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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, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
Commission File Number 0-9147
CANARGO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-0881481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CanArgo Services (UK) Limited
150 Buckingham Palace Road, London, England SW1W 9TR
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (44) 207 808 4700
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.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of February 28, 2001, was $81,405,986.
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,
75,534,215 shares outstanding as of February 28, 2001. An additional 416,466
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
PART III -- Portions of the registrant's definitive proxy statement to be issued
in connection with the registrant's annual meeting of stockholders
are incorporated by reference to Part III of this report.
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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", Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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 term CanArgo refers 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,
then known as Fountain Oil Incorporated, 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. In 1999, CanArgo wrote-down the
fourth and last significant project that was being developed by Fountain Oil
Incorporated prior to the business combination.
As a result of this effort, CanArgo then known as Fountain Oil Incorporated
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 Ninotsminda oil field in the Republic of Georgia.
Since completion of the business combination, a large portion of CanArgo's
resources have been focused on the development of the producing areas of the
Ninotsminda field.
CanArgo's principal activities are development and production of oil and gas and
oil and gas exploration. In November and December 2000 respectively, CanArgo
expanded this activity with the acquisition of a controlling interest in a
refinery and investment in a chain of petrol stations all located in and around
Tbilisi, the capital of Georgia. Despite this investment, however, CanArgo
continues to direct 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. CanArgo's principal product is
crude oil, and the sale of crude oil and crude oil products is its principal
source of revenue.
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NINOTSMINDA OIL FIELD
Since completion of the business combination with CanArgo Oil & Gas Inc.,
CanArgo's resources have, through its wholly owned subsidiary Ninotsminda Oil
Company, been focused on the development of the Ninotsminda oil field and some
associated activities. The Ninotsminda oil field covers some 10 square
kilometres and is located 40 kilometres 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 Ninotsminda
Oil Company have drilled sixteen wells in the Ninotsminda field, of which
thirteen are currently classified as producing.
BUSINESS STRUCTURE
CanArgo's activities at the Ninotsminda oil field are conducted through
Ninotsminda Oil Company. In May 2000, CanArgo Energy Corporation reached an
agreement with JKX Oil & Gas plc to acquire its 21.2% interest in Ninotsminda
Oil Company for a direct equity interest in CanArgo. In July 2000 this
transaction was completed and Ninotsminda Oil Company became a wholly owned
subsidiary of CanArgo.
In November 1999, CanArgo increased its percentage ownership of Ninotsminda Oil
Company from 68.5% to 78.8% when JKX Oil & Gas plc 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 JKX Oil & Gas plc similarly chose not to subscribe
for its pro rata portion of shares being offered to increase Ninotsminda Oil
Company's capital.
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 and the State of Georgia. 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, these terms were amended
with the initial relinquishment being due in 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 through 2001 based upon the wells and equipment in use at the time the
contract was entered into. The priority right amounts to approximately:
- -- 740 barrels of oil per day during 1998
- -- 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 allowable capital, operating and
other project 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 respectively. 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.
After recovery of its cumulative capital, operating and other allowable project
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
independently.
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Pursuant to the terms of CanArgo's production sharing contracts in Georgia,
including the Ninotsminda production sharing contract, a Georgian not-for-profit
company must be appointed as field operator. Currently there are three such
field operating companies: Georgian British Oil Company Ninotsminda, Georgian
British Oil Company Nazvrevi and Georgian British Oil Company Norio, each of
which is 50% owned by a company within the CanArgo group with the remainder
owned by Georgian Oil. The Ninotsminda operating entity, Georgian British Oil
Company Ninotsminda, is 50% owned by Ninotsminda Oil Company. The second
operating entity, Georgian British Oil Company Nazvrevi, is 50% owned CanArgo
(Nazvrevi) Ltd. The third operating entity, Georgian British Oil Company Norio,
is 50% owned by CanArgo Norio Ltd. The field operator provides the operating
personnel and is responsible for day-to-day operations. CanArgo or a company
within the CanArgo group pays the operating company's expenses associated with
the development of the Ninotsminda and Nazvrevi fields, and the operating
company performs on a non-profit basis. Georgian British Oil Company Ninotsminda
currently has 104 full time employees, and substantially all of its activities
relate to the development of the Ninotsminda field. The use of such Georgian
companies as field operator gives CanArgo less control of operations than it
might have if it were conducting operations directly, although CanArgo has board
control of these field operating companies.
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. Since CanArgo acquired its interest in Ninotsminda Oil
Company, there has been no such disagreement.
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 while technical data, including additional seismic
data about the Ninotsminda field, continues to be gathered. This seismic data,
including data gathered in 2000, will be useful in selecting both existing wells
for workover and the identification of additional drilling sites. Drilling sites
tentatively selected by Ninotsminda Oil Company must be approved by Georgian
regulatory authorities before drilling may commence.
In addition to rehabilitating existing wells, an active drilling program exists.
The first well was completed in October 1997 and initially produced at the rate
of 400 to 600 barrels of oil per day but is currently shut-in. A second well was
completed in October 1998 and has been producing at the rate of 160 barrels of
oil per day. A third well commenced in October 1998 but was suspended in
December 1998 at a depth of 700 meters as a result of undependable electrical
supply. Drilling of this well recommenced in July 2000, as part of a three-well
exploration program to explore and determine the future development potential of
gas prospects in the Ninotsminda field.
Until recently, oil exploration and production at the Ninotsminda field has
focused on one zone, the Middle Eocene. In December 2000, CanArgo announced the
discovery of a new zone in the Ninotsminda field, the Sarmatian. This new zone,
discovered while drilling the first of the three gas exploration wells noted
above, is in addition to the previously identified Upper Eocene zone from which
oil has been produced in one well. As the Sarmatian zone has only recently been
discovered, work is currently underway to quantify the reserve and production
potential of this reservoir as well as the Upper Eocene sequence. The discovery
may also open up new potential in the upper sequences of other areas currently
under license in Georgia. See "Other Georgian Licenses".
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While most of the exploration and development of the Ninotsminda field has
focused on oil, 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 no current gas supply contracts for production
from the gas cap. 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. The evaluation
of the gas cap is an on-going process to be confirmed by existing production,
the drilling of new wells and reservoir study work currently being performed.
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, under which IFC agreed under specified conditions, to lend $6
million to Ninotsminda Oil Company primarily to fund a defined Ninotsminda field
development program. Under terms of the loan agreement, if funds were disbursed,
IFC would have the right to convert all or part of the loan into common shares
of Ninotsminda Oil Company. IFC would also have the ability to accept or reject
joint venture or third party investment in the project. As a result of these and
other conditions, no funds were disbursed under the loan agreement and in
November 2000, Ninotsminda Oil Company formally advised IFC of its withdrawal
from the loan agreement.
OTHER FIELDS AND PROSPECTS UNDER NINOTSMINDA PRODUCTION SHARING CONTRACT
On July 21, 2000, Ninotsminda Oil Company executed a binding Participation
Agreement with AES Gardabani relating to the exploration and potential future
development of gas prospects on CanArgo's Ninotsminda license in Georgia. Under
the agreement, AES Gardabani will earn a 50% interest in identified prospects at
the Cretaceous stratigraphic level by funding two thirds of the cost of a
three-well exploration program. This program is currently underway and is being
implemented by CanArgo's existing operations unit in Georgia. The first well of
this three-well program, originally scheduled to be N97 (C1) commenced in July
2000. In October 2000, CanArgo announced that for mechanical reasons, the well
could not be completed to the Cretaceous but rather would be tested in the newly
discovered Sarmatian sequence. In January 2001, drilling began on well N100,
which replaces N97 as the first well of the three well exploration program. Site
preparation for the second well in the exploration program has also commenced
and is scheduled to be spud in April 2001.
In the event of a successful exploration program, the agreement mandates a long
term gas sales contract to units 9 and 10 of the Gardabani thermal power plant,
recently acquired by AES. In years one to three of the long term gas sales
contract, the contract price on the first 400,000 thousand cubic meters of
natural gas is fixed at the rate of $45 per thousand cubic meters. Ninotsminda
Oil Company is already supplying natural gas to the Gardabani plant from the
shallower Middle Eocene reservoir in its producing Ninotsminda field.
In addition to the Ninotsminda field, Ninotsminda Oil Company has under the 1996
production sharing contract rights to one other field, West Rustavi, and one
prospect, Manavi. As well as the producing Middle Eocene horizon at Ninotsminda,
the West Rustavi field has two prospective horizons being the Upper Eocene and
the Cretaceous.
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The West Rustavi field is located some 40 km southeast of Ninotsminda. Ten wells
were drilled by Georgian Oil in the West Rustavi field area, two of which
produced oil. One of the ten wells was drilled to the deeper Cretaceous/
Paleocene 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. 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. In addition, it is planned to
drill an exploration well to the Cretaceous horizon. 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
abandoned due to technical problems. No assurances can be given that either of
the West Rustavi field or Manavi prospect will be developed by Ninotsminda Oil
Company.
OIL AND GAS PRODUCTION
Production History
The Ninotsminda field was discovered and initial development began in 1979.
CanArgo is currently producing from the Ninotsminda field approximately 2,930
barrels of oil equivalent (BOE) per day, comprising approximately 2,000 barrels
of oil per day and 930 BOE of gas per day (1 BOE =6,000 cubic feet = 170 (m3)
gas) from five wells. Gross production from the Ninotsminda field for the past
three years was as follows:
YEAR ENDED
DECEMBER 31, OIL - GROSS BARRELS
------------------------------------ -----------------------------------
2000 478,999
1999 415,390
1998 554,633
Productive Wells and Acreage
The following table summarizes as of December 31, 2000 Ninotsminda Oil Company's
number of productive oil and gas wells and Ninotsminda Oil Company's 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 100% interest in
Ninotsminda Oil Company. Prior to completion of the acquisition of the remaining
21.2% held by JKX Oil & Gas plc, CanArgo's interest was 78.8% of the gross
amount.
GROSS NET
-------------------------- --------------------------
NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE
--------------- ------- --------------- -------
Ninotsminda field 13 2,500 13 2,500
On December 31, 2000, there were no productive wells or developed acreage on any
of CanArgo's other Georgian properties, except for one gross well on the West
Rustavi field which was shut-in at that date.
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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 January 1, 2001 prepared by Ashton Jenkins Mann,
independent petroleum consultants. This report is available for inspection at
CanArgo's principal executive offices during regular business hours.
OIL RESERVES - PSC ENTITLEMENT
MILLION BARRELS GROSS VOLUMES (1)
- ---------------------------------- -------------- ---------------
Proved Developed 3.8 2.6
Proved Undeveloped 14.5 7.1
----- ----
TOTAL PROVEN 18.3 9.7
===== ====
GAS RESERVES - PSC ENTITLEMENT
BILLION CUBIC FEET GROSS VOLUMES (1)
- -------------------------------------- -------------- ---------------
Proved Developed 15.2 4.6
Proved Undeveloped 29.8 8.9
----- ----
TOTAL PROVEN 45.0 13.5
===== =====
- -----------------
(1)PSC Entitlement Volumes attributed to CanArgo using the "economic interest
method" applied to the terms of the production sharing contract. PSC
Entitlement Volumes are those produced volumes which, through the production
sharing contract, accrue to the benefit of Ninotsminda Oil Company after
deduction of Georgian Oil's share which includes all Georgian taxes, levies
and duties. As a result of CanArgo's interest in Ninotsminda Oil Company,
these volumes accrue to the benefit of CanArgo for the recovery of capital,
repayment of operating costs and share of profit.
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
of production but is shut-in because its deliverability is not required to meet
commitments.
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
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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. In addition,
because the amount and timing of cost recovery is a function of oil and gas
prices, changes in these prices can significantly increase or decrease reserves
attributable to CanArgo's economic interest. 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.
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. That infrastructure, including initial processing
equipment, is 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 is
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 2000, Ninotsminda Oil Company sold its oil production to three
customers. Of these customers, each represented sales greater than 10% of oil
revenue:
CUSTOMER PERCENT OF OIL REVENUE
- ---------------------------------- ----------------------
Georgian American Oil Refinery (1) 54.4%
MS 31.4%
Caspian Trading 14.2%
In 1999, Ninotsminda Oil Company sold its production to five customers. Of these
customers, three customers represented sales greater than 10% of oil revenue:
CUSTOMER PERCENT OF OIL REVENUE
- ---------------------------------- ----------------------
Petrotrade 38.0%
Georgian American Oil Refinery (1) 34.0%
Sinan Madenchilik 11.0%
In 1998, Ninotsminda Oil Company sold its production to three customers as
follows:
CUSTOMER PERCENT OF OIL REVENUE
- ---------------------------------- ----------------------
Sis Plus 7 Ltd. 35.9%
Glencore International AG 34.4%
Navtobi Ltd. 29.7%
- -----------------
(1)51% owned by CanArgo effective November 2000
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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. Despite lower transportation costs on sales in Georgia, the
price received by Ninotsminda Oil Company on local sales remains relatively
inelastic when the price for Brent increases as demand for raw crude within
Georgia may be negatively impacted by illegal import of prepared oil products
into the country and shipments via tanker through the Black Sea require large
quantities of crude to be economic. Despite the lower price, opportunities for
domestic sales remain and Ninotsminda Oil Company 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.
OTHER GEORGIAN LICENSES
Nazvrevi/Block XIII
In February 1998, CanArgo entered into a second production sharing contract with
Georgian Oil and the State of Georgia. 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 respectively. 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 $1.2 million.
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.
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Norio and North Kumisi Blocks
In December 2000, CanArgo entered into a third production sharing contract with
Georgian Oil and the State Agency for Regulation of Oil and Gas Resources in
Georgia. This contract covers the Norio and North Kumisi blocks of East Georgia,
a 1,542 square kilometre exploration area adjacent to the Ninotsminda and West
Rustavi fields. There are two existing oil fields on the Norio block, Norio and
Satskenisi which are relatively shallow fields and which have produced oil from
the Miocene and Sarmatian sequences. The commercial terms of the production
sharing contract are similar to those of the Nazvrevi/Block XIII production
sharing contract with the exception that after all cumulative capital costs have
been recovered by CanArgo, remaining production after deduction of operating
costs is allocated on a 60/40 basis between Georgian Oil and CanArgo
respectively. CanArgo currently owns a 50% controlling interest in CanArgo Norio
Limited with the remainder held by Georgian investors.
The first phase of the preliminary work program under the Norio and North Kumisi
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. In addition to the existing upper
sequences, the potential of the blocks to produce from the Middle Eocene,
Cretaceous and Upper Eocene is being assessed. The cost of the seismic program
was approximately $1,200,000.
The second phase of the preliminary work program under the Norio and North
Kumisi production sharing agreement involves the drilling of one well at an
estimated cost of up to $5 million. CanArgo can terminate the production sharing
contract if it decides not to proceed with drilling.
The Norio production sharing agreement provides Georgian Oil with a one time
option to take up to a 15% participating interest in petroleum operations. The
option period begins on submission of the first development plan and must be
exercised within 180 days thereafter. To exercise the option, Georgian Oil must
pay their pro rata share of back costs, bear a pro rata share of all future
costs and expenses incurred from and after the date of submittal of the first
development plan in proportion to the participating interest which it acquired
through exercise of the option and execute a joint operating agreement.
OTHER GEORGIAN PROJECTS
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. On November
12, 2000, CanArgo acquired a further 38.1% of the common stock of Georgian
American Oil Refinery for Common Stock consideration valued at $1,666,575. On
completion of the acquisition, CanArgo holds 51% of the common stock of Georgian
American Oil Refinery and Georgian American Oil Refinery became a subsidiary of
CanArgo. Under purchase accounting, Georgian American Oil Refinery's results
have been included in CanArgo's consolidated financial statements since the date
of acquisition.
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
2000, Ninotsminda Oil Company sold approximately 136,400 barrels of oil to the
refinery.
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CanArgo Standard Oil Products
In December 2000, CanArgo reached an agreement to acquire an interest in several
existing petrol stations and sites in Tbilisi, Georgia. These stations and
sites, together with several existing CanArgo stations, operate under the
CanArgo name and are owned by CanArgo Standard Oil Products, a Georgian company
in which CanArgo owns a 50% equity interest.
CanArgo originally moved into the retail gasoline sector in Georgia in April
2000 with the formation of CanArgo Standard Oil Products. This company initially
was involved in the construction and operation of three high quality stations
under the retail name brand. At December 2000, two stations were operational.
Under the exercised option, seven more locations under varying degrees of
completion will be vended into CanArgo Standard Oil Products by its Georgian
partners, with CanArgo investing a further $1.2 million of development capital.
Two of these locations are operating stations, three are under construction, and
the development of the final two locations will commence shortly. The new
investment funds will be used to accelerate development of the existing sites,
purchase more sites in desirable city regions and begin the development of
CanArgo Standard Oil Product's business on the important transit routes through
Georgia.
OTHER EASTERN EUROPEAN PROJECTS
Stynawske Field, Western Region, Ukraine
In November 1996, CanArgo entered into a joint venture arrangement with the
Ukrainian state oil company, Ukranafta, for the development of the 24 square
kilometre Stynawske field, located in Western Ukraine near the town of Stryv.
CanArgo has a 45% interest in Boryslaw Oil Company, 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 continued on the transfer of the field, by
the fall of 1999 it was apparent from the length and difficulty of the
negotiations that significant uncertainty existed as to CanArgo's ability to
raise funds for the project or enter into a satisfactory farm-out agreement on a
timely basis. As a result, 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's investment in the Stynawa field was 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.
CanArgo has continued to seek the transfer of the field under satisfactory
commercial terms. In December 2000, CanArgo reached agreement with Ukranafta on
certain commercial arrangements and for the transfer of field operations to
Boryslaw Oil Company.
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 with certain
obligations being due to be met by June 2002. This could place CanArgo's rights
to the Stynawske field at risk and could subject CanArgo to possible liability.
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Bugruvativske Field, Ukraine
On March 8, 2001 CanArgo announced that it intended to make an offer to purchase
all outstanding common shares of Lateral Vector Resources Inc. On March 20, 2001
an offer was mailed to Lateral Vector Resources Inc. shareholders offering
Canadian $0.10 (approximately $0.065) in cash for each outstanding Lateral
Vector Resources Inc. share and based on publicly available information, the
transaction value represented by the offer is approximately $2.11 million. The
offer, conditional, among other matters, upon the deposit of at least 90% of
outstanding Lateral Vector Resources Inc. shares (calculated on a fully diluted
basis), is subject to the receipt of all required regulatory approvals including
any required in Ukraine and other conditions customary in this type of
transaction, including the absence of any material change in the business or
operations of Lateral Vector Resources Inc.
According to publicly available information, Lateral Vector Resources Inc.
negotiated and concluded a Joint Investment Production Activity agreement in
1998 to develop the Bugruvativske Field together with Ukranafta.
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 9.5% 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. Part of the proceeds from the sale is
to continue activities on this project and potentially to increase CanArgo's
interest. Potential work in the near future includes seismic and possibly
drilling.
RISKS ASSOCIATED WITH CANARGO'S OIL AND GAS ACTIVITIES
Future Dependent on Success of the Ninotsminda Oil Field
CanArgo has directed substantially all of its efforts and most of the available
funds to the development of the Ninotsminda oil field in the Republic of Georgia
and some ancillary activities closely related to the Ninotsminda field project.
This decision is based on management's assessment of the promise of the
Ninotsminda field area. However, CanArgo cannot assure investors that the
development plans for the Ninotsminda field will be successful. For example, the
Ninotsminda field may not produce sufficient quantities of oil and gas to
justify the investment CanArgo has made and is planning to make in the field,
and CanArgo may not be able to produce the oil and gas at a sufficiently low
cost or to market the oil and gas produced at a sufficiently high price to
generate a positive cash flow and a profit. Ninotsminda Oil Company has also
entered into certain supply and purchase agreements for natural gas associated
with crude oil production from the Ninotsminda field. Such agreements may
benefit CanArgo, but may in the future also limit its ability to sell associated
natural gas at then market prices.
Ninotsminda Field Governed by Production Sharing Contract Which May be Subject
to Certain Legal Uncertainties
CanArgo's principal business and assets are derived from production sharing
contracts in the Republic of Georgia. The legislative and procedural regimes
governing production sharing agreements and mineral use licenses in Georgia have
undergone a series of changes in recent years resulting in certain legal
uncertainties.
CanArgo's production sharing agreements and mineral use licenses, entered into
prior to the introduction in 1999 of a new Petroleum Law governing such
agreements have not, as yet, been amended to reflect or ensure compliance with
current legislation. As a result, despite references in the current legislation
grandfathering the terms and conditions of our production sharing contracts,
conflicts between the interpretation of our production sharing contracts and
mineral use licenses and current legislation could arise. Such conflicts, if
they arose, could cause an adverse effect on our rights under the production
sharing contracts.
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To confirm the validity of the Ninotsminda production sharing contract and the
mineral usage license prior to the introduction in 1999 of the petroleum law, in
connection with its preparation of the Convertible Loan Agreement with CanArgo,
IFC received in November 1998 confirmation from the State of Georgia, that among
other things:
- -- The State of Georgia recognizes and confirms the validity and
enforceability of the production sharing contract and the license and all
undertakings the State has covenanted with Ninotsminda Oil Company
thereunder;
- -- the license was duly authorized and executed by the State at the time of
its issuance and remained in full force and effect throughout its term; and
- -- the license constitutes a valid and duly authorized grant by the State,
being and remaining in full force and effect as of the signing of this
confirmation and the benefits of the license fully extend to Ninotsminda
Oil Company by virtue of its interest in the license holder and the
contractual rights under the production sharing contract.
Despite this confirmation and the grandfathering of the terms of our production
sharing contract in the Petroleum Law, subsequent legislative or other
governmental changes could conflict with, challenge our rights or otherwise
change current operations under the production sharing contract.
Write Off of Unsuccessful Properties and Projects
In order to realize the carrying value of its oil and gas properties and
ventures, CanArgo must produce oil and gas in sufficient quantities and then
sell such oil and gas at sufficient prices to produce a profit. CanArgo has a
number of unevaluated oil and gas properties. The risks associated with
successfully developing unevaluated oil and gas properties are even greater than
those associated with successfully continuing development of producing oil and
gas properties, since the existence and extent of commercial quantities of oil
and gas in unevaluated properties have not been established. During 1997,
CanArgo recorded impairment charges totalling $19.4 million relating to three
unsuccessful ventures and in 1999, recorded impairment charges totalling $5.5
million relating to a fourth venture. CanArgo could be required in the future to
write off its investments in additional projects, including the Ninotsminda
field project, if such projects prove to be unsuccessful.
Additional Funds Needed For Long-Term Oil And Gas Development Plans
It will take many years and substantial cash expenditures to develop fully
CanArgo's oil and gas properties. CanArgo generally has the principal
responsibility to provide financing for its oil and gas properties and ventures.
Accordingly, CanArgo may need to raise additional funds from outside sources in
order to pay for project development costs beyond those currently budgeted
through 2001. CanArgo may not be able to obtain that additional financing. If
adequate funds are not available, CanArgo will be required to scale back or even
suspend its operations or such funds may only be available on commercially
unattractive terms. The carrying value of the Ninotsminda field may not be
realized unless additional capital expenditures are incurred to develop the
field. Furthermore, additional funds will be required to pursue exploration
activities on its existing undeveloped properties.
Oil and Gas Activities Involve Risks, Many of Which Are Beyond CanArgo's Control
CanArgo's exploration, development and production activities are subject to a
number of factors and risks, many of which may be beyond its control. First,
CanArgo must successfully identify commercial quantities of oil and gas. The
development of an oil and gas deposit can be affected by a number of factors
which are beyond the operator's control, 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 oil prices.
- -- Government regulation and legal uncertainties.
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CanArgo's activities can also be affected by a number of hazards, such as:
- -- Labor disputes.
- -- Natural phenomena, such as bad weather and earthquakes.
- -- Operating hazards, such as fires, explosions, blow-outs, pipe failures and
casing collapses.
- -- 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.
There is also an increased risk of some of these hazards in connection with
operations that involve the rehabilitation of fields where less than optimal
practices and technology were employed in the past, as was often the case in
Eastern Europe. CanArgo does not purchase insurance covering all of the risks
and hazards that are involved in oil and gas exploration, development and
production.
Development Affected by 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 Eastern
Europe and countries of the former Soviet Union 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 totalitarian forms of government. CanArgo's operations
typically involve joint ventures or other participatory arrangements with
the national government or state-owned companies. The production sharing
contract covering the Ninotsminda oil field is such an arrangement. As a
result of such dependency on government participants, CanArgo's operations
could be adversely affected by political instability, changes in government
institutions, personnel, policies or legislation, or shifts in political
power. There is also the risk that governments could seek to nationalize,
expropriate or otherwise take over its oil and gas properties.
- -- Social, Economic and Legal Instability - The political institutions in
Eastern Europe and countries of the former Soviet Union have recently
become more fragmented, and the economic institutions of Eastern European
countries have recently converted to a market economy from a planned
economy. New laws have recently been introduced, and the legal and
regulatory regimes in such regions are often vague, containing gaps and
inconsistencies, and are constantly subject to amendment. Social, economic
and legal instability have accompanied these changes due to many factors
which include:
-- Low standards of living.
-- High unemployment.
-- Undeveloped and constantly changing legal and social institutions.
-- Conflicts with neighboring countries.
This instability can make continued operations difficult or impossible.
- -- Inadequate Or Deteriorating Infrastructure - Countries in Eastern Europe
often either have underdeveloped infrastructures or, as a result of
shortages of resources, have permitted infrastructure improvements to
deteriorate. The lack of necessary infrastructure improvements can
adversely affect operations. For example, the lack of a reliable power
supply caused Ninotsminda Oil Company to suspend drilling of one well and
the testing of a second well during the 1998-1999 winter season.
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Currency Risks -- Payment for oil and gas products sold in Eastern European
countries may be in local currencies. Although CanArgo currently sells its oil
principally for U.S. dollars, it may not be able to continue to demand payment
in hard currencies. Although most Eastern European currencies are presently
convertible into U.S. dollars, there is no assurance that convertibility will
continue. Even if currencies are convertible, the rate at which they convert
into U.S. dollars is subject to fluctuation. In addition, the ability to
transfer currencies into or out of Eastern European countries may be restricted
or limited in the future. CanArgo may also enter into contracts with suppliers
in these countries to purchase goods and services in U.S. dollars. If CanArgo
cannot receive payment for oil in U.S. dollars and the value of the local
currency relative to the U.S. dollar deteriorates, CanArgo could face
significant negative changes in working capital.
Tax Risks -- Countries in Eastern Europe frequently add to or amend existing
taxation policies in reaction to economic conditions including state budgetary
and revenue shortfalls. Since CanArgo is dependent on international operations,
specifically those in Georgia, CanArgo is subject to changing taxation policies
including the possible imposition of confiscatory excess profits, production,
remittance, export and other taxes.
Changes in the Market Price of Oil and Gas
Prices for oil and natural gas are subject to wide fluctuations in response to a
number of factors which are beyond CanArgo's control, 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.
- -- Overall economic conditions.
A reduction in oil prices can affect the economic viability of CanArgo's
operations. For example, the significant decline in oil prices during 1998
adversely affected CanArgo's results of operations and increased its operating
loss in 1998. There can be no assurance that oil prices will be at a level that
will enable CanArgo to operate at a profit.
Oil and Gas Production could Vary Significantly From Reserve Estimates
Estimates of oil and natural gas reserves and their values by petroleum
engineers are inherently uncertain. These estimates are based on professional
judgements about a number of elements including:
- -- The amount of recoverable crude oil and natural gas present in a reservoir.
- -- The costs that will be incurred to produce the crude oil and natural gas.
- -- The rate at which production will occur.
Reserve estimates are also based on evaluations of geological, engineering,
production and economic data. The data can change over time due to, among other
things:
- -- Additional development activity.
- -- Evolving production history.
- -- Changes in production costs, market prices and economic conditions.
As a result, the actual amount, cost and rate of production of oil and gas
reserves and the revenues derived from sale of the oil and gas produced in the
future will vary from those anticipated in the most recent report on the oil and
gas reserves prepared by Ashton Jenkins Mann as of January 1, 2001. The
magnitude of those variations may be material.
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The rate of production from crude oil and natural gas properties declines as
reserves are depleted. Except to the extent we acquire additional properties
containing proved reserves, conduct successful exploration and development
activities or, through engineering studies, identify additional productive zones
in existing wells or secondary recovery reserves, our proved reserves will
decline as reserves are produced. Future crude oil and natural gas production is
therefore highly dependent upon our level of success in replacing depleted
reserves.
Oil and Gas Operations are Subject to Extensive Governmental Regulation
Governments at all levels, national, regional and local, regulate oil and gas
activities extensively. CanArgo must comply with laws and regulations which
govern many aspects of its oil and gas business, including:
- -- Exploration.
- -- Development.
- -- Production.
- -- Occupational health and safety.
- -- Labor standards.
- -- Environmental matters.
CanArgo expects the trend towards more burdensome regulation of its business to
result in increased costs and operational delays. This trend is particularly
applicable in developing economies, such as those in Eastern Europe where
CanArgo has its principal operations. In these countries, the evolution towards
a more developed economy is often accompanied by a move towards the more
burdensome regulations that typically exist in the more developed economies.
Competition
The oil and gas industry can be highly competitive. CanArgo's competitors
include integrated oil and gas companies, independent oil and gas companies,
drilling and income programs, and individuals. Many of CanArgo's competitors are
large, well-established, well-financed companies. Because of CanArgo's small
size and lack of financial resources, CanArgo may not be able to compete
effectively with these companies.
Operations are Dependent on Chief Executive
David Robson, the Chief Executive Officer of CanArgo, is CanArgo's executive who
has the most experience in the oil and gas industry and who has the most
extensive business relationships in Eastern Europe. The business and operations
of CanArgo could be significantly harmed if Dr. Robson were to leave CanArgo or
become unavailable because of illness or death. Dr. Robson has signed an
agreement with a three years non competing clause effective from June 29, 2000,
the date of the signing. CanArgo does not carry key employee insurance on any of
its employees.
EMPLOYEES
As of December 31, 2000, CanArgo had 16 full time employees. The entity acting
as operator of the Ninotsminda oil field for Ninotsminda Oil Company has 104
full time employees, and substantially all of that company's activities relate
to the production and development of the Ninotsminda field.
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ITEM 2. PROPERTIES
CanArgo does not have through its production sharing contracts outright
ownership of any real property. Its real property interests are limited to
contractual leasehold and mineral interests.
The refinery owned by CanArgo's subsidiary Georgian American Oil Refinery, is
located next to Georgian Oil's central processing facility at Sartichala,
Georgia. All of the petrol stations owned by CanArgo's subsidiary CanArgo
Standard Oil Products are located in and around Tbilisi, Georgia.
PRODUCTIVE WELLS AND ACREAGE
Productive Wells and Acreage
The following table summarizes as of December 31, 2000 Ninotsminda Oil Company's
number of productive oil and gas wells and Ninotsminda Oil Company's 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 100% interest in
Ninotsminda Oil Company. Prior to completion of the acquisition of the remaining
21.2% held by JKX Oil & Gas plc, CanArgo's interest was 78.8% of the gross
amount.
GROSS NET
--------------------------------- ---------------------------------
NUMBER SQUARE NUMBER SQUARE
OF WELLS ACREAGE KILOMETRES OF WELLS ACREAGE KILOMETRES
-------- ------- ---------- -------- ------- ----------
Ninotsminda field 13 2,500 10 13 2,500 10
On December 31, 2000, 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.
Undeveloped Acreage
The following table summarizes the gross and net undeveloped acreage held under
the Ninotsminda, Nazvrevi/Block XIII and Norio/North Kumisi production sharing
contracts as of December 31, 2000. The information regarding net acreage
represents the interest of CanArgo based on its 100% interest in Ninotsminda Oil
Company and the subsidiary holding the Nazvrevi/Block XIII contract and its 50%
interest in the subsidiary holding the Norio/North Kumisi contract.
GROSS NET
----------------------- -----------------------
SQUARE SQUARE
ACREAGE KILOMETRES ACREAGE KILOMETRES
------- ---------- ------- ----------
Ninotsminda Field 24,000 97 24,000 97
Nazvrevi/Block XIII 518,500 2,098 518,500 2,098
Norio/North Kumisi 380,727 1,540 190,364 770
------- ----- ------- -----
Total 923,227 3,735 732,864 2,965
======= ===== ======= =====
CanArgo leases office space in London, England; Calgary, Alberta; Tbilisi,
Republic of Georgia; and Maidenhead, England. The leases have remaining terms
varying from three months to ten years. CanArgo's sublease of its Maidenhead
offices expires March 2001.
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ITEM 3. LEGAL PROCEEDINGS
At December 31, 2000 there were no legal proceedings pending involving CanArgo
which, if adversely decided, would have a material adverse effect on CanArgo's
financial position or business.
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, 2000, CanArgo had the contingent
obligation to issue an aggregate of 187,500 shares of its common stock, subject
to the satisfaction of conditions related to the achievement of specified
performance standards by the Stynawske field project.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of CanArgo's security holders during the
fourth quarter of the year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 30, 1999, CanArgo's common stock commenced trading on the OTC Bulletin
Board after trading from April 6, 1995 through March 29, 1999 on the Nasdaq
National Market System under the symbol "GUSH". CanArgo's common stock is also
listed on the Oslo Stock Exchange and has traded there under the symbol "CNR"
since May 1995. 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 had until October, 2000 been a
secondary listing, with the primary listing being on The Nasdaq Stock Market. In
October, 2000, CanArgo obtained a primary listing on the Oslo Stock Exchange
where it is now included on the main list.
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 or published financial sources 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
HIGH LOW DAILY VOLUME HIGH LOW DAILY VOLUME
---- --- ------------ ---- --- ------------
FISCAL QUARTER ENDED
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
March 31, 2000 1.00 0.63 95,167 0.97 0.73 144,854
June 30, 2000 1.45 0.69 103,033 1.57 0.79 469,500
September 30, 2000 1.66 1.03 69,800 1.78 1.04 1,097,007
December 31, 2000 1.38 0.75 24,500 1.45 0.75 881,592
At February 28, 2001, the closing price of CanArgo common stock on the OTC
Bulletin Board and Oslo Stock Exchange was $1.08 and $1.07 respectively.
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On December 31, 2000 the number of holders of record of the common stock of
CanArgo was approximately 7,315. 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. 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 CanArgo 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.
Reported in $1,000 except
for per common share amounts
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 1997
------------ ------------ ------------ ------------
FINANCIAL PERFORMANCE
Total revenue $ 7,136 $ 2,783 $ 821 $ 313
Operating loss (2,297) (8,078) (6,327) (25,312)
Other income (expense) 145 (395) 217 (2,371)
Net loss (2,152) (8,473) (6,110) (27,683)
Net loss per common share --
basic and diluted (0.04) (0.32) (0.39) (2.47)
Cash generated by (used in) operations 919 (1,116) (14,718) (4,176)
Working capital 22,687 2,729 1,366 13,971
Total assets 82,764 43,799 46,568 37,434
Notes payable & long-term debt -- -- -- --
Stockholders' equity 72,426 37,863 40,031 26,779
Cash dividends per common share -- -- -- --
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING INFORMATION. SEE "FORWARD
LOOKING STATEMENTS" BELOW.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
In August 2000, CanArgo closed a private placement of 12,000,000 new shares at
Norwegian Kroner (NOK) 11.20 per share. Gross proceeds from the placement were
approximately US$14.2 million. In June 2000, CanArgo Energy Corporation
completed a private placement of 15,660,916 shares of common stock at NOK 9.00
per share. Gross proceeds from the placement were approximately US$15.4 million.
In April 2000, CanArgo closed a private placement resulting in the issuance of
3,695,000 shares of common stock at NOK 7.50 per share for gross proceeds of
$3.2 million.
CanArgo's management believes that cash and cash equivalents at December 31,
2000 should be sufficient to cover operating needs for existing projects during
the next twelve month period. Also, CanArgo's cash balance at December 31, 2000
satisfies CanArgo's near term funding requirements with respect to its
activities in the Republic of Georgia envisaged in August 2000. Current
development plans for the Ninotsminda field includes the drilling of exploration
well N100, several rehabilitations of existing wells and quantification of the
reserve and production potential of the recently announced discovery in the
Saramatian sequence. This discovery may also open up new potential in the upper
sequences of other areas currently under license in Georgia. These plans are
scheduled to be implemented in 2001 and the first half of 2002, but that timing
is dependent upon key supplies and other equipment for the development being
available promptly as well as adequate financing.
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 a defined Ninotsminda field
development program. Under terms of the loan agreement, if funds were disbursed,
IFC would have the right to convert all or part of the loan into common shares
of Ninotsminda Oil Company. IFC would also have the ability to accept or reject
joint venture or third party investment in the project. As a result of these and
other conditions, no funds were disbursed under the loan agreement and in
November 2000, Ninotsminda Oil Company formally advised IFC of its withdrawal
from the loan agreement.
While a considerable amount of infrastructure for the Ninotsminda field has been
put in place, CanArgo cannot provide assurance that:
o funding of the Ninotsminda field development plan will be timely,
o that the development plan will be successfully completed or will increase
production, or
o that the Ninotsminda field operating revenues after completion of the
development plan will exceed operating costs.
To pursue additional projects and opportunities, CanArgo would require
additional capital. Potential sources of funds include additional equity,
project financing, debt financing and the participation of other oil and gas
entities in CanArgo's projects. Based on CanArgo's past history of raising
capital and continuing discussions including those with major stockholders,
investment bankers and other companies, CanArgo believes that such required
funds may be available. However, there is no assurance that such funds will be
available, and if available, will be offered on attractive or acceptable terms.
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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 may, where opportunities exist, seek to transfer portions of its interests
in oil and gas properties and ventures to entities in exchange for such
financing. CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has an
interest. There can be no assurance, however, that CanArgo or the entities that
are developing the oil and gas properties and ventures will be able to arrange
the financing necessary to develop the projects being undertaken or to support
the corporate and other activities of CanArgo. There can also be no assurance
that such financing as is available will be on terms that are attractive or
acceptable to or are deemed to be in the best interest of CanArgo, such entities
and their respective stockholders or participants.
Ultimate realization of the carrying value of CanArgo's oil and gas properties
and ventures will require production of oil and gas in sufficient quantities and
marketing such oil and gas at sufficient prices to provide positive cash flow to
CanArgo. Establishment of successful oil and gas operations is dependent upon,
among other factors, the following:
o mobilization of equipment and personnel to implement effectively drilling,
completion and production activities;
o achieving significant production at costs that provide acceptable margins;
o reasonable levels of taxation, or economic arrangements in lieu of taxation
in host countries; and
o the ability to market the oil and gas produced at or near world prices.
CanArgo has plans to mobilize resources and achieve levels of production and
profits sufficient to recover the carrying value of its oil and gas properties
and ventures. However, if one or more of the above factors, or other factors,
are different than anticipated, these plans may not be realized, and CanArgo may
not recover the carrying value of its oil and gas properties and ventures.
CanArgo will be entitled to distributions from the various properties and
ventures in which it participates in accordance with the arrangements governing
the respective properties and ventures.
On March 29, 1999, CanArgo was advised that its common stock had been delisted
from The Nasdaq Market System effective at the close of business on March 29,
1999. On March 30, 1999, CanArgo's common stock commenced trading on the OTC
Bulletin Board. This shift in the principal domestic market for CanArgo common
stock may adversely affect the market for CanArgo's common stock. See "Item 5.
"Market For Common Equity and Related Stockholder Matters".
CHANGES IN FINANCIAL POSITION
As of December 31, 2000, CanArgo had working capital of $22,687,000, compared to
working capital of $2,729,000 as of December 31, 1999. The $19,958,000 increase
in working capital from December 31, 1999 to December 31, 2000 is principally
due to several private placements and positive contribution to working capital
from operations in the year, less capital expenditures.
Cash and cash equivalents increased $25,092,000 during 2000 from $3,535,000 at
December 31, 1999 to $28,627,000 at December 31, 2000. The increase was
primarily due to several private placements in 2000 for aggregate net proceeds
of $29,853,000 and advances from a joint venture partner of $6,000,000 related
to funding a portion of the cost of a three-well exploration program less
capital expenditures. The utilization of cash during 2000 involved principally
capital expenditures of $12,486,000 including oil and gas properties and
equipment, principally related to the Ninotsminda field.
Cash and cash equivalents at December 31, 2000 included $5,889,000 held by
Ninotsminda Oil Company with respect to initial advances, less capital
expenditures, from AES Gardabani related to AES Gardabani's participation in a
three well exploration program in the Republic of Georgia.
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23
Accounts receivable increased from $464,000 at December 31, 1999 to $787,000 at
December 31, 2000. The increase is primarily as a result of accounts receivable
generated from natural gas sales in 2000.
Advances to operator increased from $nil at December 31, 1999 to $1,147,000 at
December 31, 2000 as a result of advances to the operator of the Ninotsminda
field for future expenditures on behalf and at the direction of CanArgo.
Inventory increased from $189,000 at December 31, 1999 to $696,000 at December
31, 2000 primarily as result of the acquisition in November 2000 of a
controlling interest in Georgian American Oil Refinery. In addition to the crude
oil and refined product in inventory at Georgian American Oil Refinery, at
December 31, 2000, approximately 38,600 barrels of oil were held in storage by
Ninotsminda Oil Company 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 increased from $94,000 at December 31, 1999 to $334,000 at
December 31, 2000, primarily as a result of prepaid insurance, rent and deposits
related to the London, England office.
Capital assets, net increased from $37,808,000 at December 31, 1999 to
$50,477,000 at December 31, 2000, primarily as a result of investment of
$12,486,000 in capital assets including oil and gas properties and equipment,
principally related to the Ninotsminda field.
Investments in and advances to oil and gas and other ventures, net decreased
from $1,709,000 at December 31, 1999 to $696,000 at December 31, 2000. The
decrease reflects principally CanArgo's acquisition of a controlling interest in
Georgian American Oil Refinery in November 2000 and subsequent consolidation of
the results of Georgian American Oil Refinery and CanArgo's equity share of loss
of Uentech International Corporation and East Georgian Pipeline Company. At
December 2000, CanArgo held 45% of the voting common shares of Uentech
International Corporation and 78% of the total common shares outstanding.
Uentech International Corporation specializes in the exploitation of patented
downhole-heating technology. East Georgian Pipeline Company leases from Georgian
Oil the pipeline used to transport natural gas from Sartichala to the Gardabani
power plant.
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, 2000, CanArgo had a
contingent obligation to issue 187,500 shares of common stock to a third party
upon satisfaction of conditions relating to the achievement of specified
Stynawske field project performance standards. As CanArgo develops current
projects and undertakes other projects, it could incur significant additional
obligations.
Accounts payable increased from $1,160,000 at December 31, 1999 to $2,691,000 at
December 31, 2000 primarily related to accounts payable of Georgian American Oil
Refinery and amounts due at December 31, 2000 related to the 2000 seismic
program.
Advances from joint venture partner increased to $5,889,000 at December 31, 2000
compared to $nil at December 31, 1999 as advances, less capital expenditures,
were received from AES Gardabani related to it's participation in a three well
exploration program in the Republic of Georgia.
Minority interest in subsidiaries decreased to $1,394,000 at December 31, 2000
compared to $4,371,000 at December 31, 1999 following the acquisition by CanArgo
in June 2000 of the minority shareholders 21.2% interest in Ninotsminda Oil
Company. Total consideration paid was 4,054,054 new common shares of CanArgo at
a price of $1.11 per share for total consideration of $4,500,000. In July, 2000,
CanArgo established CanArgo Norio Limited, a new subsidiary in which the
subsidiary's minority interest shareholders have contributed $400,000 for use
towards the current seismic program. CanArgo holds 50% of the outstanding common
shares of CanArgo Norio Limited but has the unilateral ability through CanArgo
Norio Limited's governing body to control the strategic, financial and operating
decisions of the company. In April 2000, CanArgo took a 50% interest in CanArgo
Standard Oil Products and in December 2000 reached agreement with CanArgo
Standard Oil Products
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other shareholders for CanArgo to have the unilateral ability to control the
strategic, financial and operational decisions of the company. Following
acquisition of a controlling interest in Georgian American Oil Refinery in
November 2000, minority interest at December 31, 2000 also includes a 49%
minority interest in Georgian American Oil Refinery.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
In November 2000, CanArgo acquired a 51% interest in Georgian American Oil
Refinery and Georgian American Oil Refinery became a subsidiary of CanArgo.
Under purchase accounting, Georgian American Oil Refinery's results have been
included in CanArgo's consolidated financial statements since the date of
acquisition.
CanArgo recorded operating revenue of $7,136,000 during the year ended December
31, 2000 compared with $2,783,000 for the year ended December 31, 1999. The
increase is primarily due to increases in crude oil and natural gas production
from the Ninotsminda field, higher crude oil prices, refining and marketing
revenue from Georgian American Oil Refinery and CanArgo Standard Oil Products
and service revenue from CanArgo's rig equipment.
Ninotsminda Oil Company generated $4,778,000 of oil revenue and $1,331,000 of
gas revenue in the year ended December 31, 2000 compared to $2,365,000 of oil
revenue and $129,000 gas revenue for the year ended December 31, 1999. Its net
share of the 479,000 barrels (1,312 barrels per day) of gross oil production
from the Ninotsminda field in the period amounted to 245,947 barrels. From
production, 8,735 barrels of oil were placed into storage in the year. For the
year ended December 31, 1999, Ninotsminda Oil Company's net share of the 415,400
barrels (1,138 barrels per day) of gross production was 142,900 barrels. During
the year ended December 31, 1999, 50,000 barrels of oil were removed from
storage and sold. Ninotsminda Oil Company's net share of the 1,764,000 thousand
cubic feet (mcf) of gas delivered in the year ended December 31, 2000 was
1,146,000 mcf.
All of Ninotsminda Oil Company's share of production was sold into the Georgian
local and regional market. Because lower transportation costs are involved,
CanArgo believes that sales of Ninotsminda oil to customers in the Georgian
local and regional market generally yield relatively higher net sales prices to
Ninotsminda Oil Company than sales to other customers. The net oil sales price
for Ninotsminda oil sold during the year ended December 31, 2000 averaged $20.14
per barrel as compared with an average of $13.17 per barrel in the year ended
December 31, 1999. The net gas sales price during the year ended December 31,
2000 averaged $1.16 per mcf ($41.19 per thousand cubic meter).
Refining and marketing revenue for the year ended December 31, 2000 relate to
operating activities of Georgian American Oil Refinery and CanArgo Standard Oil
Products for November and December 2000. In December 2000, sales from the
refinery were nominal following the imposition of restrictions and subsequent
excise tax on feedstock. These issues are being addressed with authorities in
Georgia and it is expected that new legislation addressing indigenous refining
activities will be put forward in March 2001. No assurance can be given,
however, that new legislation will be put forward, that such legislation will be
passed or that if passed, it will sufficiently remove existing restrictions and
excise taxes on feedstock and refined product. See Risks Associated with
CanArgo's Oil and Gas Activities -- Oil and Gas Operations are Subject to
Extensive Governmental Regulation. In December 2000, the first of several petrol
stations planned to be opened by CanArgo Standard Oil Products over the next 12
months opened in Tbilisi, Georgia
CanArgo recorded in the year ended December 31, 2000 other revenue of $365,000
compared to $289,000 for the year ended December 31, 1999 attributable to rental
of CanArgo equipment in Georgia.
The operating loss for the year ended December 31, 2000 amounted to $2,297,000
compared with an operating loss of $8,078,000 for the year ended December 31,
1999. The decrease in the operating loss is attributable primarily to the
impairment in 1999 of CanArgo's interest in the Stynawske project, increased oil
production and sales, higher oil prices and the addition of gas sales in the
year.
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Field operating expenses increased to $1,287,000 for the year ended December 31,
2000 as compared to $1,063,000 for the year ended December 31, 2000. The
increase is primarily a result of increased oil and gas production in the year.
Purchases of crude oil and products and refinery operating expenses of $138,000
and $439,000 respectively for the year ended December 31, 2000 relate to
operating activities of Georgian American Oil Refinery and CanArgo Standard Oil
Products for November and December 2000.
Direct project costs decreased to $738,000 for the year ended December 31, 2000,
from $766,000 for the year ended December 31, 1999, reflecting efforts initiated
in early 1999 to reduce Ninotsminda project expenses. Direct project costs are
expected to increase in 2001 as a result of a significant increase in
exploration and development activity in Georgia in the latter part of 2000 and
early part of 2001.
General and administrative costs increased to $2,955,000 for the year ended
December 31, 2000, from $2,193,000 for the year ended December 31, 1999. The
increase is primarily attributable to increased operating and corporate activity
in the latter part of 2000, costs related to the transition of administrative
and finance functions from Calgary to London in the third and fourth quarters of
2000 and general and administrative costs of $188,000 related to refining and
marketing activities.
The increase in depreciation, depletion and amortization expense from $1,145,000
for the year ended December 31, 1999 to $3,876,000 for the year ended December
31, 2000 is attributable principally to higher oil and gas production from the
Ninotsminda field and depreciation of drilling equipment. In addition, CanArgo
recorded depreciation expenses of $190,000 with respect to refining and
marketing assets in 2000.
CanArgo recorded net other income of $110,000 for the year ended December 31,
2000, as compared to net other expenses of $577,000 during the year ended
December 31, 1999. The principal reason for the increase is interest income
during the year ended December 31, 2000 on cash balances and the payment of
facility fees in the year ended December 31, 1999 related to Ninotsminda Oil
Company's Loan Agreement with the International Finance Corporation.
The net loss of $2,152,000 or $0.04 per share for the year ended December 31,
2000 compares to a net loss of $8,473,000, or $0.32 per share for the year ended
December 31, 1999. The weighted average number of common shares outstanding was
substantially higher during the year ended December 31, 2000 than during the
year ended December 31, 1999, due in large part to private placements in April,
June and August 2000.
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
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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 $8,078,000, compared with $6,327,000 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.
Field operating expenses increased to $1,063,000 during 1999, as compared to
$851,000 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 $766,000 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
$3,887,000 for 1998, reflecting the restructuring of CanArgo since the
combination with Fountain Oil Incorporated and CanArgo Oil & Gas Inc. and 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 CanArgo 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 $577,000 for 1999, as compared to net
other income of $35,000 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.
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NEW ACCOUNTING STANDARDS
In 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities and in June 2000 issued SFAS No. 138,which amended certain
provisions of SFAS 133. SFAS 133, as amended, will be adopted in the 2001 annual
financial statements and based on present circumstances would not have any
material effect on CanArgo's financial statements.
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 the
licensed developer of some projects that CanArgo may pursue in Eastern Europe
such as the Stynawske field project, even though CanArgo may be the designated
operator of the oil or gas field. In such circumstances, the concurrence of
co-venturers may be required for various actions. Other parties influencing the
timing of events may have priorities that differ from those of CanArgo, even if
they generally share CanArgo's objectives. As a result of all of the foregoing,
among other matters, the forward looking statements regarding the occurrence and
timing of future events may well anticipate results that will not be realized.
The availability of equity or debt financing to CanArgo or to the entities that
are developing projects in which CanArgo has interests is affected by many
factors including:
o world economic conditions;
o international relations;
o the stability and policies of various governments;
o fluctuations in the price of oil and gas and the outlook for the oil and
gas industry;
o competition for funds; and
o an evaluation of CanArgo and specific projects in which CanArgo has an
interest.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of CanArgo and its projects and comparisons with alternative investment
opportunities. 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.
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The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to CanArgo's properties are subject to change as additional
information becomes available.
Most of CanArgo's interests in oil and gas properties and ventures are located
in Eastern European countries. Operations in those countries are subject to
certain additional risks including the following:
o enforceability of contracts;
o currency convertibility and transferability;
o unexpected changes in tax rates;
o availability of trained personnel; and
o availability of equipment and services and other factors that could
significantly change the economics of production.
Production estimates are subject to revision as prices and costs change.
Production, even if present, may not be recoverable in the amount and at the
rate anticipated and may not be recoverable in commercial quantities or on an
economically feasible basis. World and local prices for oil and gas can
fluctuate significantly, and a reduction in the revenue realizable from the sale
of production can affect the economic feasibility of an oil and gas project.
World and local political, economic and other conditions could affect CanArgo's
ability to proceed with or to effectively operate projects in various foreign
countries.
Demands by or expectations of governments, co-venturers, customers and others
may affect CanArgo's strategy regarding the various projects. Failure to meet
such demands or expectations could adversely affect CanArgo's participation in
such projects or its ability to obtain or maintain necessary licenses and other
approvals.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
28
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information under the captions "Information Concerning Solicitation and Voting,"
"Election of Directors" and "Section 16(A) Beneficial Ownership Reporting
Compliance" contained in our definitive proxy statement to be filed no later
than April 30, 2001 in connection with solicitation of proxies for our annual
meeting of stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the captions "Executive Compensation," and "Compensation of
Directors" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
contained in the Proxy Statement.
29
30
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 September 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
September 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 September 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
30
31
International Limited dated August 10, 1995 by and among
Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated
as Purchaser, and John Richard Tate as Warrantor (Incorporated
herein by reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International Limited
dated November 3, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
May 29, 1996 by and among Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference from September
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 September
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 September 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15, 1998
Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX
Nederland B.V. dated September 28, 2000, relating to purchase
of 21.2% interest in Ninotsminda Oil Company (Incorporated
herein by reference from July 20, 2000 Form 8-K).
*10(1) Form of Option Agreement for options granted to certain
persons, including Directors (Incorporated herein by reference
from August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
*10(2) 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(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
*10(4) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September
30, 1998 Form 10-Q).
*10(5) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30,
1998 Form 10-Q).
10(6) Convertible Loan Agreement between Ninotsminda Oil Company
(NOC) and International Finance Corporation (IFC) dated
December 17, 1998 (Incorporated herein by reference
31
32
from Form S-1 Registration Statement, File No. 333-72295 filed
on February 12, 1999).
10(7) 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(8) 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(9) Agreement between Georgian American 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(10) 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(11) 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 September 7, 1999).
10(12) 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(13) Agreement between CanArgo Energy Corporation, Ninotsminda Oil
Company and IFC dated October 19, 1999 (Incorporated herein by
reference from September 30, 1999 Form 10-Q).
10(14) 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(15) Form of Subscription Agreement (Incorporated herein by
reference from December 28, 1999 Form 8-K).
10(16) Agreement between CanArgo Energy Corporation and JKX Nederland
BV dated January 19, 2000 (Incorporated herein by reference
from December 31, 1999 Form 10-K).
*10(17) Employment Agreement between CanArgo Energy Corporation and
Paddy Chesterman dated February 24, 2000 (Incorporated herein
by reference from December 31, 1999 Form 10-K).
10(18) Agreement between Ninotsminda Oil Company and AES Gardabani
dated March 10, 2000 (Incorporated herein by reference from
December 31, 1999 Form 10-K).
10(19) Term Sheet dated September 27, 2000 relating to sale of
15,660,916 shares of Registrant's common stock (Incorporated
herein by reference from July 20, 2000 Form 8-K).
10(20) Form of Subscription Agreement relating to sale of 15,660,916
shares of the Registrant's common stock (Incorporated herein
by reference from July 20, 2000 Form 8-K).
32
33
10(21) Subscription Agreement between Registrant and JKX Nederland
B.V. dated September 15, 2000 relating to purchase of 21.2%
interest in Ninotsminda Oil Company (Incorporated herein by
reference from July 20, 2000 Form 8-K).
*10(22) Employment Agreement between CanArgo Energy Corporation and
Dr. David Robson dated June 29, 2000 (Incorporated herein by
reference from September 30, 2000 Form 10-Q).
10(23) Tenancy Agreement between CanArgo Energy Corporation and
Grosvenor West End Properties dated September 8, 2000
(Incorporated herein by reference from September 30, 2000
Form 10-Q).
10(24) Agreement between CanArgo Energy Corporation and Roger
Brittain dated August 18, 2000.
*10(25) Employment Agreements between CanArgo Energy Corporation and
Murray Chancellor dated September 22, 2000
*10(26) Employment Agreements between CanArgo Energy Corporation and
Anthony Potter dated October 1, 2000
10(27) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and CanArgo Norio Limited dated December 12, 2000
10(28) Share Exchange Agreement between CanArgo Energy Corporation
and Argonaut Oil and Gas Limited dated November 10, 2000
related to the purchase of 28.7% interest in Georgian American
Oil Refinery
10(29) Agreement between CanArgo Energy Corporation and Georgian
British Oil Services Company dated November 10, 2000 relating
to the purchase of 9.35% interest in Georgian American Oil
Refinery
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, 2000, CanArgo filed the following
current reports on Form 8-K:
1. On June 16, 2000, CanArgo filed a Form 8-K dated June 14, 2000
reporting Item 5. Other Events regarding a press announcing
its initiatives for the Caspian region.
2. On July 20, 2000, CanArgo filed a Form 8-K dated June 28, 2000
reporting Item 5. Other Events regarding a press release as to
the sale of 15,660,916 shares of CanArgo's Common Stock at
Norwegian Kroner (NOK) 9.00 per share.
3. On July 28, 2000, CanArgo filed a Form 8-K dated July 20, 2000
reporting Item 5. Other Events regarding a press release as to
the agreement with JSC National Oil Company ("Georgian Oil")
and the State Agency for the Regulation of Oil and Gas
Resources of Georgia on CanArgo's participation in the Norio
Block XIC located in eastern Georgia.
4. On August 24, 2000, CanArgo filed a Form 8-K dated August 16,
2000 reporting Item 5. Other Events regarding a press release
as to the declaration by the U.S. Securities and
33
34
Exchange Commission on August 15, 2000 that CanArgo's
Registration Statement on Form S-3 relating to the offer and
sale of 25,048,766 shares of its common stock by certain
stockholders was declared effective. CanArgo also announced on
August 18, 2000 that it had closed a private placement of
12,000,000 shares at NOK 11.20 per share.
5. On September 7, 2000, CanArgo filed a Form 8-K dated August
31, 2000 reporting Item 5. Other Events regarding a press
release as to the appointment on August 31, 2000 of Mr. Roger
Brittain as non-executive Chairman of the Board of Directors,
effective September 1, 2000. On August 31, 2000, CanArgo also
announced the initial results of its horizontal well, N98H on
the Ninotsminda field in the Republic of Georgia.
34
35
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/Anthony J. Potter Date: March 27, 2001
---------------------------------------------
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/Roger Brittain Date: March 27, 2001
---------------------------------------------
Roger Brittain, Director and
Chairman of the Board
By: /s/David Robson Date: March 27, 2001
---------------------------------------------
David Robson, Managing Director and
Chief Executive Officer
By: /s/Russell Hammond Date: March 27, 2001
---------------------------------------------
Russell Hammond, Director
By: /s/Peder Paus Date: March 27, 2001
---------------------------------------------
Peder Paus, Director
By: /s/Nils N. Trulsvik Date: March 27, 2001
---------------------------------------------
Nils N. Trulsvik, Director
By: /s/Anthony J. Potter Date: March 27, 2001
---------------------------------------------
Anthony J. Potter, Chief Financial Officer
35
36
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 as indicated in their report. 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/Dr. David Robson /s/Anthony J. Potter
Chief Executive Officer Chief Financial Officer
March 27, 2001
F-1
37
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 as of December 31, 2000 and 1999, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 2000 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.
/s/PricewaterhouseCoopers LLP
Calgary, Alberta PRICEWATERHOUSECOOPERS LLP
March 27, 2001 Chartered Accountants
F-2
38
CANARGO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31,
2000 1999
------------- --------------
ASSETS
Cash and cash equivalents $ 28,627,013 $ 3,534,983
Accounts receivable 786,570 464,435
Advances to operator 1,146,584 -
Inventory 695,909 188,500
Other current assets 334,402 94,174
------------- --------------
Total current assets $ 31,590,478 $ 4,282,092
Capital assets 50,477,344 37,808,162
Investments in and advances to oil and gas and other
ventures - net 696,374 1,709,215
------------- --------------
TOTAL ASSETS $ 82,764,196 $ 43,799,469
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,691,118 $ 1,159,949
Advances from joint venture partner 5,888,573 -
Accrued liabilities 323,936 393,411
------------- --------------
Total current liabilities $ 8,903,627 $ 1,553,360
Provision for future site restoration 40,990 12,700
Minority interest in subsidiaries 1,393,915 4,370,785
Commitments and contingencies (Note 7) - -
Stockholders' equity:
Preferred stock, par value $0.10 per share - -
Common stock, par value $0.10 per share 7,595,069 3,735,292
Capital in excess of par value 139,071,031 106,216,164
Accumulated deficit (74,240,436) (72,088,832)
------------- --------------
Total stockholders' equity $ 72,425,664 $ 37,862,624
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,764,196 $ 43,799,469
============= ==============
The accompanying notes are an integral part of the consolidated
financial statements
F-3
39
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(EXPRESSED IN UNITED STATES
DOLLARS)
DECEMBER 31, December 31, December 31,
2000 1999 1998
------------- ------------- -------------
Operating Revenues:
Oil and gas sales $ 6,108,779 $ 2,493,612 $ 804,552
Refining and marketing 661,880 - -
Other 364,900 289,321 16,400
------------- ------------- -------------
7,135,559 2,782,933 820,952
------------- ------------- -------------
Operating Expenses:
Field operating expenses 1,287,035 1,062,610 851,057
Purchases of crude oil and products 138,144 - -
Refinery operating expenses 439,037 - -
Direct project costs 737,731 766,424 1,157,163
General and administrative 2,954,675 2,192,728 3,887,386
Depreciation, depletion and amortization 3,875,988 1,145,029 238,924
Impairment of property and equipment - - 113,000
Impairment of oil and gas properties - 233,957 900,000
Impairment of oil and gas ventures - 5,459,793 -
------------- ------------- -------------
9,432,610 10,860,541 7,147,530
------------- ------------- -------------
OPERATING LOSS (2,297,051) (8,077,608) (6,326,578)
------------- ------------- -------------
Other Income (Expense):
Interest income 549,749 - 782,596
Interest expense - (199,604) (479,932)
Other (199,469) (74,172) (76,540)
Gain (loss) on disposition of equipment - (41,742) (30,333)
Equity loss from investments in
unconsolidated subsidiaries (240,070) (261,234) (161,180)
------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 110,210 (576,752) 34,611
------------- ------------- -------------
NET LOSS BEFORE INCOME TAX EXPENSE (2,186,841) (8,654,360) (6,291,967)
INCOME TAX EXPENSE - - -
------------- ------------- -------------
NET LOSS BEFORE MINORITY INTEREST (2,186,841) (8,654,360) (6,291,967)
Minority interest in loss of consolidated
subsidiaries 35,237 181,500 181,644
------------- ------------- -------------
NET LOSS AND COMPREHENSIVE LOSS $ (2,151,604) $ (8,472,860) $ (6,110,323)
============= ============= =============
Weighted average number of
common shares outstanding 54,950,630 26,370,235 15,783,889
------------- ------------- -------------
NET LOSS PER COMMON SHARE - BASIC $ (0.04) $ (0.32) $ (0.39)
------------- ------------- -------------
NET LOSS PER COMMON SHARE - DILUTED $ (0.04) $ (0.32) $ (0.39)
------------- ------------- -------------
F-4
40
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
Operating activities:
Net loss $ (2,151,604) $ (8,472,860) $ (6,110,323)
Depreciation, depletion and amortization 3,875,988 1,145,029 238,924
Issuance of common stock for services 112,700 298,872 --
Impairment of property and equipment -- -- 113,000
Impairment of oil and gas properties -- 233,957 900,000
Impairment of oil and gas ventures -- 5,459,793 --
Equity loss from investments in unconsolidated subsidiaries 240,070 261,234 161,180
Loss (gain) on disposition of equipment -- 41,742 30,333
Allowance for doubtful accounts 100,000 76,921 --
Minority interest in income (loss) of consolidated subsidiaries (35,237) (181,500) (181,644)
Changes in assets and liabilities:
Accounts receivable (186,067) (116,989) 649,671
Advances to operator (1,146,584) 376,890 665,358
Inventory 19,256 (18,095) (150,000)
Other current assets (240,228) 359,302 331,936
Accounts payable 249,972 277,188 (2,202,203)
Accrued liabilities 80,525 (857,639) (9,164,558)
------------ ------------ ------------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES 918,791 (1,116,155) (14,718,326)
------------ ------------ ------------
Investing activities:
Capital expenditures (12,485,506) (3,504,840) (5,727,029)
Proceeds from the disposition of assets 13,408 1,166,234 438,033
Investments in and advances to oil and gas and other
ventures (236,074) (649,603) (1,652,447)
Restricted cash -- -- 9,700,000
Acquisition costs -- -- (1,214,948)
Change in non cash working capital items (150,000) 150,000 --
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (12,858,172) (2,838,209) 1,543,609
------------ ------------ ------------
Financing Activities:
Proceeds from sales of common stock 33,283,873 6,392,739 --
Share issue costs (2,848,505) (828,300) --
Advances from minority interest 500,000 -- --
Advances from joint venture partner 5,888,573 -- --
Cash acquired 207,470 -- 935,448
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,031,411 5,564,439 935,448
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,092,030 1,610,075 (12,239,269)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,534,983 1,924,908 14,164,177
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,627,013 $ 3,534,983 $ 1,924,908
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated
financial statements
F-5
41
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK
------------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
------------- ------------- ------------- ------------- -------------
\
TOTAL, 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
----------- ------------- ------------- ------------- -------------
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 shares issuable 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
----------- ------------- ------------- ------------- -------------
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
F-6
42
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK
------------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
------------- ------------- ------------- ------------- -------------
TOTAL, DECEMBER 31, 1999 37,352,922 $ 3,735,292 $ 106,216,164 $ (72,088,832) $ 37,862,624
Less shares issuable at
beginning of year (529,759) (52,976) (994,678) -- (1,047,654)
Issuance of common stock upon
exchange of CanArgo Oil & Gas Inc.
Exchangeable Shares 105,968 10,597 198,966 -- 209,563
Issuance of common stock
for services 140,000 14,000 98,700 -- 112,700
Issuance of common stock
pursuant to private placement 3,695,000 369,500 2,814,666 -- 3,184,166
Issuance of common stock
to purchase minority shareholder's
interest in subsidiary 4,054,054 405,406 4,094,594 -- 4,500,000
Exercise of stock options 1,504,664 150,466 431,939 -- 582,405
Issuance of common stock
pursuant to June private
placement 15,660,916 1,566,092 13,795,415 -- 15,361,507
Issuance of common stock
pursuant to August private
placement 12,000,000 1,200,000 12,955,795 -- 14,155,795
Issuance of common stock
to purchase controlling interest
in refinery 1,543,125 154,313 1,512,263 -- 1,666,576
Share issue costs -- -- (2,848,505) -- (2,848,505)
Net loss -- -- -- (2,151,604) (2,151,604)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 75,526,890 $ 7,552,690 $ 138,275,319 $ (74,240,436) $ 71,587,573
------------- ------------- ------------- ------------- -------------
Shares issuable upon
exchange of CanArgo Oil
& Gas Inc. Exchangeable
Shares without receipt of
further consideration 423,791 42,379 795,712 -- 838,091
------------- ------------- ------------- ------------- -------------
TOTAL, DECEMBER 31, 2000 75,950,681 $ 7,595,069 $ 139,071,031 $ (74,240,436) $ 72,425,664
============= ============= ============= ============== ==============
The accompanying notes are an integral part of the consolidated
financial statements
F-7
43
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
CanArgo Energy Corporation and its consolidated subsidiaries
(collectively "CanArgo"), is an integrated oil and gas company
operating predominately within the Republic of Georgia. Historically
the principal activity of CanArgo has been the acquisition of interests
in and development of crude oil and natural 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. In 2000, this activity was
expanded to include the refining and marketing of crude oil and crude
oil products.
Certain activities in which CanArgo has interests are conducted through
unconsolidated entities. CanArgo 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, 2000 are
CanArgo Oil & Gas Inc. (formerly CanArgo Energy Inc.), CanArgo Limited,
CanArgo (Kaspi) Limited, CanArgo Nazvrevi Limited, CanArgo Norio
Limited, CanArgo Petroleum Products Limited, CanArgo Services (UK)
Limited, CanArgo Standard Oil Products, EOR Canada Ltd., 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,
Georgian American Oil Refinery, Ninotsminda Oil Company Limited, Novara
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 - CanArgo 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. CanArgo 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 of crude oil, refined products and supplies
are valued at the lower of average cost and net realizable value.
F-8
44
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL ASSETS - Capital assets are recorded at cost less accumulated
provisions for depreciation, depletion and amortization 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.
Oil And Gas Properties - CanArgo and the unconsolidated entities for
which it accounts using the equity method account for oil and gas
properties and interests under the full cost method. Under this
accounting method, costs, including a portion of internal costs
associated with property acquisition and exploration for and
development of oil and gas reserves, are capitalized within cost
centers established on a country-by-country basis. Capitalized costs
within a cost center, as well as the estimated future expenditures to
develop proved reserves and estimated net costs of dismantlement and
abandonment, are amortized using the unit-of-production method based on
estimated proved oil and gas reserves. All costs relating to production
activities are charged to expense as incurred.
Capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, are
limited to an amount (the 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 $820,000 at December 31, 2000 are amortized on a unit of production
basis and reflected with accumulated depreciation, depletion and
amortization. CanArgo 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 CanArgo has not been required to expend
any material amounts to satisfy such obligations.
Property and Equipment - 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.
Refining and Marketing - The refinery, petrol stations and additions
thereto are depreciated over the estimated useful lives of the assets
ranging from ten to fifteen years for the petrol stations to fifteen to
twenty years for the refinery.
REVENUE RECOGNITION - CanArgo 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. Where
crude oil or natural gas production is sold to or used for internal
consumption by the refinery, on consolidation revenues from these sales
are eliminated from sales and other operating revenues and operating
expenses.
F-9
45
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN OPERATIONS - CanArgo's future operations and earnings will
depend upon the results of CanArgo's operations in the Republic of
Georgia. There can be no assurance that CanArgo will be able to
successfully conduct such operations, and a failure to do so would have
a material adverse effect on the CanArgo's financial position, results
of operations and cash flows. Also, the success of CanArgo'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 CanArgo is dependent on international
operations, specifically those in the Republic of Georgia, CanArgo will
be subject to various additional political, economic and other
uncertainties. Among other risks, CanArgo'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 CanArgo'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, 2000, 1999 and 1998 were not material.
INCOME TAXES - CanArgo recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been
included in the financial statements or tax returns.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 - CanArgo 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. CanArgo 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.
STOCK-BASED COMPENSATION PLANS - CanArgo 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, CanArgo
computes compensation cost for each employee stock option granted as
the amount by which the quoted market price of the CanArgo'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 and in
June 2000 issued SFAS No. 138,which amended certain provisions of SFAS
133. SFAS 133, as amended, will be adopted in the 2001 annual financial
statements and based on present circumstances would not have any
material effect on CanArgo's financial statements.
F-10
46
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS COMBINATION
On November 12, 2000, CanArgo acquired 38.1% of the common stock of
Georgian American Oil Refinery ("GAOR") for Common Stock consideration
valued at $1,666,576. On completion of the acquisition, CanArgo held
51% of the common stock of GAOR and GAOR became a subsidiary of the
Company. Under purchase accounting, GAOR's results have been included
in the Company's consolidated financial statements since the date of
acquisition.
The purchase price was allocated to the net assets of GAOR as follows:
Cash $ 207,470
Other Current Assets 762,733
Refining and Marketing 3,040,910
Current Liabilities (1,281,197)
Minority Interest (1,063,340)
-----------------
Consideration Given- Common Shares $ 1,666,576
=================
In July 2000, CanArgo acquired the minority shareholder's 21.2%
interest in Ninotsminda Oil Company for Common Stock consideration
valued at $4,500,000. The purchase price was allocated to the net
assets of Ninotsminda Oil Company based on their fair value which
approximated net book value. On completion of this transaction,
Ninotsminda Oil Company became a wholly owned subsidiary of CanArgo.
On July 15, 1998, CanArgo completed the acquisition of all of the
common stock of CanArgo Oil & Gas Inc. ("CAOG") for Common Stock
consideration valued at $19,362,500. Under purchase accounting, CAOG's
results have been included in CanArgo's consolidated financial
statements since the date of acquisition. On completion of the
acquisition, CAOG became a subsidiary of CanArgo, and each previously
outstanding share of CAOG common stock was converted into the right to
receive 0.8 shares of CanArgo's Common Stock, giving the former
shareholders of CAOG the right to receive approximately 47% of
CanArgo's Common Stock.
4. CAPITAL ASSETS
Capital assets, net of accumulated depreciation and impairment, at
December 31, 2000 include the following:
ACCUMULATED
DEPRECIATION NET
COST AND IMPAIRMENT CAPITAL ASSETS
------------------- --------------------- ---------------------
OIL AND GAS PROPERTIES
Proved properties $ 29,768,241 $ (5,597,509) $ 24,170,732
Unproved properties 13,897,096 - 13,897,096
------------------- --------------------- ---------------------
43,665,337 (5,597,509) 38,067,828
PROPERTY AND EQUIPMENT
Oil and gas related equipment 10,394,139 (2,966,868) 7,427,271
Office furniture, fixtures and
equipment and other 884,162 (421,660) 462,502
-------------------- ---------------------- ----------------------
11,278,301 (3,388,528) 7,889,773
REFINING AND MARKETING 4,710,210 (190,467) 4,519,743
-------------------- ---------------------- ----------------------
$ 59,653,848 $ (9,176,504) $ 50,477,344
==================== ====================== ======================
F-11
47
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital assets, net of accumulated depreciation and impairment, at
December 31, 1999 include the following:
ACCUMULATED
DEPRECIATION NET
COST AND IMPAIRMENT CAPITAL ASSETS
------------------- --------------------- ---------------------
OIL AND GAS PROPERTIES
Proved properties $ 20,506,617 $ (2,330,893) $ 18,175,724
Unproved properties 12,531,313 - 12,531,313
-------------------- ---------------------- ----------------------
33,037,930 (2,330,893) 30,707,037
PROPERTY AND EQUIPMENT
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
-------------------- ---------------------- ----------------------
10,335,720 (3,234,595) 7,101,125
REFINING AND MARKETING - - -
-------------------- ---------------------- ----------------------
$ 43,373,650 $ (5,565,488) $ 37,808,162
==================== ====================== ======================
OIL AND GAS PROPERTIES
Oil and gas properties obtained in connection with the acquisition of
CAOG included $15,120,000 of properties in the full cost pool and
$10,550,500 of unevaluated properties. The Ninotsminda field includes
both proved and unproved properties and has since February 1996 been
operated under the terms of a production sharing contract ("PSC")
between Ninotsminda Oil Company, the Republic of Georgia and the state
oil company, Georgian Oil. Other unproved properties in the Republic of
Georgia include the Nazvrevi block operated under the terms of a PSC
between the Company's subsidiary, CanArgo Nazvrevi Limited, and the
Republic of Georgia and the Norio block operated under the terms of a
PSC between the Company's subsidiary, CanArgo Norio Limited, Georgian
Oil and the State of Georgia as represented by the State Agency for
Regulation of Oil and Gas Resources in Georgia. These properties are
expected to be evaluated over the next four years.
Ultimate realization of the carrying value of CanArgo's oil and gas
properties will require production of oil and gas in sufficient
quantities and marketing such oil and gas at sufficient prices to
provide positive cash flow to CanArgo, which is dependent upon, among
other factors, achieving significant production at costs that provide
acceptable margins, reasonable levels of taxation from local
authorities, and the ability to market the oil and gas produced at or
near world prices. In addition, CanArgo must mobilize drilling
equipment and personnel to initiate drilling, completion and production
activities. If one or more of the above factors, or other factors, are
different than anticipated, CanArgo may not recover its carrying value.
CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has
an interest. There can be no assurance, however, that CanArgo or the
entities that are developing the oil and gas properties and ventures
will be able to arrange the financing necessary to develop the projects
being undertaken or to support the corporate and other activities of
CanArgo or that such financing as is available will be on terms that
are attractive or acceptable to or are deemed to be in the best
interests of CanArgo, such entities or their respective stockholders or
participants.
F-12
48
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of CanArgo do not give effect to
any additional impairment in the value of CanArgo's investment in oil
and gas properties and ventures or other adjustments that would be
necessary if financing cannot be arranged for the development of such
properties and ventures or if they are unable to achieve profitable
operations. Failure to arrange such financing on reasonable terms or
failure of such properties and ventures to achieve profitability would
have a material adverse effect on the financial position, including
realization of assets, results of operations, cash flows and prospects
of CanArgo.
PROPERTY AND EQUIPMENT
Oil and gas related equipment includes drilling rigs and related
equipment currently in use by CanArgo in the development of the
Ninotsminda field.
5. INVESTMENT IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES
CanArgo has acquired interests in oil and gas and other ventures
through less than majority interests in corporate and corporate-like
entities. A summary of CanArgo's net investment in and advances to oil
and gas and other ventures at December 31, 2000 and 1999 is set out
below:
DECEMBER 31, December 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 2000 1999
----------------- ----------------
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company $ 6,086,254 $ 6,086,254
Republic of Georgia - Sartichala
Through 12.9% ownership of Georgian American Oil Refinery -- 1,008,845
Republic of Georgia - Ninotsminda
Through 50.0% effective ownership CanArgo Power Corporation 676,583 635,713
Republic of Georgia - Ninotsminda
Through an effective 50% ownership of East Georgian Pipeline Co. 90,500 --
Uentech International Corporation
Through an effective 45% voting interest 304,943 274,310
Other Investments 75,001 --
----------------- ----------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES $ 7,233,281 $ 8,005,122
----------------- ----------------
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw (626,461) (626,461)
Republic of Georgia - CanArgo Power Corporation (186,074) (186,074)
Republic of Georgia - East Georgian Pipeline Co. (50,000) --
Uentech International Corporation (214,579) (23,579)
----------------- ----------------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES $ (1,077,114) $ (836,114)
IMPAIRMENT - STYNAWSKE FIELD (5,459,793) (5,459,793)
----------------- ----------------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 696,374 $ 1,709,215
================= ================
In November 2000, CanArgo increased its interest in Georgian American
Oil Refinery from 12.9% to 51% for Common Stock consideration valued at
$1,666,576. On completion of the acquisition, Georgian American Oil
Refinery became a subsidiary of CanArgo.
F-13
49
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As a result of prolonged
negotiations which 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, 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.
As of December 31, 2000, the Company has a 50% interest in CanArgo
Power Corporation and 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, 2000, 45% of the voting common shares of Uentech
International Corporation and 78% of the total common shares
outstanding.
CanArgo's ventures are in the development stage. Accordingly,
realization of these investments is dependent upon successful
development of and ultimately cash flows from operations of the
ventures.
6. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2000 and 1999 include the
following:
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------ -------------------
Professional fees $ 175,000 $ 167,500
Office relocation 126,666 -
Workovers - 150,000
Other 22,270 75,911
------------------ -------------------
$ 323,936 $ 393,411
================== ===================
7. 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, 2000,
CanArgo had the contingent obligation to issue an aggregate of 187,500
shares of its common stock, subject to the satisfaction of conditions
related to the achievement of specified performance standards by the
Stynawske field project. In December 2000, CanArgo announced that a
preliminary development plan had been reached with the joint venture
partner.
LEASE COMMITMENTS - CanArgo leases office space under non-cancellable
operating lease agreements. Rental expense for the years ended December
31, 2000, 1999 and 1998 was $178,745, $115,425 and $170,795
respectively. Future minimum rental payments over the next five years
for the Company's lease obligations as of December 31, 2000, are as
follows:
2001 $ 260,000
2002 250,000
2003 250,000
2004 250,000
2005 220,000
F-14
50
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CONCENTRATIONS OF CREDIT RISK
CanArgo'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. CanArgo places
its temporary cash investments with high credit quality financial
institutions. Accounts receivable relates primarily to entities active in
the energy and manufacturing sectors. The concentration of credit risk
associated with accounts receivable is reduced as CanArgo's debtors are
spread across several countries and industries.
9. STOCKHOLDERS' EQUITY
On July 8, 1998, at a Special Meeting of Stockholders, the stockholders of
CanArgo 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 CanArgo, 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 CanArgo's Common Stock on a
share-for-share basis.
The stockholders of CanArgo 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 CanArgo'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 CanArgo's Common Stock. When fully divested of voting rights
through the exchange of all Exchangeable Shares, the Voting Preferred
Shares can be redeemed by CanArgo 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, 2000, 75,526,890 shares of Common Stock, 423,791
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, 2000, 1999 and 1998, the following
transactions regarding CanArgo's Common Stock were consummated pursuant to
authorization by CanArgo's Board of Directors or duly constituted
committees thereof.
YEAR ENDED DECEMBER 31, 2000
o In 2000, CanArgo issued 105,968 shares upon exchange by holders of
Exchangeable Shares.
o In February and March 2000, CanArgo issued 140,000 shares at $0.805
per share in connection with services performed by third parties.
o In April 2000, CanArgo issued 3,695,000 shares at $0.862 per share for
gross proceeds of $3,184,166 upon completion of a private placement.
o In June 2000, CanArgo issued 4,054,054 shares at $1.11 per share for
gross proceeds of $4,500,000 to acquire the minority interest
shareholders interest in Ninotsminda Oil Company.
F-15
51
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o In 2000, CanArgo issued 1,504,664 shares at $0.387 per share pursuant
to exercised stock options.
o In June 2000, CanArgo issued 15,550,916 shares at $0.98 per share upon
completion of a private placement.
o In August 2000, CanArgo issued 12,000,000 shares at $1.18 per share
upon completion of a private placement.
o In November 2000, CanArgo issued 1,543,125 shares at $1.08 per share
to acquire controlling interest in a refinery.
YEAR ENDED DECEMBER 31, 1999
o In 1999, CanArgo issued 5,327,016 shares upon exchange by holders of
Exchangeable Shares.
o In 1999, CanArgo 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.
o In 1999, CanArgo issued 537,917 shares at $0.555 per share in
connection with services performed by third parties.
o In August 1999, CanArgo 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.
o In December 1999, CanArgo 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
o In 1998, CanArgo issued 3,934,124 shares upon exchange by holders of
Exchangeable Shares.
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 CanArgo's Common Stock on a share-for-share basis.
10. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the years ended December
31, 2000, 1999 and 1998 were based on the weighted average number of common
shares outstanding during those periods. The weighted average number of
shares used was 54,950,630, 26,370,235 and 15,783,889 respectively. Options
to purchase CanArgo's Common Stock were outstanding during the years ended
December 31, 2000, 1999 and 1998 but were not included in the computation
of diluted net loss per common share because the effect of such inclusion
would have been antidilutive.
F-16
52
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
CanArgo 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 CanArgo'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 U.S. federal statutory rate (34%) and
CanArgo's reported provision for income taxes is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
Income tax benefit at statutory rate $(731,545) $(2,880,772) $(2,077,510)
Benefit of losses not recognized 731,545 2,880,772 2,077,510
Foreign tax provision -- -- --
Other, net -- -- --
--------- ----------- -----------
Provision for income taxes $ -- $ -- $ --
========= =========== ===========
Effective tax rate 0% 0% 0%
========= =========== ===========
The components of deferred tax assets as of December 31, 2000 and 1999 were
as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Net operating loss carryforwards $13,172,000 $13,576,000
Foreign net operating loss carryforwards 6,268,000 5,916,000
Impairments 9,097,000 9,097,000
Patent rights and related equipment -- --
----------- -----------
28,537,000 28,589,000
Valuation allowance (28,537,000) (28,589,000)
----------- -----------
Net deferred tax asset recognized in balance sheet $ -- $ --
=========== ===========
On August 1, 1991, August 17, 1994, July 15, 1998 and June 28, 2000 CanArgo
experienced changes in the CanArgo'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, 2000, total U.S. net operating
loss carryforwards were approximately $38,740,000. Of that amount,
approximately $291,000 was incurred subsequent to the ownership change in
2000, $38,449,000 was incurred prior to 2000 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 2001 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. CanArgo has also generated approximately $18,436,000 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.
CanArgo's available net operating loss carryforwards may be used to offset
future taxable income, if any, prior to their expiration. CanArgo may
experience further limitations on the utilization of net operating loss
carryforwards and other tax benefits as a result of additional changes in
ownership.
F-17
53
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT AND GEOGRAPHICAL DATA
During the years ended December 31, 1999 and 1998 CanArgo operated through
one business segment, oil and gas exploration and production. In 2000,
CanArgo expanded its oil and gas exploration and production activities to
include the refining and marketing of crude oil and crude oil products.
Operating revenues for the years ended December 31, 2000, 1999 and 1998 by
business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
OPERATING REVENUES: 2000 1999 1998
------------ ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $6,108,779 $2,274,524 $602,724
Canada -- 219,088 201,828
---------- ---------- --------
6,108,779 2,493,612 804,552
REFINING AND MARKETING
Eastern Europe 661,880 -- --
INTERSEGMENT ELIMINATIONS -- -- --
---------- ---------- --------
TOTAL $6,770,659 $2,493,612 $804,552
========== ========== ========
In 2000, the Company sold its oil and gas production in Eastern Europe to
five (1999 -- five, 1998 -- two) customers. In 2000 sales to three
customers represented 43%, 25% and 14% of operating revenue respectively.
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, 2000, 1999 and
1998 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
OPERATING PROFIT (LOSS): 2000 1999 1998
------------ ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ 871,896 $(6,154,404) $(2,247,788)
Canada -- (7,926) (1,258,506)
----------- ----------- -----------
871,896 (6,162,330) (3,506,294)
REFINING AND MARKETING
Eastern Europe (294,156) -- --
CORPORATE AND OTHER EXPENSES (2,874,791) (1,915,278) (2,820,284)
----------- ----------- -----------
TOTAL $(2,297,051) $(8,077,608) $(6,326,578)
=========== =========== ===========
F-18
54
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable assets as of December 31, 2000 and 1999 by business segment
and geographical area were as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
CORPORATE
Eastern Europe $ 695,909 $ 262,174
Canada -- 3,981,274
Western Europe (principally cash) 30,894,569 38,644
----------- -----------
TOTAL CORPORATE 31,590,478 4,282,092
----------- -----------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe 46,348,728 37,794,754
Canada -- 13,408
----------- -----------
TOTAL OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION 46,348,728 37,808,162
----------- -----------
REFINING AND MARKETING
Eastern Europe 4,128,616 --
OTHER ENERGY PROJECTS
Eastern Europe 606,010 1,458,484
Canada 90,364 250,731
----------- -----------
696,374 1,709,215
----------- -----------
TOTAL IDENTIFIABLE ASSETS $82,764,196 $43,799,469
=========== ===========
14. SUPPLEMENTAL CASH FLOW INFORMATION AND
NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the years
ended December 31, 2000, 1999 and 1998:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Supplemental schedule of non-cash
activities:
Issuance of Common Stock in connection
with acquisition of minority interest
shareholders interest in subsidiary $4,500,000 $ -- $ --
Issuance of Common Stock in connection
with acquisition of controlling interest
in refinery 1,666,576 -- --
Issuance of Common Stock in connection
with investments in oil and gas ventures
-- 440,740 --
Issuance of Common Stock in connection
with compensation earned and third
party services provided 112,700 298,872 --
---------- -------- --------
$6,279,276 $739,612 $ --
========== ======== ========
F-19
55
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCK-BASED COMPENSATION PLANS
On August 17, 1994, options to purchase 200,000 shares of CanArgo's Common
Stock were issued to various individuals who were serving or were expected
in the future to serve CanArgo 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
CanArgo in February 1996, 4,000,000 shares of the CanArgo'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 CanArgo, 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, 2000. The
exercise price and vesting schedule of stock appreciation rights are
determined at the date of grant. Under the 1995 Plan, 2,273,669 options
were outstanding at December 31, 2000.
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 CanArgo's Common Stock. Pursuant to the CAOG
Plan, which has been adopted by CanArgo, a total of 988,000 shares of
CanArgo'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, 621,667 options were outstanding at December 31, 2000.
On September 30, 2000, special stock options and warrants to purchase
2,220,000 shares of CanArgo's Common Stock were issued to various
individuals who were serving or were expected in the future to serve
CanArgo as officers, directors and employees. The special stock options are
exercisable at an exercise price of $1.437 per common share. The warrants
are exercisable at an exercise price of $1.27 per common share.
The purpose of the Company's stock option plans is to further the interest
of the Company by enabling officers, directors, employees, consultants and
advisors of the Company to acquire an interest in the Company by ownership
of its stock through the exercise of stock options and stock appreciation
rights granted under its various stock option plans.
F-20
56
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of stock options granted under the 1994 Plan, the
1995 Plan, CAOG Plan and special stock options and warrants is as follows:
SHARES SHARES ISSUABLE WEIGHTED
AVAILABLE UNDER OUTSTANDING AVERAGE EXERCISE
FOR ISSUE OPTIONS PRICE
--------- ----------------- ----------------
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
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
Canceled 198,000 (198,000) 1.17
--------- ---------
BALANCE, DECEMBER 31, 1999 866,250 4,121,750 0.72
Options (1994 & 1995 Plan):
Granted at market (1,087,000) 1,087,000 1.06
Exercised -- (1,441,331) 0.39
Canceled 556,250 (556,250) 0.89
CAOG Plan Authorization:
Granted at market (485,000) 485,000 1.10
Exercised (63,333) 0.46
Canceled 737,500 (737,500) 1.69
Special Stock Options and Warrants:
Granted at market -- 2,220,000 1.40
--------- ---------
BALANCE, DECEMBER 31, 2000 588,000 5,115,336 1.02
========= =========
Shares issuable upon exercise of vested options and the corresponding
weighted average exercise price are as follows:
SHARES ISSUABLE WEIGHTED
UNDER EXERCISABLE AVERAGE EXERCISE
OPTIONS PRICE
----------------- ----------------
December 31, 1998 413,661 $2.82
December 31, 1999 672,277 $1.85
December 31, 2000 725,329 $0.99
F-21
57
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of options granted at market was $1.26,
$0.22, and $0.61, for the years ended December 31, 2000, 1999 and 1998. The
weighted average fair value of options granted at a premium was $0.13 for
the year ended December 31, 1998. The weighted average fair value of all
options granted during the years ended December 31, 2000, 1999 and 1998 was
$1.26, $0.22 and $0.59.
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------- -----------------------------
NUMBER NUMBER
OF SHARES WEIGHTED WEIGHTED OF SHARES WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2000 TERM PRICE 2000 PRICE
------------------------ -------------- --------- -------- -------------- --------
$0.275 to $0.69 1,543,336 3.75 0.36 247,496 0.36
$0.70 to $0.99 175,000 4.92 0.88 -- --
$1.00 to $1.85 3,389,500 4.32 1.30 470,333 1.11
$9.00 to $14.50 7,500 6.00 14.50 7,500 14.50
--------- -------
$0.275 to $14.50 5,115,336 4.17 1.02 725,329 0.99
========= =======
As discussed in Note 2, Summary of Significant Accounting Policies,
"Stock-Based Compensation Plans", CanArgo 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, CanArgo's net loss
and net loss per common share after plan forfeitures would have been
approximately $3,077,000 and $0.05 respectively for the year ended December
31, 2000, $8,806,000 and $0.34 respectively for the year ended December 31,
1999 and $5,750,000 and $0.36, respectively, for the year ended December
31, 1998.
The fair value of each stock option granted by CanArgo was calculated using
the Black-Scholes option-pricing model applying the following
weighted-average assumptions for the years ended December 31, 2000, 1999
and 1998: dividend yield of 0.00%; risk-free interest rate of 5.98% for the
year ended December 31, 2000, dividend yield of 0.00%; risk-free interest
rate of 5.86% for the year ended December 31, 1999 and dividend yield of
0.00%; risk-free interest rate of 5.25% for the year ended December 31,
1998, the average expected lives of options of 3.51 years, 4.0 years and
4.0 years respectively; and volatility of 75.07% for the year ended
December 31, 2000; 80.0% for the year ended December 31, 1999 and 44.8% for
the year ended December 31, 1998.
16. RELATED PARTY TRANSACTIONS
In 2000, three non-employee directors each received compensation in the
amount of $90,000 for services provided with respect to the June and August
2000 private placements.
17. SUBSEQUENT EVENTS
On March 8, 2001 CanArgo announced that it intended to make an offer to
purchase all outstanding common shares of Lateral Vector Resources Inc. On
March 20, 2001 an offer was mailed to Lateral Vector Resources Inc.
shareholders offering Canadian $0.10 (approximately $0.065) in cash for
each outstanding Lateral Vector Resources Inc. share and based on publicly
available information, the transaction value represented by the offer is
approximately $2.11 million. The offer, conditional, among other matters,
upon the deposit of at least 90% of outstanding Lateral Vector Resources
Inc. shares (calculated on a fully diluted basis), is subject to the
receipt of all required regulatory approvals including any required in
Ukraine and other conditions customary in this type of transaction,
including the absence of any material change in the business or operations
of Lateral Vector Resources Inc.
F-22
58
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, 2000 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, 2000, as estimated by the independent petroleum engineering
firm, Ashton Jenkins Mann:
NET PROVED RESERVES - OIL REPUBLIC OF
(In Thousands of Barrels) GEORGIA CANADA TOTAL
----------- ------ -----
DECEMBER 31, 1997 -- 334 334
Purchase of properties 6,050 -- 6,050
Revisions of previous estimates 198 (155) 43
Extension, discoveries, other additions 1,388 -- 1,388
Production (92) (21) (113)
----- ---- -----
DECEMBER 31, 1998 7,544 158 7,702
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
Purchase of properties 1,610 -- 1,610
Revisions of previous estimates -- -- --
Extension, discoveries, other additions 583 -- 583
Production (246) -- (246)
Disposition of properties -- -- --
----- ---- -----
DECEMBER 31, 2000 9,665 -- 9,665
===== ==== =====
NET PROVED DEVELOPED OIL RESERVES
December 31, 2000 2,570 -- 2,570
===== ===== =====
F-23
59
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
The following table sets forth the Company's net proved gas reserves,
including the changes therein, and net proved developed reserves at
December 31, 2000, 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
Purchase of properties 1,658 -- 1,658
Revisions of previous estimates -- -- --
Extension, discoveries, other additions 4,654 -- 4,654
Production (1,146) -- (1,146)
Disposition of properties -- -- --
------ ----- ------
DECEMBER 31, 2000 13,500 -- 13,500
====== ===== ======
NET PROVED DEVELOPED GAS RESERVES
December 31, 2000 4,560 -- 4,560
====== ===== ======
Net proved oil reserves in the Republic of Georgia as at December 31, 2000
and 1999 were as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
------------------------------- ---------------------------------
OIL RESERVES PSC ENTITLEMENT OIL RESERVES PSC ENTITLEMENTS
-- GROSS VOLUMES -- GROSS VOLUMES
(MSTB) (MSTB) (1) (MSTB) (MSTB) (1)
------------ --------------- ------------- ----------------
Proved Developed Producing 3,800 2,570 3,600 1,572
Proved Undeveloped 14,500 7,095 15,200 6,146
------ ----- ------ -----
TOTAL PROVEN 18,300 9,665 18,800 7,718
====== ===== ====== =====
Net proved gas reserves in the Republic of Georgia as at December 31, 2000
and 1999 were as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
-------------------------------- -------------------------------
GAS RESERVES PSC ENTITLEMENT GAS RESERVES PSC ENTITLEMENT
-- GROSS VOLUMES -- GROSS VOLUMES
(MMCF) (MMCF) (1) (MMCF) (MMCF) (1)
------------ --------------- ------------ ---------------
Proved Developed Producing 15,200 4,560 17,425 4,117
Proved Undeveloped 29,800 8,940 17,850 4,217
------ ------ ------ -----
TOTAL PROVEN 45,000 13,500 35,275 8,334
====== ====== ====== =====
------------
(1) PSC Entitlement Volumes attributed to CanArgo using the "economic
interest method" applied to the terms of the production sharing
contract. PSC Entitlement Volumes are those produced volumes which,
through the production sharing contract, accrue to the benefit of
Ninotsminda Oil Company after deduction of Georgian Oil's share which
includes all Georgian taxes, levies and duties. As a result of
CanArgo's interest in Ninotsminda Oil Company, these volumes accrue to
the benefit of CanArgo for the recovery of capital, repayment of
operating costs and share of profit. Net oil and gas reserves at
December 31, 1999 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.
F-24
60
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
Results of operations for oil and gas producing activities for the years
ended December 31, 2000, 1999 and 1998 are as follows:
YEAR ENDED DECEMBER 31, 2000 EASTERN EUROPE CANADA TOTAL
-------------- -------- ----------
Revenues $6,108,779 $ -- $6,108,779
Operating Expenses 1,287,035 -- 1,287,035
Depreciation, depletion and amortization 3,099,000 -- 3,099,000
---------- -------- ----------
Operating Income 1,722,744 -- 1,722,744
Income tax provision -- -- --
---------- -------- ----------
RESULTS OF OPERATIONS FOR OIL AND GAS
PRODUCING ACTIVITIES $1,722,744 $ -- $1,722,744
========== ======== ==========
YEAR ENDED DECEMBER 31, 1999 EASTERN EUROPE 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 602,891 13,593 616,484
---------- -------- ----------
Income tax provision -- -- --
---------- -------- ----------
RESULTS OF OPERATIONS FOR OIL AND GAS
PRODUCING ACTIVITIES $ 602,891 $ 13,593 $ 616,484
========== ======== ==========
YEAR ENDED DECEMBER 31, 1998 EASTERN EUROPE 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)
========== =========== ===========
F-25
61
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
Costs incurred for oil and gas property acquisition, exploration and
development activities for the years ended December 31, 2000, 1999 and 1998
are as follows:
EASTERN
EUROPE CANADA TOTAL
----------- --------- -----------
DECEMBER 31, 2000
Property Acquisition
Unproved* $ 1,365,783 $ -- $ 1,365,783
Proved -- -- --
Exploration -- -- --
Development 9,261,624 -- 9,261,624
----------- --------- -----------
Total costs incurred $10,627,407 -- $10,627,407
=========== ========= ===========
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
=========== ========= ===========
*These amounts represent costs incurred by CanArgo and excluded from the
amortization base until proved reserves are established or impairment is
determined.
F-26
62
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES
The following information has been developed utilizing procedures
prescribed by SFAS No. 69 Disclosure about Oil and Gas Producing Activities
("SFAS 69") and based on crude oil reserve and production volumes estimated
by the Company's engineering staff. It may be useful for certain
comparative purposes, but should not be solely relied upon in evaluating
the Company or its performance. Further, information contained in the
following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.
CanArgo 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, 2000 (IN THOUSANDS) GEORGIA CANADA TOTAL
----------- --------- -----------
Future cash inflows $219,531 $ -- $ 219,531
Less related future:
Production costs 37,356 -- 37,356
Development and abandonment costs 63,049 -- 63,049
-------- --------- -----------
Future net cash flows before income taxes 119,126 -- 119,126
Future income taxes (1) -- -- --
-------- --------- -----------
Future net cash flows 119,126 -- 119,126
10% annual discount for estimating
timing of cash flows 53,365 -- 53,365
-------- --------- -----------
Standardized measure of discounted
future net cash flows $ 65,761 $ -- $ 65,761
======== ========= ===========
F-27
63
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- UNAUDITED
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 before
income taxes 80,410 -- 80,410
Future income taxes(1) -- -- --
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 $ 41,951 $ -- $ 41,951
======== ========= ===========
- --------------
(1) Future cash flows are based on PSC Entitlement Volumes attributed to
CanArgo using the 'economic interest method' applied to the terms of the
production sharing contract. PSC Entitlement Volumes are those produced
volumes which, through the production sharing contract, accrue to the
benefit of Ninotsminda Oil Company after deduction of Georgian Oil's share
which includes all Georgian taxes, levies and duties.
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:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
IN THOUSANDS 2000 1999 1998
------------ ------------ ------------
Beginning of year $ 41,951 $ 15,708 $ 1,243
Purchase (sale) of reserves in place 11,316 (437) 14,088
Revisions of previous estimates (409) -- 115
Development costs incurred during the period 9,262 1,992 4,642
Additions to proved reserves resulting from
extensions, discoveries and improved recovery -- -- --
Accretion of discount -- -- --
Sales of oil and gas, net of production costs (4,822) (1,410) 38
Net change in sales prices, net of production
costs 4,393 29,256 --
Changes in production rates (timing) and other 4,070 (3,158) (4,418)
-------- -------- --------
Net increase 23,810 26,243 14,465
-------- -------- --------
End of year $ 65,761 $ 41,951 $ 15,708
======== ======== ========
F-28
64
INDEX TO EXHIBITS
Filed Exhibit
Herewith No. Description
- -------- ------- -----------
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 September 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
September 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 September 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
65
International Limited dated August 10, 1995 by and among
Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated
as Purchaser, and John Richard Tate as Warrantor (Incorporated
herein by reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International Limited
dated November 3, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
May 29, 1996 by and among Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference from September
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 September
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 September 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15, 1998
Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX
Nederland B.V. dated September 28, 2000, relating to purchase
of 21.2% interest in Ninotsminda Oil Company (Incorporated
herein by reference from July 20, 2000 Form 8-K).
*10(1) Form of Option Agreement for options granted to certain
persons, including Directors (Incorporated herein by reference
from August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
*10(2) 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(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
*10(4) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September
30, 1998 Form 10-Q).
*10(5) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30,
1998 Form 10-Q).
10(6) Convertible Loan Agreement between Ninotsminda Oil Company
(NOC) and International Finance Corporation (IFC) dated
December 17, 1998 (Incorporated herein by reference
66
from Form S-1 Registration Statement, File No. 333-72295 filed
on February 12, 1999).
10(7) 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(8) 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(9) Agreement between Georgian American 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(10) 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(11) 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 September 7, 1999).
10(12) 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(13) Agreement between CanArgo Energy Corporation, Ninotsminda Oil
Company and IFC dated October 19, 1999 (Incorporated herein by
reference from September 30, 1999 Form 10-Q).
10(14) 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(15) Form of Subscription Agreement (Incorporated herein by
reference from December 28, 1999 Form 8-K).
10(16) Agreement between CanArgo Energy Corporation and JKX Nederland
BV dated January 19, 2000 (Incorporated herein by reference
from December 31, 1999 Form 10-K).
*10(17) Employment Agreement between CanArgo Energy Corporation and
Paddy Chesterman dated February 24, 2000 (Incorporated herein
by reference from December 31, 1999 Form 10-K).
10(18) Agreement between Ninotsminda Oil Company and AES Gardabani
dated March 10, 2000 (Incorporated herein by reference from
December 31, 1999 Form 10-K).
10(19) Term Sheet dated September 27, 2000 relating to sale of
15,660,916 shares of Registrant's common stock (Incorporated
herein by reference from July 20, 2000 Form 8-K).
10(20) Form of Subscription Agreement relating to sale of 15,660,916
shares of the Registrant's common stock (Incorporated herein
by reference from July 20, 2000 Form 8-K).
67
10(21) Subscription Agreement between Registrant and JKX Nederland
B.V. dated September 15, 2000 relating to purchase of 21.2%
interest in Ninotsminda Oil Company (Incorporated herein by
reference from July 20, 2000 Form 8-K).
*10(22) Employment Agreement between CanArgo Energy Corporation and
Dr. David Robson dated June 29, 2000 (Incorporated herein by
reference from September 30, 2000 Form 10-Q).
10(23) Tenancy Agreement between CanArgo Energy Corporation and
Grosvenor West End Properties dated September 8, 2000
(Incorporated herein by reference from September 30, 2000
Form 10-Q).
10(24) Agreement between CanArgo Energy Corporation and Roger
Brittain dated August 18, 2000.
*10(25) Employment Agreements between CanArgo Energy Corporation and
Murray Chancellor dated September 22, 2000
*10(26) Employment Agreements between CanArgo Energy Corporation and
Anthony Potter dated October 1, 2000
10(27) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and CanArgo Norio Limited dated December 12, 2000
10(28) Share Exchange Agreement between CanArgo Energy Corporation
and Argonaut Oil and Gas Limited dated November 10, 2000
related to the purchase of 28.7% interest in Georgian American
Oil Refinery
10(29) Agreement between CanArgo Energy Corporation and Georgian
British Oil Services Company dated November 10, 2000 relating
to the purchase of 9.35% interest in Georgian American Oil
Refinery
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.