of Kashtan Petroleum Ltd.. 2,435,725 2,435,725
Adygea, Russian Federation - Maykop Field
Through 37% ownership in Intergas JSC. . . . . . . . . . . . . . 6,710,874 6,710,874
Albania - Gorisht-Kocul Field
Through 50% ownership of the joint venture. . . . . . . . . . . 2,202,922 2,202,922
------------- -------------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS AND OTHER VENTURES. . . . . . . . . . . . . . . . . . . $ 19,354,643 $ 18,802,375
------------- -------------
DECEMBER 31, December 31,
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES 1999 1998
- --------------------------------------------------------- -------------- --------------
Ukraine - Stynawske Field, Boryslaw . . . . . . . . . . . $ (626,461) $ (574,880)
Republic of Georgia - Sagarego Power Corporation. . . . . (186,074) --
Uentech International Corporation . . . . . . . . . . . . (23,579) --
Ukraine - Lelyaki Field, Pryluki Region . . . . . . . . . (2,435,725) (2,435,725)
Adygea, Russian Federation - Maykop Field . . . . . . . . (1,452,510) (1,452,510)
Albania - Gorisht-Kocul Field . . . . . . . . . . . . . . (833,191) (833,191)
-------------- --------------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF
OIL AND GAS AND OTHER VENTURES. . . . . . . . . . . . . . $ (5,557,540) $ (5,296,306)
-------------- --------------
DECEMBER 31, December 31,
IMPAIRMENT OF OIL AND GAS AND OTHER VENTURES 1999 1998
- ---------------------------------------------------------- -------------- --------------
Impairment - Stynawske Field . . . . . . . . . . . . . . . $ (5,459,793) $ --
Impairment - Maykop Field. . . . . . . . . . . . . . . . . (5,258,364) (5,258,364)
Impairment - Gorisht-Kocul Field . . . . . . . . . . . . . (1,369,731) (1,369,731)
-------------- --------------
TOTAL IMPAIRMENT . . . . . . . . . . . . . . . . . . . . . $ (12,087,888) $ (6,628,095)
-------------- --------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER
VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT. . . . . . . . $ 1,709,215 $ 6,877,974
============== ==============
Under the terms of the license Boryslaw Oil Company holds in the Stynawske
field, field operations were to be transferred to Boryslaw Oil Company
effective January 1, 1999. While negotiations continue on the transfer of the
field, the length and difficulty of the negotiations have created significant
uncertainty as to CanArgo's ability to raise funds for the project or enter into
a satisfactory farm-out agreement on a timely basis. Accordingly, CanArgo
cannot be reasonably assured that development of the Stynawske project will
proceed. As such, CanArgo recorded in the third quarter of 1999 an impairment
charge of $5,459,793 against its investment in and advances to Boryslaw Oil
Company.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999, the Company has an effective 42.5% interest in
Sagarego Power Corporation, a Georgian joint stock company, for which operations
have not yet begun.
In 1999 CanArgo restructured its EEOR assets by placing these assets into
Uentech International Corporation, a Canadian controlled private corporation,
with the objective of Uentech International Corporation raising additional
third party capital specifically for development of the EEOR technology.
Following the restructuring and the raising of additional capital by Uentech
International Corporation, CanArgo held at December 31, 1999, 45% of the voting
common shares of Uentech International Corporation and 78% of the total common
shares outstanding.
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. In July 1999, CanArgo transferred its 45% interest in the joint
venture company to Zhoda Corporation. 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. In
December 1999, the Company entered into an agreement to, subject to various
conditions, transfer its entire right and interest in the Gorisht-Kocul project
to a third party in exchange for 31,000 British Pounds and a 15% share of any
future profits earned under the Joint Operating Agreement governing the project.
One of the conditions of the agreement is confirmation that the license
governing the project remains in force. As confirmation has not yet been
received, no sales proceeds have been recognized for the year ended December 31,
1999.
As a result of the events associated with the impairment of the Company's
investment in and advances to and other assets related to Stynawske, 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.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company'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.
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 include the following:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Professional fees . $ 167,500 $ 280,000
Seismic acquisition -- 771,207
Workovers . . . . . 150,000 --
Other . . . . . . . 75,911 49,843
------------- -------------
$ 393,411 $ 1,101,050
============= =============
8. 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 December 31, 1999, CanArgo had the
contingent obligation to issue an aggregate of 187,500 shares of its common
stock, subject to the satisfaction of conditions related to the achievement of
specified performance standards by the Stynawske field project.
POTENTIAL CLAIMS RELATING TO PREVIOUSLY IMPAIRED PROJECTS
As a result of CanArgo's decision to cease active development of
the Lelyaki, Maykop and Gorisht-Kocul projects, CanArgo may be subject to
contingent liabilities in the form of claims from the joint ventures developing
such projects or from others participating in those projects. CanArgo was
advised during the first quarter of 1998 that Intergas and another shareholder
of Intergas were considering asserting such claims in relation to the Maykop
project, but no such claims have yet been asserted. CanArgo is unable to
estimate the range that such claims, if made, might total. However, if one or
more such claims were asserted and determined to be valid, they could have a
material adverse effect on CanArgo's financial position, results of operations,
cash flows and prospects. Such claims may be adjudicated in the host country
forum under host country laws.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASE COMMITMENTS - The Company leases office space under non-cancellable
operating lease agreements. Rental expense for the years ended December 31,
1999, 1998 and 1997 was $115,425, $170,795 and $293,855 respectively.
Future minimum rental payments for the Company's lease obligations as of
December 31, 1999, are as follows:
2000 . . $92,400
2001 . . 63,600
2002 . . 38,700
2003 . . 38,700
2004 . . 38,700
-------
272,100
--------
The Company has sublet office space representing $59,000 of the future
minimum rental payments in 2000.
9. 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.
10. 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, 1999, 36,823,163 shares of Common Stock, 529,759
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.
During the years ended December 31, 1999, 1998 and 1997, the following
transactions regarding the Company's Common Stock were consummated pursuant to
authorization by the Company's Board of Directors or duly constituted committees
thereof.
YEAR ENDED DECEMBER 31, 1999
- - In 1999, the Company issued 5,327,016 shares upon exchange by holders of
Exchangeable Shares.
- - In 1999, the Company issued 650,000 shares at $0.678 per share in
connection with the acquisition of net profits interests related to the
Ninotsminda oil field in the Republic of Georgia.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - In 1999, the Company issued 537,917 shares at $0.555 per share in
connection with services performed by third parties.
- - In August 1999, the Company issued 11,850,362 shares at $0.30 per share
for gross proceeds of $3,555,109 upon completion of the Company's
registered public offering.
- - In December 1999, the Company issued 3,300,000 shares at $0.86 per share
for gross proceeds of $2,837,630 upon completion of a private placement.
YEAR ENDED DECEMBER 31, 1998
- - In 1998, the Company issued 3,934,124 shares upon exchange by holders
of Exchangeable Shares.
YEAR ENDED DECEMBER 31, 1997
- - In 1997, the Company issued 87,500 shares at a price of $12.125 per
share in connection with the acquisition of an interest in the Stynawske
field, Ukraine.
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.
The following table summarizes warrants to purchase the Company's Common
Stock, which were outstanding:
NUMBER OF EXERCISE EXPIRATION
WARRANTS PRICE DATE
--------------- --------------- ------------------
BALANCE, DECEMBER 31, 1998 1,097,511 $C2.75 - $C3.25 4/30/99 to 11/1/99
Expired. . . . . . . . . . (1,097,511) $C2.75 - $C3.25 4/30/99 to 11/1/99
--------------- --------------- ------------------
BALANCE, DECEMBER 31, 1999 --
=============== =============== ==================
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. None
of the warrants issued were exercised prior to expiry.
11. 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, 1999, 1998 and 1997 were based on the weighted
average number of common shares outstanding during those periods. The weighted
average number of shares used was 26,370,235, 15,783,889 and 11,206,586
respectively. Options to purchase the Company's Common Stock were outstanding
during the years ended December 31, 1999, 1998 and 1997 but were not included in
the computation of diluted net loss per common share because the effect of such
inclusion would have been antidilutive.
12. 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.
A reconciliation of the differences between income taxes computed at the US
federal statutory rate (34%) and the Company's reported provision for income
taxes is as follows:
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------- -------------------
Income tax benefit at statutory rate $ (2,880,772) $ (2,077,510) $ (9,412,203)
Benefit of losses not recognized . . 2,880,772 2,077,510 9,412,203
Foreign tax provision. . . . . . . . -- -- --
Other, net . . . . . . . . . . . . . -- -- --
------------------- ------------------- -------------------
Provision for income taxes . . . . . $ 0 $ 0 $ 0
------------------- ------------------- -------------------
Effective tax rate . . . . . . . . . 0% 0% 0%
The components of the deferred tax assets as of December 31, 1999 and 1998 were
as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
Net operating loss carryforwards . . . . . . . . . $ 13,576,000 $ 13,105,000
Foreign net operating loss carryforwards . . . . . 5,916,000 5,892,000
Impairments. . . . . . . . . . . . . . . . . . . . 9,079,000 7,161,000
Patent rights and related equipment. . . . . . . . -- 180,378
-------------- --------------
28,589,000 26,338,378
Valuation allowance. . . . . . . . . . . . . . . . (28,589,000) (26,338,378)
-------------- --------------
Net deferred tax asset recognized in balance sheet $ -- $ --
-------------- --------------
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, 1999, total U.S. net operating loss carryforwards were
approximately $39,930,000. Of that amount, approximately $17,624,000 was
incurred subsequent to the ownership change in 1994, $17,606,000 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 2000 to 2014. 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 $17,400,000 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.
13. SEGMENTS
During the years ended December 31, 1999, 1998 and 1997 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 year ended
December 31, 1997 was minimal.
Operating revenues for the years ended December 31, 1999, 1998 and 1997 by
business segment and geographical area were as follows:
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe. . . . . . . . . . . . . . . . . . . $ 2,274,524 $ 602,724 $ --
Canada. . . . . . . . . . . . . . . . . . . . . . . 219,088 201,828 313,301
------------- ------------- -------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $ 2,493,612 $ 804,552 $ 313,301
------------- ------------- -------------
In 1999, the Company sold its production in Eastern Europe to five (1998 -
two) customers. In 1999 sales to three customers represented 38%, 34% and 11% of
operating revenue respectively. In 1998, sales to two customers represented 57%
and 43% of operating revenue, respectively.
Operating profit (loss) for the years ended December 31, 1999, 1998
and 1997 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
-------------- -------------- --------------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe. . . . . . . . . . . . . . . . . . . $ (6,392,059) $ (2,408,968) $ (24,831,798)
United States . . . . . . . . . . . . . . . . . . . -- -- (257,407)
Canada. . . . . . . . . . . . . . . . . . . . . . . (7,926) (1,258,506) (97,541)
-------------- -------------- --------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $ (6,399,985) $ (3,667,474) $ (25,186,746)
-------------- -------------- --------------
CORPORATE EXPENSES. . . . . . . . . . . . . . . . . $ (1,938,857) $ (2,820,284) $ (3,903,446)
-------------- -------------- --------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $ (8,338,842) $ (6,487,758) $ (29,090,192)
-------------- -------------- --------------
The Company's loss from investments in unconsolidated subsidiaries pertains
primarily to operations in Eastern Europe. Identifiable assets as of December
31, 1999 and 1998 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
CORPORATE
Eastern Europe . . . . . . . . . . . . . . . . $ 262,174 $ 170,405
United States. . . . . . . . . . . . . . . . . -- 3,319
Canada . . . . . . . . . . . . . . . . . . . . 3,981,274 2,980,018
Western Europe . . . . . . . . . . . . . . . . 38,644 196,304
------------- -------------
TOTAL CORPORATE. . . . . . . . . . . . . . . . $ 4,282,092 $ 3,350,046
------------- -------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe . . . . . . . . . . . . . . . . $ 37,794,754 $ 40,798,968
United States. . . . . . . . . . . . . . . . . -- --
Canada . . . . . . . . . . . . . . . . . . . . 13,408 1,001,733
Western Europe . . . . . . . . . . . . . . . . -- 13,769
------------- -------------
TOTAL OIL AND GAS EXPLORATION, DEVELOPMENT AND
PRODUCTION . . . . . . . . . . . . . . . . . . $ 37,808,162 $ 41,814,470
------------- -------------
OTHER ENERGY PROJECTS
Eastern Europe. . . . . . . . . . . . . . . . $ 1,458,484 $ 1,403,013
Canada. . . . . . . . . . . . . . . . . . . . 250,731 --
------------- -------------
$ 1,709,215 $ 1,403,013
------------- -------------
TOTAL IDENTIFIABLE ASSETS. . . . . . . . . . . $ 43,799,469 $ 46,567,529
------------- -------------
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The percentage of operating revenues for the years ended December 31, 1999,
1998 and 1997 by business segment and geographical area are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe . . . . . . 90% 75% --
United States. . . . . . . -- -- --
Canada . . . . . . . . . . 10% 25% 100%
14. SUPPLEMENTAL CASH FLOW INFORMATION AND NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the years
ended December 31, 1999, 1998 and 1997:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Supplemental schedule of non-cash activities:
Issuance of Common Stock in connection
with investments in oil and gas ventures. . . $ 440,740 $ -- $ 1,060,936
------------- ------------- -------------
Issuance of Common Stock in connection
with compensation earned and third party
services provided . . . . . . . . . . . . . . $ 298,872 $ -- $ --
------------- ------------- -------------
Accruals recorded applicable to effective
guaranty of Kashtan obligation and Lelyaki
field close-down costs. . . . . . . . . . . . $ -- $ -- $ 8,971,000
------------- ------------- -------------
15. 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 were exercisable at an
exercise price of $3.00 and were only exercisable at the time or within six
months after services are rendered by such individuals. In 1999 all of the
options issued under the 1994 Plan expired.
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan") adopted by
the Company in February 1996,4,000,000 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, 1999. The
exercise price and vesting schedule of stock appreciation rights are determined
at the date of grant. Under the 1995 Plan, 3,184,250 options were outstanding
at December 31, 1999.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 937,500 options were outstanding at
December 31, 1999.
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. A summary of the status of stock
options granted under the 1994 Plan, the 1995 Plan and the CAOG Plan is as
follows:
SHARES SHARES ISSUABLE WEIGHTED
AVAILABLE UNDER OUTSTANDING AVERAGE
FOR ISSUE OPTIONS EXERCISE PRICE
----------- ------------------ ---------------
BALANCE, 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, 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 0.56
Granted at a premium. . . . . . . (50,000) 50,000 0.70
Canceled. . . . . . . . . . . . . 220,000 (220,000) 1.85
----------- ------------------ ---------------
BALANCE, DECEMBER 31, 1998 . . . . . 93,584 1,718,416 $ 1.70
----------- ------------------ ---------------
Options (1994 & 1995 Plan):
Increase in shares available for
issue . . . . . . . . . . 3,250,000 --
Granted at market . . . . . . . . (2,746,166) 2,746,166 0.36
Granted at a premium. . . . . . . -- --
Canceled (1994 Plan). . . . . . . -- (74,000) 3.00
Canceled. . . . . . . . . . . . . 298,332 (298,332) 1.95
CAOG Plan Authorization:
Granted at market . . . . . . . . (227,500) 227,500 0.31
Granted at a premium. . . . . . . -- --
Canceled. . . . . . . . . . . . . 198,000 (198,000) 1.17
----------- ------------------ ---------------
BALANCE, DECEMBER 31, 1999 . . . . . 866,250 4,121,750 $ 0.72
----------- ------------------ ---------------
Shares issuable upon exercise of vested options and the corresponding
weighted average exercise price are as follows:
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHARES ISSUABLE
UNDER WEIGHTED
EXERCISABLE AVERAGE
OPTIONS EXERCISE PRICE
--------------- --------------
December 31, 1997 177,832 $ 7.12
December 31, 1998 413,661 $ 2.82
December 31, 1999 672,277 $ 1.85
The weighted average fair value of options granted at market was $0.22,
$0.61 and $2.92, for the years ended December 31, 1999, 1998 and 1997. The
weighted average fair value of options granted at a premium was $0.13 and $1.85
for the years ended December 31, 1998 and 1997 respectively. The weighted
average fair value of all options granted during the years ended December 31,
1999, 1998 and 1997 was $0.22, $0.59 and $2.05 respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------- ----------------------------
NUMBER WEIGHTED NUMBER
OF SHARES AVERAGE WEIGHTED OF SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/99 TERM EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- -------------------- ------------------- --------- --------------- ------------ --------------
0.275 to $0.69. . . 3,149,250 4.81 $ 0.37 69,777 $ 0.58
1.00 to $1.85 . . . 957,500 4.27 $ 1.67 587,500 $ 1.75
9.00 to $14.50. . . 15,000 3.71 $ 11.75 15,000 $ 11.75
- -------------------- ------------------- ------------
0.275 to $14.50 . . 4,121,750 4.68 $ 0.72 672,277 $ 1.85
- -------------------- ------------------- ------------
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 $8,805,918 and $0.34 respectively for the year ended
December 31, 1999, $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. 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, 1999, 1998 and 1997:
dividend yield of 0.00%; risk-free interest rate of 5.86% for the year ended
December 31, 1999, 5.25% for the year ended December 31, 1998 and 6.1% for the
year ended December 31, 1997; the average expected lives of options of 4. years,
4.0 years and 2.1 years respectively; and volatility of 80.0% for the year
ended December 31, 1999, 44.8% for the year ended December 31, 1998 and 44.7%
for the year ended December 31, 1997.
16. 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.
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 two options, each exercisable until
December 31, 1998. One option entitled Terrenex to acquire 12 1/2% of the
stock of the subsidiary holding the Nazvrevi/Block XIII production sharing
contract. Under the second option, Terrenex could purchase 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 repaid the Terrenex loan following
completion of the business combination July 1998. 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. In 1999 these options expired
unexercised.
17. SUBSEQUENT EVENTS
Subsequent to December 31, 1999, the Company and the other shareholder in
Ninotsminda Oil Company reached an agreement for the possible purchase, by the
Company, of the other shareholders interest in Ninotsminda Oil Company. Total
consideration would be $4,500,000 payable in common shares of CanArgo based on
the 10 day moving average trading price calculated in accordance with NASDAQ
rules. Closing is subject to regulatory and board approval by both companies.
On March 10, 2000, Ninotsminda Oil Company signed a Letter of Intent (LOI)
with a third party relating to exploration and potential future development of
gas prospects in Ninotsminda Oil Company's acreage in Georgia. The LOI
contemplates the third party earning a 50% interest in identified prospects at
the Cretaceous stratigraphic level, by funding a portion of the cost of three
exploration wells. The program would be implemented by CanArgo's existing
operations unit in Georgia, directed jointly by CanArgo and the third party.
Final agreement is subject to negotiation of satisfactory formal agreements,
board approvals and any necessary regulatory approvals. In addition the LOI
covers the general terms of a long term gas sales contract which would be
entered into in the event of a successful development.
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, 1999 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 oil reserves,
including the changes therein, and net proved developed reserves at December 31,
1999, as estimated by the independent petroleum engineering firm, Ashton
Jenkins Mann:
NET PROVED RESERVES - OIL REPUBLIC OF
(In Thousands of Barrels) GEORGIA CANADA TOTAL
------------ -------- ------
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. 1388 -- 1,388
Production . . . . . . . . . . . . . . . (92) (21) (113)
------------ -------- ------
DECEMBER 31, 1998 . . . . . . . . . . . . 7,544 158 7,702
------------ -------- ------
Purchase of properties . . . . . . . . . -- -- --
Revisions of previous estimates. . . . . -- -- --
Extension, discoveries, other additions. 274 -- 274
Production . . . . . . . . . . . . . . . (100) (17) (117)
Disposition of properties. . . . . . . . -- (141) (141)
------------ -------- ------
DECEMBER 31, 1999 . . . . . . . . . . . . 7,718 -- 7,718
------------ -------- ------
NET PROVED DEVELOPED RESERVES
December 31,1999 . . . . . . . . . . . . 1,572 -- 1,572
------------ -------- ------
The following table sets forth the Company's net proved gas reserves,
including the changes therein, and net proved developed reserves at December 31,
1999, as estimated by the independent petroleum engineering firm, Ashton
Jenkins Mann:
NET PROVED RESERVES - GAS REPUBLIC OF
(In Million Cubic Feet) GEORGIA CANADA TOTAL
------------ -------- ------
Purchase of properties . . . . . . . . . -- --
Revisions of previous estimates. . . . . -- --
Extension, discoveries, other additions. 8,417 -- 8,417
Production . . . . . . . . . . . . . . . (83) -- (83)
------------ -------- ------
DECEMBER 31, 1999 . . . . . . . . . . . . 8,334 -- 8,334
NET PROVED DEVELOPED GAS RESERVES
December 31, 1999. . . . . . . . . . . . 4,117 -- 4,117
------------ -------- ------
Net proved oil reserves in the Republic of Georgia as at December 31, 1999
were as follows:
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
OIL RESERVES (MSTB) PSC ENTITLEMENT VOLUMES (1)
------------------- ---------------------------
COMPANY SHARE
NOC OF NOC
GROSS NET (2) ENTITLEMENT ENTITLEMENT
-------- -------- ----------- --------------
Proved Developed Producing 3,600 2,836 1,996 1,572
Proved Undeveloped. . . . . 15,200 11,978 7,804 6,146
--------- ------- ----------- --------------
TOTAL PROVEN. . . . . . . . 18,800 14,814 9,800 7,718
--------- ------- ----------- --------------
Net proved gas reserves in the Republic of Georgia as at December 31, 1999 were
as follows:
GAS RESERVES (MMCF) PSC ENTITLEMENT VOLUMES (1)
------------------- ---------------------------
COMPANY SHARE
NOC OF NOC
GROSS NET (2) ENTITLEMENT ENTITLEMENT
-------- -------- ----------- --------------
Proved Developed Producing 17,425 13,731 5,228 4,117
Proved Undeveloped. . . . . 17,850 14,066 5,354 4,217
--------- ------- ----------- --------------
TOTAL PROVEN. . . . . . . . 35,275 27,797 10,582 8,334
--------- ------- ----------- --------------
(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 and gas reserves represent the Company's 78.8% share of NOC's
interest under the production sharing contract in the gross reserves,
before taking into account the interest of Georgian Oil.
Results of operations for oil and gas producing activities for the years
ended December 31, 1999, 1998 and 1997 are as follows:
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
REPUBLIC OF
YEAR ENDED DECEMBER 31, 1999 GEORGIA CANADA TOTAL
----------- ------- ---------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 2,274,524 219,088 2,493,612
Operating Expenses. . . . . . . . . . . . . . . . . . . . . 703,430 205,495 908,925
Depreciation, depletion and amortization. . . . . . . . . . 968,203 -- 968,203
----------- ------- ---------
Operating Income (Loss) . . . . . . . . . . . . . . . . . . 602,891 13,593 616,484
Income tax provision. . . . . . . . . . . . . . . . . . . . -- -- --
----------- ------- ---------
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES. 602,891 13,593 616,484
----------- ------- ---------
REPUBLIC OF
YEAR ENDED DECEMBER 31, 1998 GEORGIA CANADA TOTAL
------------ ----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 602,724 201,828 804,552
Operating Expenses. . . . . . . . . . . . . . . . . . . . . 538,273 290,303 828,576
Depreciation, depletion and amortization. . . . . . . . . . 120,159 95,752 215,911
Valuation Provision . . . . . . . . . . . . . . . . . . . . -- 900,000 900,000
------------ ----------- -----------
Operating Income (Loss) . . . . . . . . . . . . . . . . . . (55,708) (1,084,227) (1,139,935)
Income tax provision. . . . . . . . . . . . . . . . . . . . -- -- --
------------ ----------- -----------
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES. (55,708) (1,084,227) (1,139,935)
------------ ----------- -----------
REPUBLIC OF
YEAR ENDED DECEMBER 31, 1997 GEORGIA CANADA TOTAL
----------- -------- --------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . -- 313,301 313,301
Operating Expenses. . . . . . . . . . . . . . . . . . . . . -- 181,110 181,110
Depreciation, depletion and amortization. . . . . . . . . . -- 211,424 211,424
----------- -------- --------
Operating Income (Loss) . . . . . . . . . . . . . . . . . . -- (79,233) (79,233)
Income tax provision. . . . . . . . . . . . . . . . . . . . -- -- --
----------- -------- --------
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES. -- (79,233) (79,233)
----------- -------- --------
Costs incurred for oil and gas property acquisition, exploration and development
activities for the years ended December 31, 1999, 1998 and 1997 are as follows:
EASTERN
EUROPE CANADA TOTAL
---------- ---------- ----------
December 31, 1999
- --------------------
Property Acquisition
Unproved*. . . . . $ -- $ -- $ --
Proved . . . . . . -- -- --
Exploration. . . . -- -- --
Development. . . . . 1,991,779 39,101 2,030,880
---------- ---------- ----------
Total costs incurred $1,991,779 $ 39,101 $2,030,880
---------- ---------- ----------
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
---------- ---------- ----------
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
*These amounts represent costs incurred by the Company and excluded from the
amortization base until proved reserves are established or impairment is
determined.
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:
REPUBLIC OF
DECEMBER 31, 1999 (IN THOUSANDS) GEORGIA CANADA TOTAL
------------ ------- --------
Future cash inflows. . . . . . . . . . . . $ 158,127 $ -- $158,127
Less related future:
Production costs . . . . . . . . . . . . . 22,241 -- 22,241
Development and abandonment costs. . . . . 55,476 -- 55,476
Income taxes . . . . . . . . . . . . . . . -- -- --
------------ ------- --------
Future net cash flows. . . . . . . . . . . 80,410 -- 80,410
10% annual discount for estimating timing
of cash flows. . . . . . . . . . . . . . . 38,459 -- 38,459
------------ ------- --------
Standardized measure of discounted future
net cash flows before income taxes . . . . $ 41,951 $ -- $ 41,951
------------ ------- --------
REPUBLIC OF
DECEMBER 31, 1998 (IN THOUSANDS) GEORGIA CANADA TOTAL
------------ ------- --------
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
------------ ------- --------
REPUBLIC OF
DECEMBER 31, 1997 (IN THOUSANDS) GEORGIA CANADA TOTAL
------------ ------- --------
Future cash inflows. . . . . . . . . . . . $ --- $ 5,469 $ 5,469
Less related future:
Production costs . . . . . . . . . . . . . --- 2,090 2,090
Development and abandonment costs. . . . . --- 840 840
Income taxes . . . . . . . . . . . . . . . -- -- --
------------ ------- --------
Future net cash flows. . . . . . . . . . . --- 2,539 2,539
10% annual discount for estimating timing
of cash flows. . . . . . . . . . . . . . . --- 1,296 1,296
------------ ------- --------
Standardized measure of discounted future
net cash flows before income taxes . . . . $ --- $ 1,243 $ 1,243
------------ ------- --------
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:
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
IN THOUSANDS 1999 1998 1997
-------------- ------------- -------------
Beginning of period . . . . . . . . . . . . . . . . $ 15,708 1,243 --
Purchase (sale) of reserves in place. . . . . . . . (437) 14,088 551
Revisions of previous estimates . . . . . . . . . . -- 115 (141)
Development costs incurred during the period. . . . 1,992 4,642
Additions to proved reserves resulting from
extensions, discoveries and improved recovery . . . -- -- 745
Accretion of discount . . . . . . . . . . . . . . . -- -- 55
Sales of oil and gas, net of production costs . . . (1,410) 38 (113)
Net change in sales prices, net of production costs 29,256 --
Changes in production rates (timing) and other. . . (3,158) (4,418) 146
-------------- ------------- -------------
Net increase. . . . . . . . . . . . . . . . . . . . 26,243 14,465 1,243
-------------- ------------- -------------
End of the period . . . . . . . . . . . . . . . . . $ 41,951 15,708 1,243
-------------- ------------- -------------
EXHIBIT INDEX
FILED
HEREWITH EXHIBIT
- -----------------------------------------------------------------------------------------------------------
1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295 filed on June
9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities Limited, David
Williamson Associates Limited, and Orkla Finans (Fondsmegling) ASA (Incorporated
herein by reference from Form S-1 Registration Statement, File No. 333-72295
filed on June 9, 1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295 filed on June
9, 1999).
1(4) Selling Agent Agreement with National Securities Corporation (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 333-72295 filed on July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust Company (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share Capital of
Gastron International Limited dated August 10, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference from October 19,
1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated November 3, 1995 by and among
Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and
John Richard Tate as Warrantor (Incorporated herein by reference from October
19, 1995 Form 8-K).
2(3) Supplement Deed Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated May 29, 1996 by and among
Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and
John Richard Tate as Warrantor (Incorporated herein by reference from June 30,
1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services Pty, Ltd., A.C.N.
005 506 123 and Fountain Oil Incorporated dated May 16, 1995 (Incorporated
herein by reference from December 31, 1997 Form 10-K/A).
2(5) Amended and Restated Combination Agreement between Fountain Oil Incorporated
and CanArgo Energy Inc. dated as of February 2, 1998 (Incorporated herein by
reference from Form S-3 Registration Statement, File No. 333-48287 filed on June
9, 1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated herein by reference
as Annex G from Form S-3 Registration Statement, File No. 333-48287 filed on
June 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments thereto (Incorporated
herein by reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from Post-Effective
Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on
July 29, 1999).
*10(1) Form of Option Agreement for options granted to certain persons, including
Directors (Incorporated herein by reference from August 31, 1994 Form 10-KSB,
filed by Electromagnetic Oil Recovery, Inc., the Company's predecessor).
*10(2) Employment Agreement between Fountain Oil Incorporated and Susan E. Palmer
(Incorporated herein by reference from August 31, 1995 Form 10-KSB).
*10(3) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated herein by
reference from Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
*10(4) Fee Agreement dated November 15, 1995 between Fountain Oil Incorporated and
Robert A. Halpin (Incorporated herein by reference from August 31, 1996 Form 10-
KSB).
*10(5) Amended Fee Agreement dated December 10, 1996 between Fountain Oil Incorporated
and Robert A. Halpin (Incorporated herein by reference from December 31, 1996
Form 10-K).
*10(6) Amended and Restated CanArgo Energy Inc. Stock Option Plan (Incorporated herein
by reference from September 30, 1998 Form 10-Q).
*10(7) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as Consultant
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(8) Consultancy Agreement between CanArgo Energy Corporation and Fincom AS,
Norway (Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(9) Employment Contract between CanArgo Energy Inc. and Anthony J. Potter
(Incorporated herein by reference from September 30, 1998 Form 10-Q).
*10(10) Workorder between CanArgo Energy Inc. and Alfred Kjemperud as Consultant
(Incorporated herein by reference from Form S-1 Registration Statement, File No.
333- 72295 filed on February 12, 1999).
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.
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).
X 10(21) Agreement between CanArgo Energy Corporation and JKX Nederland BV dated
January 19, 2000.
X *10(22) Employment Agreement between CanArgo Energy Corporation and Paddy Chesterman
dated February 24, 2000.
X 10(23) Agreement between Ninotsminda Oil Company and AES Gardabani dated March 10,
2000.
21 List of Subsidiaries (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on February 12, 1999).
X 23 Consent of PricewaterhouseCoopers LLP.
X 27 Financial Data Schedule.