As filed with the Securities and Exchange Commission on April 17, 2002
Registration No. 333-67814
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CANARGO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1311 91-0881481
------------------------------- ----------------------------- -------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
organization) Classification Code Number) incorporation or organization)
C/O CANARGO SERVICES (UK) LIMITED
150 BUCKINGHAM PALACE ROAD, LONDON, ENGLAND SWIW 9TR
(44) 207 808-4700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------------
ANTHONY J. POTTER
CANARGO SERVICES (UK) LIMITED
150 BUCKINGHAM PALACE ROAD, LONDON, ENGLAND SWIW 9TR
(44) 207 808-4700
(Name, address, including zip code, and telephone number, including area code
of agent for service)
---------------------------
Please forward a copy of all correspondence to:
PETER A. BASILEVSKY
SATTERLEE STEPHENS BURKE & BURKE LLP
230 PARK AVENUE, 11TH FLOOR
NEW YORK, NY 10169
PHONE: (212) 818-9200
Approximate date of commencement of proposed sale to the public: FROM TIME TO
TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to the Registration Statement on Form S-1
filed with the Securities and Exchange Commission (the "SEC") on August 24, 2001
(the "Original Form S-1") by CanArgo Energy Corporation, a Delaware corporation
(the "Company"), is being filed pursuant to the undertaking of the company in
the Original Form S-1 to file with the SEC, during any period in which offers or
sales of the securities registered under the Original Form S-1 are being made, a
post-effective amendment to the Original Form S-1, to include any prospectus
required by Section 10(a)(3) of the Securities Act of 1933, as amended.
The prospectus included within this Post-Effective Amendment No. 1 to
Registration Statement supercedes and replaces the prospectus included in the
Original Form S-1 in its entirety. Except as otherwise set forth herein, the
information set forth in Part II of the Original Form S-1 remains accurate and
in full force and effect.
SUBJECT TO COMPLETION
Preliminary Prospectus dated April 15, 2002.
PROSPECTUS
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CANARGO ENERGY CORPORATION
(CANARGO LOGO)
8,027,706 SHARES
COMMON STOCK
This prospectus relates to the offer and sale from time to time in one or more
transactions of 8,027,706 shares of common stock of CanArgo Energy Corporation
("CanArgo") by certain of our stockholders. None of our directors or executive
officers is selling shares in this offering, and neither we nor they will
receive any proceeds from the sale of the shares offered hereby. All expenses of
registration of the shares which may be offered hereby under the Securities Act
of 1933, as amended, will be paid by us (other than underwriting discounts and
selling commissions, and fees and expenses of advisors to any of the selling
stockholders).
CanArgo is an independent oil and gas exploration, production, refining and
marketing company operating in Eastern Europe with finance and administrative
functions located in London, England c/o CanArgo Services (UK) Limited, 150
Buckingham Palace Road, London, England SW1W 9TR, telephone (44) 207 808-4700.
Our common stock is traded in the Over-the-Counter (OTC) Bulletin Board (symbol:
GUSH). On April 15, 2002, the closing bid price of the common stock on the OTC
Bulletin Board was $0.285 per share. Our common stock is also traded on the main
list of the Oslo Stock Exchange (symbol: CNR). On April 15, 2002, the last
reported sale price of our common stock on the Oslo Stock Exchange was 2.55
Norwegian Kroner (NOK) per share. On April 15, 2002 one U.S. dollar equaled
8.667 NOK based upon the noon buying rate as reported by the Federal Reserve
Bank of New York.
The selling stockholders and any broker-dealers, agents or underwriters that
participate with them in the distribution of the common stock may be deemed
underwriters, as that term is defined in the Securities Act, and any commissions
received by them and any profit on the resale of the common stock purchased by
them may be deemed underwriting commissions or discounts under the Securities
Act. The common stock may be offered and sold by the selling stockholders in one
or more transactions through the facilities of any stock exchange on which the
shares are then listed for trading, in the over-the-counter market or in
negotiated transactions or a combination of these and other methods of sale, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The common stock may be sold
either (a) to a broker or dealer as principal for resale by such broker or
dealer for its account pursuant to this prospectus (for example, in transactions
with a market maker) or (b) in brokerage transactions, including transactions in
which the broker solicits purchasers or (c) directly to third persons. See "Plan
of Distribution" beginning on page 12.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
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The date of this Prospectus is [ - ] , 2002
TABLE OF CONTENTS
Page
----
Forward Looking Statements.................................................. 3
Summary..................................................................... 5
Risk Factors................................................................ 6
Use of Proceeds............................................................. 11
The Selling Stockholders.................................................... 11
Plan of Distribution........................................................ 12
Market for Common Stock and Dividend Policy................................. 14
Selected Consolidated Financial Data........................................ 15
The Company................................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 32
Management.................................................................. 42
Related Transactions........................................................ 49
Ownership of Voting Securities.............................................. 50
Description of Capital Stock................................................ 52
Shares Eligible for Future Resale........................................... 54
Certain United States Federal Tax Considerations for
Non-United States Holders of Common Stock................................... 56
Limitation of Liability and Indemnification................................. 58
Legal Matters............................................................... 58
Experts..................................................................... 58
Available Information....................................................... 59
Index to Financial Statements............................................... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS AND ANY
SUPPLEMENT. WE HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH
DIFFERENT OR ADDITIONAL INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND ANY SUPPLEMENT IS ACCURATE AS
OF ITS DATE ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
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FORWARD-LOOKING STATEMENTS
The United States Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements in this prospectus. When used in
this prospectus, 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. The forward-looking statements are based on our
current expectations and speak only as of the date made. These forward-looking
statements involve risks, uncertainties and other factors that in some cases
have affected our historical results and could cause actual results in the
future to differ significantly from the results anticipated in forward-looking
statements made in this prospectus. Important factors that could cause such a
difference are discussed in this prospectus, particularly in this section and
the section "Risk Factors". You are cautioned not to place undue reliance on the
forward-looking statements.
Few of the forward-looking statements in this prospectus deal with matters that
are within our unilateral control. 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. These
third parties generally have objectives and interests that may not coincide with
ours and may conflict with our interests. Unless we are able to compromise these
conflicting objectives and interests in a mutually acceptable manner, agreements
and arrangements with these third parties 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, such as the Bugruvativske and Stynawske
field projects, that CanArgo may pursue in Eastern Europe, even though we may be
the designated operator of the oil or gas field. In these 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 ours, even
if they generally share our objectives. As a result of all of the foregoing,
among other matters, any forward-looking statements regarding the occurrence and
timing of future events may well anticipate results that will not be realized.
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 our ability to obtain or maintain necessary licenses and other
approvals.
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 or
abandon part of all of CanArgo's project development, capital expenditure,
production and other plans. 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, the outlook for the oil and
gas industry and 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 us and our projects and comparisons with alternative investment
opportunities.
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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 sudden or unexpected changes in demand for crude oil and or natural gas;
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.
-4-
SUMMARY
DESCRIPTION OF THE COMPANY
CanArgo Energy Corporation is an independent oil and gas exploration,
production, refining and marketing company operating in Eastern Europe. Our
principal operations are located in the Republic of Georgia. Our activities at
our primary field in Georgia, the Ninotsminda field, are conducted through our
100% owned subsidiary, Ninotsminda Oil Company Limited. In addition, we have
interests in several other oil and gas prospects both in Georgia and in the
Ukraine.
Our principal executive offices are located c/o CanArgo Services (UK) Limited,
150 Buckingham Palace Road, London, England SW1W 9TR, and our telephone number
is (44) 207 808 4700.
RECENT DEVELOPMENTS
We closed a private placement of 5,210,000 new shares at Norwegian Kroner (NOK)
2.95 per share (approximately US$0.33 per share) to certain institutions and
qualified purchasers on February 12, 2002. Gross proceeds from the placement
were some NOK 15.4 million (approximately US$1.7 million). The shares were
placed by ABG Sundal Collier ASA who received a placement fee and reimbursement
of their expenses amounting to $110,000 in the aggregate. Net proceeds from the
placement were approximately US$1.5 million which we intend to use for working
capital purposes. The shares issued in connection with the private placement
were issued in a transaction intended to qualify for an exemption from
registration under the Securities Act afforded by Regulation S promulgated
thereunder by the SEC and may not be offered or sold in the United States or to
U.S. persons (as defined in such Regulation) absent registration under the
Securities Act or pursuant to an applicable exemption from such registration. We
agreed, as soon as practicable after the closing of the private placement, to
prepare and file with the SEC a registration statement registering the shares
under the Securities Act for resale. On March 28, 2002, we filed with the SEC a
registration statement on Form S-1 (File No. 333-85116) registering these shares
for resale. Under terms of the Engagement Letter between the Company and ABG
Sundal Collier ASA, we agreed to indemnify the placement agents under certain
conditions for certain liabilities arising from the engagement, including
liabilities arising under the Securities Act. After completion of the private
placement, we had 97,218,446 common and Exchangeable shares issued and issuable.
See "Description of Capital Stock" at page 52 for a description of our common
and Exchangeable shares.
THE PROSPECTUS
This prospectus relates to the offer and sale from time to time in one or more
transactions of 8,027,706 shares of our common stock by certain of our
stockholders who acquired their shares in a private placement concluded on July
4, 2001. See "The Selling Stockholders" at page 11. None of our directors or
executive officers is selling shares in this offering, and neither they nor we
will receive any proceeds from the sale of the shares offered hereby. All
expenses of registration of the shares which may be offered hereby under the
Securities Act of 1933, as amended, will be paid by us (other than underwriting
discounts and selling commissions, and fees and expenses of advisors to any of
the selling stockholders). See "Plan of Distribution" at page 12.
The shares were placed by Sundal Collier & Co. ASA and Den Norske Bank ASA, Dnb
Markets who received a placement fee and reimbursement of their expenses
amounting to $468,608 in the aggregate. Net proceeds from the placement were
approximately US$ 6.8 million which CanArgo intends to use to replenish cash
resources used to acquire Lateral Vector Resources Inc., to initiate development
of its Ukrainian properties and for working capital purposes. The shares issued
in connection with the private placement were issued in transactions intended to
qualify for an exemption from registration under the Securities Act afforded by
Regulation S promulgated thereunder by the SEC and may not be offered or sold in
the United States or to U.S. persons (as defined in such Regulation) absent
registration under the Securities Act or pursuant to an applicable exemption
from such registration. On August 24, 2001 we filed with the SEC a registration
statement on Form S-1 registering the shares under the Securities Act for
resale. This registration statement became effective on August 27, 2001.
-5-
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider the
risks described below, as well as all other information in this prospectus,
before investing in our common stock. This prospectus contains forward-looking
statements that involve risks and uncertainties. Future events and our actual
results could differ materially from those anticipated in these forward-looking
statements. Some of the important factors that might cause such a difference are
discussed in the various risk factors that follow and in the "Forward-Looking
Statements" section of this prospectus.
CURRENT OPERATIONS DEPENDENT ON SUCCESS OF THE NINOTSMINDA OIL FIELD AND
GEORGIAN EXPLORATION
We have directed substantially all of our efforts and most of our available
funds to the development of the Ninotsminda oil field in the Republic of
Georgia, exploration in that area 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, we cannot
assure investors that the exploration and 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 we have made and
are planning to make in the field, and we 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 production from the Ninotsminda field. Such
agreements may benefit us, but may in the future also limit our ability to sell
associated natural gas at then market prices. Our Georgian exploration programme
is an important factor for future success, and this programme may not be
successful, as it carries substantial technical risk.
UKRAINE PROJECTS IN EARLY STAGE OF EVALUATION AND DEVELOPMENT
In April 2001, we acquired approximately 82% (77% on a fully diluted basis) of
the outstanding common shares of Lateral Vector Resources Inc. pursuant to an
unsolicited offer to purchase all of its outstanding common shares. According to
publicly available information at the time, Lateral Vector Resources Inc.
negotiated and concluded with Ukrnafta, the Ukrainian State Oil Company, a Joint
Investment Production Activity (JIPA) agreement in 1998 to develop the
Bugruvativske field in Eastern Ukraine. In July 2001, we completed the
acquisition of the remaining outstanding common shares and Lateral Vector
Resources Inc. became a wholly owned subsidiary of CanArgo. To date, neither of
the parties has fulfilled their initial contribution requirements which may
result in Ukrnafta exercising any rights it might have to terminate and cancel
the Joint Investment Production Activity agreement.
In addition, certain other aspects of Lateral Vector's interest in the field
under the Joint Investment Production Agreement remain to be determined. We are
presently in discussions with Ukrnafta regarding these matters and there is no
assurance that such discussions will be successfully concluded. The
Bugruvativske field together with the Stynawske field in Western Ukraine, are
both in the early stage of evaluation and development and are themselves
relatively new to us. At present, we have yet to establish our own operational
and finance infrastructure in the Ukraine. Establishment of this infrastructure
may result in a diversion, temporary or otherwise, of time and other resources
from other operating activities.
NINOTSMINDA FIELD GOVERNED BY PRODUCTION SHARING CONTRACT WHICH MAY BE SUBJECT
TO CERTAIN LEGAL UNCERTAINTIES
Our principal business and assets are derived from production sharing contracts
in the Republic of Georgia. The legislative and procedural regimes governing
production sharing contracts and mineral use licenses in Georgia have undergone
a series of changes in recent years resulting in certain legal uncertainties.
Our production sharing contracts 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
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on our rights under the production sharing contracts. However the Norio (Block
XI(c)) and North Kumisi Production Sharing Agreement was concluded after
enactment of the Petroleum Law, and under the terms and conditions of this
legislation.
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 us, the
International Finance Corporation, an affiliate of the World Bank received in
November 1998 confirmation from the State of Georgia, that among other things:
o 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;
o 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
o 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 our oil and gas properties and
ventures, we must produce oil and gas in sufficient quantities and then sell
such oil and gas at sufficient prices to produce a profit. We have 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. In 2001, we recorded an
impairment charge of $7.3 million following application of the full cost ceiling
limitation with respect to capitalized oil and gas property costs. During 1997,
we 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. We could be required in the future to
write off our 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 our
oil and gas properties. We generally have the principal responsibility to
provide financing for our oil and gas properties and ventures. Accordingly, we
may need to raise additional funds from outside sources in order to pay for
project development costs beyond those currently budgeted through 2002. We may
not be able to obtain that additional financing. If adequate funds are not
available, we will be required to scale back or even suspend our 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 OUR CONTROL
Our exploration, development and production activities are subject to a number
of factors and risks, many of which may be beyond our control. First, we 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:
o Unexpected or unusual geological conditions.
o The recoverability of the oil and gas on an economic basis.
-7-
o The availability of infrastructure and personnel to support operations.
o Local and global oil prices.
o Government regulation and legal uncertainties.
Our activities can also be affected by a number of hazards, such as:
o Labour disputes.
o Natural phenomena, such as bad weather and earthquakes.
o Operating hazards, such as fires, explosions, blow-outs, pipe failures and
casing collapses.
o 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 us. 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.
We do not purchase insurance covering all of the risks and hazards that are
involved in oil and gas exploration, development and production.
RISK OF FOREIGN OPERATIONS
Our principal oil and gas properties, including the Ninotsminda field, are
located in Eastern Europe. In addition, our refinery and all of our petrol
stations are located in and around Tbilisi, Georgia. Operation and development
of these assets is subject to a number of conditions endemic to Eastern European
countries, including:
o Political Instability -- The present governmental arrangements in Eastern
Europe and countries of the former Soviet Union in which we operate 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. Our 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 and the
Joint Investment Production Activity Agreement covering the Bugruvativske oil
field are examples of such arrangements. As a result of such dependency on
government participants, our 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 our oil and gas properties. We are not insured against such political
risks because management deems the premium costs of such insurance to be
currently prohibitively expensive.
o 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. Application and enforceability of these laws
may also vary widely from region to region within these countries. Within
Georgia, the Georgian government has recently requested assistance from the
United States to combat terrorism in the Pankisi Gorge, a region of Georgia
bordering the separatist Chechnya region of Russia. Social, economic and
legal instability have accompanied these changes due to many factors which
include:
o Low standards of living.
o High unemployment.
o Undeveloped and constantly changing legal and social institutions.
o Conflicts within and with neighbouring countries.
This instability can make continued operations difficult or impossible.
-8-
o 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.
o Currency Risks - Payment for oil and gas products sold in Eastern European
countries may be in local currencies. Although we currently sell our oil
principally for U.S. dollars, we 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. We may also enter into contracts
with suppliers in these countries to purchase goods and services in U.S.
dollars. If we cannot receive payment for oil in U.S. dollars and the value
of the local currency relative to the U.S. dollar deteriorates, we could face
significant negative changes in working capital.
o 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 we are dependent on international
operations, specifically those in Georgia, we are 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 and their refined products are subject to wide
fluctuations in response to a number of factors which are beyond our control,
including:
o Global changes in the supply and demand for oil and natural gas.
o Actions of the Organization of Petroleum Exporting Countries.
o Weather conditions.
o Domestic and foreign governmental regulations.
o The price and availability of alternative fuels.
o Political conditions in the Middle East and elsewhere.
o Overall economic conditions.
A reduction in oil prices can affect the economic viability of our operations.
For example, the significant decline in oil prices during 1998 adversely
affected our results of operations and increased our operating loss in 1998.
There can be no assurance that oil prices will be at a level that will enable us
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
judgments about a number of elements and such professional judgments may vary as
among different petroleum engineers:
o The amount of recoverable crude oil and natural gas present in a reservoir.
o The costs that will be incurred to produce the crude oil and natural gas.
o 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:
o Additional development activity.
o Evolving production history.
o Changes in production costs, market prices and economic conditions.
-9-
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, 2002. The
magnitude of those variations may be material.
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. We must comply with laws and regulations which govern
many aspects of its oil and gas business, including:
o Exploration
o Development
o Production
o Refining
o Marketing
o Transportation
o Occupational health and safety
o Labour standards
o Environmental matters
We expect the trend towards more burdensome regulation of our business to result
in increased costs and operational delays. This trend is particularly applicable
in developing economies, such as those in Eastern Europe where we have our
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 more developed economies.
COMPETITION
The oil and gas industry including the refining and marketing of crude oil
products is highly competitive. Our competitors include integrated oil and gas
companies, independent oil and gas companies, drilling and income programmes,
and individuals. Many of our competitors are large, well-established,
well-financed companies. Because of our small size and lack of financial
resources, we may not be able to compete effectively with these companies.
OPERATIONS ARE DEPENDENT ON CHIEF EXECUTIVE
Dr. David Robson, the Chief Executive Officer of CanArgo, is our executive who
has the most experience in the oil and gas industry and who has the most
extensive business relationships in Eastern Europe. Our business and operations
could be significantly harmed if Dr. Robson were to leave us or become
unavailable because of illness or death. Dr. Robson has signed an agreement with
a two-year non competition clause effective from June 29, 2003, the date of
termination of the agreement. We do not carry key employee insurance on any of
our employees.
FUTURE STOCK ISSUANCES AND THE PROVISIONS OF DELAWARE LAW COULD HAVE
ANTI-TAKEOVER EFFECTS
As of March 31 , 2002, we had 150,000,000 shares of common stock and 5,000,000
shares of preferred stock authorized, of which 97,218,446 shares of common stock
and 100 shares of preferred stock were outstanding. Our Board of Directors may
at any time issue additional shares of preferred stock and common stock without
any prior approval by the stockholders, which might impair or impede a third
party from making an offer to acquire us. In addition, the Board of Directors
may designate the rights and privileges of a series of preferred stock, which
rights
-10-
and privileges may impair or impede a third party takeover of CanArgo. Holders
of outstanding shares have no preemptive right to purchase a pro rata portion of
additional shares of common or preferred stock issued by us. In addition, the
provisions of Section 203 of the Delaware General Corporation Law, to which we
are subject, places certain restrictions on third parties who seek to effect a
business combination with a company opposed by the company's Board of Directors.
THE PRICE OF OUR COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS
The market price of our common stock could be subject to wide fluctuations in
response to quarterly variations in the Company's results of operations, changes
in earnings estimates by analysts, changing conditions in the oil and gas
industry or changes in general market or economic conditions.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE
We have not paid any cash dividends to date on the common stock and there are no
plans for such dividend payments in the foreseeable future.
USE OF PROCEEDS
The selling stockholders are offering all of the shares of common stock covered
by this prospectus. We will not receive any proceeds from sales of these shares.
THE SELLING STOCKHOLDERS
All of the 8,027,706 shares being offered were acquired by the selling
stockholders pursuant to a private placement of 16,057,765 shares at Norwegian
Kroner (NOK) 4.25 per share, which was completed on July 4, 2001. On August 24,
2001 we filed with the SEC a registration statement on Form S-1 registering the
shares under the Securities Act for resale. This registration statement became
effective on August 27, 2001. From the net proceeds, CanArgo paid subscribers to
the private placement a cash fee of approximately $247,000 representing 3.33% of
the purchase price of their shares for the 30 day delay after closing until the
registration statement registering such shares was declared effective by the
SEC. Under terms of the Engagement Letter between the Company and Sundal Collier
& Co. ASA, the lead manager, we agreed to indemnify the placement agents under
certain conditions for certain liabilities arising from the engagement,
including liabilities arising under the Securities Act.
Our registration of the shares does not necessarily mean that any selling
stockholder will sell any or all of his, her, or its shares at any time or from
time to time in one or more transactions.
The following table sets forth the number of shares owned by each of the selling
stockholders. All information contained in the table below is based upon their
beneficial ownership as of March 31, 2002. The following table assumes that all
of the shares being registered will be sold. The selling stockholders are not
making any representation that any shares covered by the prospectus will be
offered for sale. The selling stockholders reserve the right to accept or
reject, in whole or in part, any proposed sale of shares. As of March 31, 2002,
we had an aggregate of 97,218,446 common shares outstanding.
-11-
NUMBER OF PERCENT OF
SHARES NUMBER OF OUTSTANDING
BENEFICIALLY OWNED NUMBERED OF SHARES OWNED SHARES
PRIOR SHARES REGISTERED AFTER THE AFTER THE
NAME OF SELLING STOCKHOLDER TO THE OFFERING FOR SALE HEREBY OFFERING OFFERING
-------------------------------------- ------------------ ----------------- ------------- ------------
Morgan Stanley & Co International Ltd. 9,622,000 1,250,000 8,372,000 8.6%
Caldwell Associates 5,299,899 1,700,000 3,599,899 3.7%
Sundal Collier Fondsforvaltning (1) 2,555,400 1,000,000 1,555,400 1.6%
Storebrand/Spar 1,391,000 800,000 591,000 *
Notodden Calsium + Carbio 470,588 470,588 - *
Syerre Stiksrud 800,000 400,000 400,000 *
Sparebanken Rogaland -Bank 938,200 200,000 738,200 *
Juvi Beta AS 200,000 200,000 - *
Thomas Fleischer 300,000 200,000 100,000 *
Sparebanken Sor 100,000 100,000 - *
Falkum Invest 100,000 100,000 - *
Per Erik Asmyr 60,000 60,000 - *
Hustadkalk AS 75,000 75,000 - *
GAG Consult AS 100,000 100,000 - *
Herman Holding AS 350,000 100,000 250,000 *
Rag AS 48,000 48,000 - *
Myre Havfiske AS 90,000 90,000 - *
Arnstein Kalliainen 170,000 90,000 80,000 *
Rune Frones 85,000 85,000 - *
Hammersborg Invest AS 200,000 85,000 115,000 *
Thomas Burchardt 85,000 85,000 - *
Viraga AS 155,000 85,000 70,000 *
Paragon AS 84,000 84,000 - *
Info Team AS 230,000 83,000 147,000 *
Manfried Kraus 148,000 83,000 65,000 *
Engelsviken Canning AS 424,353 82,353 342,000 *
Lars Sigvart Gran Andersen 504,853 82,353 422,500 *
Peder Paus 85,782 82,353 3,429 *
Industri- og montasjeservice 82,353 82,353 - *
Helge Reme 42,353 42,353 - *
Kjell O. Johannessen 82,353 82,353 - *
--------------------------------------------------------------------------------------------------------------------------
TOTALS 24,879,134 8,027,706 16,851,428
--------------------------------------------------------------------------------------------------------------------------
----------------
(1) Sundal Collier & Co. acted as placement agent in connection with CanArgo's
July 4, 2001 private placement. The shares listed are held in private
investors accounts for which Sundal Collier Fondsforvaltning acts as a
nominee and over which it does not have any discretion.
* Less than one percent.
-12-
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders named in this prospectus, by their donees, pledgees or transferees,
or by their other successors in interest. The selling stockholders may sell
their shares at market prices prevailing at the time of sale, at prices related
to such prevailing market prices at the time of sale, at negotiated prices, or
at fixed prices, which may be changed. Each selling stockholder reserves the
right to accept or reject, in whole or in part, any proposed purchase of shares,
whether the purchase is to be made directly or through agents. We are not aware
that any of the selling stockholders have entered into any arrangements with any
underwriters or broker-dealers regarding the sale of their shares of common
stock. The registration rights available to selling stockholders shall terminate
at such time as all shares qualified by this Registration Statement are sold by
the selling stockholder in accordance with this prospectus or in accordance with
the provisions of Rules 144, 144A or their equivalent under the Securities Act,
or have been sold pursuant to a transaction effected through the facilities of
the Oslo Stock Exchange in accordance with the provisions of Rule 904 or are
otherwise freely transferable without restriction under applicable United States
securities laws.
The selling stockholders may offer their shares, subject to the restrictions
outlined above, at various times in one or more of the following transactions:
o in ordinary brokers' transactions and transactions in which the broker
solicits purchasers;
o in transactions including block trades, in which brokers, dealers or
underwriters purchase the shares as principal and resell the shares for
their own accounts pursuant to this prospectus;
o in transactions "at the market" to or through market makers in the
common stock;
o in other ways not involving market makers or established trading markets,
including direct sales of the shares to purchasers or sales of the shares
effected through agents;
o through transactions in options, swaps or other derivatives which may or
may not be listed on an exchange;
o an exchange distribution in accordance with the rules of such exchange;
o in privately negotiated transactions;
o in transactions to cover short sales; or
o in a combination of any of the foregoing transactions.
In addition, the selling stockholders also may sell their shares in private
transactions or in accordance with Rules 144, 144A or 904 under the Securities
Act rather than under this prospectus.
From time to time, one or more of the selling stockholders may pledge or grant a
security interest in some or all of the shares owned by them. If the selling
stockholders default in the performance of the secured obligations, the pledgees
or secured parties may offer and sell the shares from time to time. The selling
stockholders also may transfer and donate shares in other circumstances. The
number of shares beneficially owned by selling stockholders who donate or
otherwise transfer their shares will decrease as and when the selling
stockholders take these actions. The plan of distribution for the shares offered
and sold under this prospectus will otherwise remain unchanged, except that the
transferees, donees or other successors in interest will be selling stockholders
for purposes of this prospectus. The selling stockholders may use brokers,
dealers, underwriters or agents to sell their shares. The persons acting as
broker, dealers or agents may receive compensation in the form of commissions,
discounts or concessions. This compensation may be paid by the selling
stockholders or the purchasers of the shares for whom such persons may act as
agent, or to whom they may sell as a principal, or both. The selling
stockholders and any agents or broker-dealers that participate with the selling
stockholders in the offer and sale of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act. Any commissions they
receive and any profit they realize on the resale of the shares by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
Neither any selling stockholders nor we can presently estimate the amount of
such compensation.
-13-
Because selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, selling stockholders and persons participating in
the offer and sale of their shares may be subject to the prospectus delivery
requirements of the Securities Act.
The selling stockholders and any other person participating in a distribution of
the securities covered by this prospectus will be subject to applicable
provisions of the Exchange Act and the rules and regulations under the Exchange
Act, including Regulation M, which may limit the timing of purchases and sales
of any of the securities by the selling stockholders and any other such person.
Furthermore, under Regulation M, any person engaged in the distribution of the
securities may not simultaneously engage in market-making activities with
respect to the particular securities being distributed for certain periods prior
to the commencement of or during such distribution. All of the above may affect
the marketability of the securities and the availability of any person or entity
to engage in market-making activities with respect to the securities.
Under our agreements with the selling stockholders, we are required to bear the
expenses relating to the registration of this offering. The selling stockholders
will bear any underwriting discounts or commissions, brokerage fees, stock
transfer taxes and fees of their legal counsel. The selling stockholders may
agree to indemnify any broker-dealer or agent that participates in transactions
involving sales of the shares against certain liabilities, including liabilities
arising under the Securities Act. The selling stockholders have agreed to
indemnify us against certain liabilities in connection with the offer of the
shares, including liabilities arising under the Securities Act.
If we are notified by a selling stockholder that any material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, we will file a supplement to this prospectus, if
required, pursuant to Rule 424(b) under the Securities Act. In addition, if we
are notified by a selling stockholder that a donee or pledgee intends to sell
more than 500 shares, we will file a supplement to this prospectus.
To the extent required, this prospectus may be amended or supplemented from time
to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with broker-dealers
in connection with distributions of the shares or otherwise. In such
transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders also may sell shares short and redeliver the shares to
close out such short positions. The selling stockholders may enter into option
or other transactions with broker-dealers, which require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer such shares pursuant to this prospectus. The selling stockholders also
may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the
shares so loaned, or upon a default, the broker-dealer may sell the pledged
shares pursuant to this prospectus.
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
On March 30, 1999, our 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". Our 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 our common stock
from the NASDAQ National Market System to the OTC Bulletin Board, stockholders
may:
o find it more difficult to obtain accurate and timely quotations regarding the
bid and asked prices for common stock;
o experience greater spreads between bid and asked prices;
o be charged relatively higher transactional costs when buying or selling
common stock; and
o 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
-14-
securities laws when raising capital. The listing of our 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, we obtained a
primary listing on the Oslo Stock Exchange where we are now included on the main
list.
The following table sets forth the high and low sales prices of the common stock
on the Oslo Stock Exchange, and the high and low bid prices on the NASDAQ OTC
Bulletin Board for the periods indicated. Average daily trading volume on these
markets during these periods is also provided. 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 exchange
rate for buying United States dollars with Norwegian Kroner announced by the
central bank of Norway. Prices in Norwegian Kroner are denominated in "NOK".
NASDAQ/OTC OSE
------------------------------------ -----------------------------------
AVERAGE AVERAGE
HIGH LOW DAILY VOLUME HIGH LOW DAILY VOLUME
------- ------ -------------- ------ ----- --------------
FISCAL QUARTER ENDED
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
March 31, 2001 1.19 0.75 12,933 1.32 0.79 754,976
June 30, 2001 0.87 0.50 4,467 0.86 0.43 301,201
September 30, 2001 0.50 0.24 20,923 0.56 0.21 261,900
December 31, 2001 0.43 0.24 12,757 0.49 0.23 830,746
March 31, 2002 0.36 0.26 32,697 0.34 0.25 550,687
At April 15, 2002, the closing price of our common stock on the OTC Bulletin
Board and Oslo Stock Exchange was $0.285 and $0.29 respectively.
On March 31, 2002 the number of holders of record of our common stock was
approximately 8,800. We have not paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, for use in our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends, if any, will depend, among other
things, on our results of operations and financial condition and on such other
factors as our Board of Directors may, in their discretion, consider relevant.
In addition, we may not pay dividends on our common stock unless our subsidiary,
CanArgo Oil & Gas Inc., is able to pay and simultaneously pays an equivalent
dividend on the Exchangeable Shares issued by that subsidiary. On January 24,
2002, we announced a redemption of all such outstanding Exchangeable Shares
which we anticipate completing on May 24, 2002.
-15-
SELECTED CONSOLIDATED FINANCIAL DATA
The following data, insofar as it relates to each of the years 1997-2001, has
been derived from annual financial statements, including our consolidated
balance sheets at December 31, 2001 and 2000 and the related consolidated
statements of operations, of cash flows and of stockholders' equity for the
three years ended December 31, 2001 and notes thereto appearing elsewhere
herein. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements included herein.
Reported in $000's except for YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
per common share amounts DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998 1997
------------ ------------ ---------- ---------- -----------
FINANCIAL PERFORMANCE
Total revenue $ 14,778 $ 7,136 $ 2,783 $ 821 $ 313
Operating loss (15,256) (2,397) (8,119) (6,357) (25,583)
Other income (expense) 2,038 245 (354) 247 (2,100)
Net loss from continuing
operations (13,218) (2,152) (8,473) (6,110) (27,683)
Net loss per common share -
basic and diluted (0.16) (0.04) (0.32) (0.39) (2.47)
Cash generated by (used in)
operations (11,509) 7,765 (1,210) (14,718) (4,176)
Working capital 9,589 22,687 2,729 1,366 13,971
Total assets 70,861 82,849 43,948 46,618 37,434
Notes payable & long-term debt 514 - - - -
Minority shareholder advances 450 - - - -
Stockholders' equity 65,800 72,426 37,863 40,031 26,779
Cash dividends per common
share - - - - -
-16-
THE COMPANY
We are engaged in the acquisition, exploration, development and production of
oil and natural gas reserves. Our activities also include investments in
downstream operations such as refining, marketing and independent power
production. Our properties are concentrated in Eastern Europe and, in particular
the Republic of Georgia. Our management and technical staff have substantial
experience in these areas. Our principal product is crude oil, and the sale of
that oil is our principal source of revenue.
To date our reserves and production have been derived principally through
development of the Ninotsminda field. We typically focus on properties that
either offer us existing production as well as additional exploitation
opportunities, or exploration prospects management believes have significant
potential. We believe that our cash flow from operations and our financial
resources will provide us with the ability to fully develop our current
properties, to finance our current exploration projects and to pursue new
acquisition opportunities in the coming year.
Our business strategy is focused on the following:
Further Development of Existing Properties
We intend to further develop our properties that have established oil. We seek
to add proved reserves and increase production through the use of advanced
technologies, including detailed technical analysis of our properties, drilling
new structures from existing locations and selectively recompleting existing
wells. We also plan to drill step-out wells to expand known field limits.
Growth Through Exploitation and Exploration
We conduct an active technology-driven exploitation and exploration program that
is designed to complement our property acquisition and development drilling
efforts with moderate to high-risk exploration projects that have greater
reserve potential. We generate exploration prospects through the analysis of
geological and geophysical data and the interpretation of seismic data. We
intend to manage our exploration expenditures through the optimal scheduling of
our drilling program and, if considered appropriate, selectively reducing our
participation in certain exploratory prospects through sales of interests to
industry partners.
Pursuit of Strategic Acquisitions
We continually review opportunities to acquire producing properties, leasehold
acreage and drilling prospects. We seek to acquire operational control of
properties that we believe have significant exploitation and exploration
potential. We are especially focused on increasing our holdings in fields and
basins from which we leverage existing infrastructure and resources.
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 investment in three of
-17-
those four projects and began to actively seek a business combination or similar
transaction with another oil and gas company.
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 and its Georgian exploration programme and in 1999, CanArgo
wrote-down the fourth and last significant project that was being developed by
Fountain Oil Incorporated prior to the business combination.
To increase efficiency within the company's current structure and to better
position the company for future growth, CanArgo announced in November 2001 plans
to recommend to its shareholders a move of the company's domicile from the
United States to Europe. These plans continue to progress and will be subject to
shareholder, regulatory, tax and all other related approvals and rulings as
applicable. Further information will be provided to shareholders once a formal
plan is completed.
CanArgo's principal activities are oil and gas exploration, development and
production of oil and gas. CanArgo also engages in oil and gas marketing and
refining activities in Georgia. Segment and geographical information including
revenue from external customers, operating profit (loss) and total assets is
incorporated herein by reference from note 15 to the consolidated financial
statements.
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES
In Georgia CanArgo's exploration, development and production activities are
carried out under three production sharing arrangements (PSC's), these being the
Ninotsminda, Manavi and West Rustavi Production Sharing Contract,the Nazvrevi
and Block XIII Production Sharing Contract in which CanArgo owns a 100% interest
through its subsidiary CanArgo (Nazrevi) Limited , and the Norio (Block XI(c))
and North Kumisi Production Sharing Agreement which CanArgo entered into through
its subsidiary CanArgo Norio Limited. 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 exploration programme and 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. In Ukraine, CanArgo's activities are focused on
the further development of the Stynawske oilfield, through the Boryslaw Oil
Company joint venture, and the Bugruvativske oilfield, through the Joint
Investment Production Activity (JIPA) agreement. CanArgo's principal product is
crude oil, and the sale of crude oil and crude oil products is its principal
source of revenue.
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 east 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 seventeen wells in the Ninotsminda field, of which
thirteen are currently classified as producing.
CanArgo believes the field license to have significant exploration potential,
and has invested substantial funds in an exploration programme.
-18-
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 had 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.
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 had 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:
o 740 barrels of oil per day during 1998
o 542 barrels of oil per day during 1999;
o 280 barrels of oil per day during 2000;
o 93 barrels of oil per day during 2001; and
o 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 the Republic of Georgia for taxes and similar levies related to
activities covered by the production sharing contract. Georgian Oil and
Ninotsminda Oil Company take their respective shares of production in kind, and
they market their oil independently.
Pursuant to the terms of CanArgo's PSC's in Georgia, including the Ninotsminda,
Manavi and West Rustavi production sharing contract, a Georgian not-for-profit
company must be appointed as field operator. Currently there are three such
field operating companies, relating to CanArgo's three PSC's: 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 fields, and
the operating company performs on a non-profit basis. Georgian British Oil
Company Ninotsminda currently has 114 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.
-19-
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. Similar procedures apply to
CanArgo's other two Georgian PSC's.
NINOTSMINDA FIELD DEVELOPMENT
When Ninotsminda Oil Company assumed developmental responsibility for the
Ninotsminda field in 1996, production was minimal. CanArgo believed 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 was
to produce oil from one zone, the Middle Eocene. This development included
rehabilitating and adding perforations to existing wells, obtaining additional
seismic data and an active, but limited drilling programme. The first well in
this programme 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 oil exploration 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 a potential gas
exploration well but in October 2000, CanArgo announced that for mechanical
reasons, the well could not be completed to the Cretaceous as originally planned
but rather would be tested in the newly discovered Sarmatian sequence. While
some work has been undertaken to identify the reserve and production potential
of this and a previously identified Upper Eocene zone from which oil has been
produced from one well, further work is required. Such information may, however,
also open up new potential in the upper sequences of other areas currently under
license in Georgia. See "Other Georgian Licenses".
While most of the exploration and development of the Ninotsminda field prior to
2000 focused on oil, a gas cap was known to exist above the principal producing
zone. In December 1999, Ninotsminda Oil Company began commercial production of
this 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 had agreed to purchase all
the gas produced by Ninotsminda Oil Company in priority to all other suppliers
with no maximum or minimum volume. AES continued to purchase gas from
Ninotsminda Oil Company on similar contractual terms during 2000 and into 2001.
With increases in demand for indigenous natural gas production in Georgia, in
2001 Ninotsminda Oil Company commenced the first and second wells of a three-
well exploration programme to explore and determine the future development
potential of gas prospects in the Ninotsminda field. In January 2002, the first
of these wells, N100, reached target depth and is currently undergoing testing
to determine if hydrocarbons are present in the well and if present, the
possible extent of the hydrocarbons. The second well in the exploration
programme was spudded in June 2001 is currently at a depth of 3436 meters.
The gas exploration programme was initiated under a binding Participation
Agreement with AES Gardabani dated July 19, 2000 relating to the exploration and
potential future development of Sub Middle Eocene gas prospects on CanArgo's
Ninotsminda production sharing contract in Georgia. Under the agreement, AES
Gardabani was to earn a 50% interest in identified prospects at the Sub Middle
Eocene stratigraphic level by funding two thirds of the cost of a three-well
exploration programme. Under terms of the Participation Agreement, the
exploration was and continues to be implemented by CanArgo's existing operations
unit in Georgia. However, prior to completion of the exploration programme as
defined in the Participation Agreement, AES indicated in January 2002 that it
wished to withdraw from the Participation Agreement in order to focus on its
core business. Agreement was subsequently reached pending completion of formal
legal documentation to terminate the Participation Agreement without AES
-20-
earning any rights to any of the Ninotsminda field reservoirs. If gas from the
Sub Middle Eocene is discovered and produced, AES would be entitled to recover
at the rate of 15% of future gas sales from the Sub Middle Eocene, net of
operating costs, their funding under the Participation Agreement. AES would also
have an option to enter into a five year take or pay gas sales agreement for a
quantity up to 200 million cubic meters per year at an initial contract price of
$46.00 per one thousand cubic meters. Gas purchased by AES would likely to be
supplied to the Gardabani thermal power plant.
CanArgo has not yet fully evaluated the reserves and economics of production
from the upper oil zones, the gas cap or from potential hydrocarbon zones below
the Middle Eocene. To fully evaluate these zones, further seismic, technical
interpretation and drilling will be required. Drilling sites tentatively
selected by Ninotsminda Oil Company must be approved by Georgian regulatory
authorities before drilling may commence. With respect to gas production, no gas
supply contracts currently exist for production directly from the gas cap.
Further, production from the gas cap can both aid and hinder the production of
crude oil, and 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.
Gas currently produced from the Middle Eocene and upper zones is subject to
market conditions and environmental constraints within Georgia and the ability
of Ninotsminda Oil Company to arrange short term gas supply agreements as
required.
OTHER FIELDS AND PROSPECTS UNDER NINOTSMINDA PRODUCTION SHARING CONTRACT
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
currently identified prospect, Manavi. As well as the producing Middle Eocene
horizon at Ninotsminda, the West Rustavi field has additional prospective
horizons at the Cretaceous /Paleocene levels.
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 1 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.
The second well in the planned three-well Cretaceous drilling programme is being
drilled on the Manavi prospect located east of the Ninotsminda field. The well
was located on the Manavi prospect based on seismic data regarding the Manavi
prospect obtained by Ninotsminda Oil Company from work it commissioned and
earlier efforts by Georgian Oil. A previous attempt by Georgian Oil to drill in
the Manavi prospect was abandoned due to technical problems.
Seismic and well data are currently being interpreted to identify further
prospects in the Ninotsminda area at several different stratigraphic levels.
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 1,324
barrels of oil equivalent (BOE) per day, comprising approximately 1,039 barrels
of oil per day and 285 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
------------------------------------ -----------------------------------
2001 413,724
2000 478,999
1999 415,390
-21-
Productive Wells and Acreage
The following table summarizes as of December 31, 2001 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.
GROSS NET
------------------------------------ -----------------------------------
NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE
----------------- ---------------- ------------------ ----------------
Ninotsminda field 13 2,500 13 2,500
On December 31, 2001, 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.
Reserves
The following table summarizes net hydrocarbon reserves for the Ninotsminda
field. This information is derived from a report dated as of January 1, 2002
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 4.0 2.9
Proved Undeveloped 1.1 0.8
------------------ --------------------
TOTAL PROVEN 5.1 3.7
================== ====================
GAS RESERVES - PSC ENTITLEMENT
BILLION CUBIC FEET GROSS VOLUMES (1)
------------------ ------------------ --------------------
Proved Developed 12.9 3.9
Proved Undeveloped 3.9 1.1
------------------ --------------------
TOTAL PROVEN 16.8 5.0
================== ====================
-----------------
(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. For
PSC Entitlement Volume calculations only, only oil volumes have been
assumed to be used to recover cumulative capital and operating costs.
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 include 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
-22-
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 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. The
oil and gas price used in the report by Ashton Jenkins Mann as of January 1,
2002 was $15.08 per barrel and $1.13 per mcf respectively. 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. However,
different petroleum engineers may arrive at differing results based upon the
same data.
No independent reserves have been assessed for the West Rustavi field, and
independent reserve estimates for other properties are described in the
appropriate part of the text in this document.
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 kilometres 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 kilometres to Rustavi where it is delivered to the Gardabani thermal
power plant or other industrial consumers.
At Sartichala, the water is separated from the oil. Ninotsminda Oil Company then
sells oil in this state to buyers at Sartichala for local consumption or
transfers it by pipeline 20 kilometres to a railhead at Gatchiani primarily for
export sales. At the railhead, the oil is loaded into railcars for transport to
the Black Sea port of Batumi, Georgia, where oil can be loaded onto tankers for
international shipment. Buyers transport the oil at their own risk and cost from
the delivery points.
Ninotsminda Oil Company sells its oil directly to local and international
buyers. In 2001, Ninotsminda Oil Company sold its oil production to three
customers.
CUSTOMER PERCENT OF OIL REVENUE
---------------------------------- ----------------------
Caspian Trading 63.8%
Georgian American Oil refinery (1) 23.5%
MS 12.7%
-23-
In 2000, Ninotsminda Oil Company sold its oil production to three customers.
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%
--------------
(1) 51% owned by CanArgo effective November 2000
Sales to both the domestic and international markets are based on the average of
a number of quotations for dated Brent Mediterranean with an appropriate
discount for transportation and other charges. Sales in 2001 were at an average
discount of $6.29 to Brent, although this discount has been reduced to $4.41 in
recent sales.
Prices for oil and natural gas are subject to wide fluctuations in response to a
number of factors including:
o global changes in the supply and demand for oil and natural gas;
o actions of the Organization of Petroleum Exporting Countries
o weather conditions;
o domestic and foreign governmental regulations;
o the price and availability of alternative fuels;
o political conditions in the Middle East and elsewhere; and
o overall economic conditions.
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 2,008 square kilometre 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 programme under the Nazvrevi/Block XIII
production sharing agreement involved 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 continue to be interpreted,
-24-
with a view towards defining possible oil and gas prospects and exploration
drilling locations. The cost of the seismic programme was approximately $1.5
million, and met the minimum obligatory work commitment under the contract. The
second phase of the preliminary work programme under the Nazvrevi/Block XIII
production sharing contract involves the drilling of one well, unless CanArgo
decides to terminate the contract.
Norio (Block XI(c)) and North Kumisi Blocks
In December 2000, CanArgo entered into a third PSC with the State of Georgia
represented by Georgian Oil and the State Agency for Regulation of Oil and Gas
Resources in Georgia. This agreement covers the Norio and North Kumisi blocks of
East Georgia, a 1,542 square kilometre exploration area adjacent to the
Ninotsminda, West Rustavi and Samgori fields. There are two existing oil fields
on the Norio block, Norio and Satskhenisi which are relatively shallow fields
and which have produced oil from the Miocene and Sarmatian sequences. The
commercial terms of the production sharing agreement 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 and other private investors.
The first phase of the preliminary work programme under the Norio and North
Kumisi production sharing agreement involved 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 have and will continue to be interpreted. In addition to the existing
upper sequences, the potential of the blocks to produce from the Middle Eocene,
Cretaceous and Upper Eocene are being assessed. The cost of the seismic
programme was approximately $1.5 million.
The second phase of the preliminary work programme under the Norio and North
Kumisi production sharing agreement is currently underway with the commencement
in January 2002 of the first exploration well at an estimated cost of up to $4.2
million of which CanArgo's estimated share of costs is $3.0 million. CanArgo
anticipates increasing its interest to over 60% in CanArgo Norio Limited through
an increased level of funding of this well. This well completes the minimum work
programme for the production sharing agreement. Other attractive prospects have
also been identified on the blocks.
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.
The two shallow oilfields on the block (Norio and Satskhenisi) are currently
producing small amounts of oil. These oilfields are currently being operated by
Georgian Oil under permission from CanArgo, the licence holder.Georgian Oil
takes the production from these fields as full payment for any costs. CanArgo is
currently reviewing the potential for economic rehabilitation of these small
fields, and if CanArgo wishes to proceed it could take over field operations and
production forthwith.
REFINING, MARKETING AND OTHER ACTIVITIES
CanArgo also engages in oil and gas marketing, refining and other activities in
Georgia. Segment and geographical information including revenue from external
customers, operating profit (loss) and total assets is incorporated herein by
reference from note 15 to the consolidated financial statements. See also the
information appearing under the section entitled "Segment Information" on page
29.
Georgian American Oil Refinery
In September 1998, CanArgo purchased for $1,000,000 a 12.9% equity interest in
Georgian American Oil Refinery, a company which owns a small refinery located at
Sartichala, Georgia. On November 12, 2000, CanArgo acquired a
-25-
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 design capacity of approximately 4,000 barrels
per day. Operating as a straight-run distillation unit it produces naphtha,
diesel, fuel oil and kerosene. Further product expansion is possible with the
addition of additives and or a catalytic reformer.
For much of 2001 and to date, the refinery has not been operating. Since its
acquisition, sales from the refinery have been negatively impacted by the
imposition of restrictions and subsequent excise tax on feedstock and refined
products. Although in April 2001, new legislation addressing indigenous refining
activities was passed by the Republic of Georgia that removed or reduced excise
taxes on feedstock and refined product, the refinery has since experienced
unexpected product stability difficulties which has effectively curtailed the
enhancement of the basic product stream into gasoline. As a result, the refinery
can only produce straight distillation products excluding high octane gasoline.
Due to the presence of excise tax on naphtha, there is limited economic demand
for the product in Georgia, either as a feedstock for a separate refining
company or for the blending with higher octane gasoline to produce "normal"
grade gasoline for the local market.
In January 2002, GAOR entered into an agreement to lease the refinery for a
nominal amount for 90 days to a third party in Georgia who intends to sell
refined product from the refinery to an unrelated company that holds a reforming
unit in Georgia. Should the test of the new reforming unit be successful, then
further sales or other business arrangement between the two corporate entities
may be sought, however, no assurance can be given that the test will be
successful or that sales or a business arrangement could be reached on terms
satisfactory to GAOR or its shareholders, including CanArgo. As a result of the
uncertainty as to the ultimate recoverability of the carrying value of the
refinery, CanArgo recorded in 2001 a write-down of the refinery's property,
plant and equipment of approximately $3.5 million.
In 2001, Ninotsminda Oil Company sold approximately 49,055 barrels of oil to the
refinery and in 2000 sold 136,400 barrels of oil to the refinery.
CanArgo Standard Oil Products
In December 2000, CanArgo expanded its downstream retail business in Georgia
through an agreement to acquire an interest in several existing petrol stations
and sites in Tbilisi. These stations and sites, together with several existing
CanArgo stations, operate under the name "CanArgo Standard Oil Products", a
Georgian company in which CanArgo owns a 50% controlling interest.
CanArgo originally moved into the retail gasoline sector in Georgia in April
2000 with the formation of CanArgo Standard Oil Products. The original objective
of CanArgo was to create a premium chain of petroleum product outlets. In
February 2002, CanArgo Standard Oil Products had 14 sites in operation with five
further sites under construction. CanArgo Standard Oil Products has a total of
23 licenses/sites in its portfolio and expects to have all locations in
operation by the end of 2002.
CanArgo Standard Oil Products sells several different grades of petrol to a
broad range of corporate and retail customers. No one customer purchases more
than 10% of total sales.
Drilling Rigs and Associated Equipment
CanArgo owns several items of drilling equipment, and other related machinery
which are primarily for use in its Georgian operations. These include three
drilling rigs, pumping equipment and ancillary machinery. In addition CanArgo
owns a mobile 3 megawatt duel fuel power plant. The rigs and related equipment
are being used in CanArgo's Georgian operations, and have also been leased out
to other operators on a service basis.
-26-
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, Ukrnafta, 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 Ukrnafta holding the remaining 55% interest. Ukrnafta 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.
In December 2000, CanArgo reached agreement with Ukrnafta on certain commercial
arrangements and for the transfer of field operations to Boryslaw Oil Company.
To commence a three well workover programme (the Pilot Development Scheme), a
$500,000 credit facility was established for Boryslaw Oil Company in 2001 and
$550,000 advanced as a deposit against the facility. Workovers of two of the
three wells in the workover programme commenced in 2001 and the results of these
workovers is currently being assessed prior to a decision to proceed with a
larger field development programme. At present, certain obligations must be met
by June 2002 in order for Boryslaw Oil Company to retain the field licence
including the drilling of one new well. CanArgo is currently seeking an
extension to the licence to allow a proper assessment of the workovers and
development plans. If Boryslaw Oil Company does not proceed with the Stynawske
field development programme or if an extension to the current licence cannot be
obtained, it may be in breach of obligations it has with regard to the field
license. This could place Boryslaw Oil Company's rights to the Stynawske field
at risk and substantially reduce Boryslaw Oil Company's ability to repay amounts
advanced to it by CanArgo under the credit facility and deposit.
The following table summarizes net hydrocarbon reserves for the Pilot
Development Scheme for the Stynawske field. This information is derived from a
report as of January 1, 2002 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 - CANARGO SHARE
MILLION BARRELS GROSS (45%)
--------------- -------------- -------------
Proved Developed 0.7 0.3
Proved Undeveloped - -
------- -------
TOTAL PROVEN 0.7 0.3
======= =======
GAS RESERVES - CANARGO SHARE
BILLION CUBIC FEET GROSS (45%)
------------------ -------------- -------------
Proved Developed 4.1 1.8
Proved Undeveloped - -
------- -------
TOTAL PROVEN 4.1 1.8
======= =======
For information as to the definition of proved, proved producing and proved
undeveloped reserves, see the description of Ninotsminda reserves.
-27-
Considerable uncertainty exists in the interpretation and extrapolation of
existing data for the purposes of projecting the ultimate production of oil from
underground reservoirs and the corresponding future net cash flows associated
with that production. The process of estimating quantities of proved crude oil,
and the subcategories thereof, is very complex. The estimating process requires
significant subjective decisions relating to the evaluation of all available
geological, engineering and economic data for each reservoir. The data for a
given reservoir may change substantially over time as a result of such factors
as additional development activity, evolving production history and changing
economic conditions. 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. The
oil and gas price used in the report by Ashton Jenkins Mann as of January 1,
2002 was $21.50 per barrel and $0.57 per mcf respectively. 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.
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, 2001, 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.
Bugruvativske Field, Ukraine
In April 2001, CanArgo acquired approximately 82% (77% on a fully diluted basis)
of the outstanding common shares of Lateral Vector Resources Inc. ("LVR")
pursuant to an unsolicited offer to purchase all of its outstanding common
shares. According to publicly available information at the time CanArgo made its
offer in March 2001, LVR negotiated and concluded with Ukrnafta a Joint
Investment Production Activity (JIPA) agreement in 1998 to develop the
Bugruvativske Field in Eastern Ukraine. In July 2001, CanArgo completed the
acquisition of the remaining outstanding common shares and LVR became a wholly
owned subsidiary of CanArgo.
Prior to the acquisition of LVR, CanArgo had directed substantially all of its
efforts and most of its 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. Since acquisition, CanArgo has
attempted to reach a satisfactory investment and development agreement with
Ukrnafta for the Bugruvativske field. Ukrnafta and LVR are required under the
terms of the JIPA to make a total initial contribution of $2 million prior to
December 31, 2000. LVR's portion of the initial contribution was $960,000, which
it failed to make. Provided a satisfactory investment agreement can be reached
and given available funding, CanArgo would intend to increase production from
these fields by investing in both remedial workover activity and potential
infill drilling, horizontal drilling and pressure maintenance utilising
appropriate technologies.
Subject to the JIPA being brought into effect, and based on LVR's previous
analysis of the field, independent estimates have been made of the reserve
potential under the JIPA. The following table summarizes net hydrocarbon
reserves for the JIPA on the Bugruvativske field. This analysis only includes
incremental production. This information is derived from a report as of January
1, 2002 prepared by Ashton Jenkins Mann, independent petroleum consultants. This
report is available for inspection at CanArgo's principal executive offices
during regular business hours.
JIPA OIL CANARGO (LVR)
RESERVES - SHARE
MILLION BARRELS GROSS (44.64%)
--------------- ---------- -------------
Proved Developed 3.3 1.5
Proved Undeveloped 14.0 6.2
------- -------
TOTAL PROVEN 17.3 7.7
======= =======
No associated gas reserves have been calculated. For information as to the
definition of proved, proved producing and proved undeveloped reserves, see the
description of Ninotsminda reserves.
-28-
Considerable uncertainty exists in the interpretation and extrapolation of
existing data for the purposes of projecting the ultimate production of oil from
underground reservoirs and the corresponding future net cash flows associated
with that production. The process of estimating quantities of proved crude oil,
and the subcategories thereof, is very complex. The estimating process requires
significant subjective decisions relating to the evaluation of all available
geological, engineering and economic data for each reservoir. The data for a
given reservoir may change substantially over time as a result of such factors
as additional development activity, evolving production history and changing
economic conditions. 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. The
oil price used in the report by Ashton Jenkins Mann as of January 1, 2002 was
$18.50 per barrel. 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.
Both the Bugruvativske field and the Stynawske field in Western Ukraine are in
the early stage of evaluation and development and are themselves relatively new
to CanArgo and additional financing will be required to fully develop and
exploit these fields. In addition, CanArgo is in the process of establishing its
own operational and finance infrastructure in Ukraine. Establishment of this
infrastructure may result in a diversion, temporary or otherwise, of time and
other resources from other operating activities.
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 reduced its interest to a 9.5% in exchange for $250,000 credit to
CanArgo should additional financing or an equity partner be found for the
project. Subsequent to this, a restructuring of interests in the project took
place with CanArgo increasing its interest slightly to 10%, and with Rosneft,
the Russian State owned oil company, becoming the majority owner of the project
with 75.1%. Seismic was acquired as part of this restructuring, with CanArgo
utilising its credit, and future plans include interpretation of this data and
possible drilling.
SEGMENT INFORMATION
During the year ended December 31, 1999 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, 2001, 2000 and 1999 by business segment and geographical area
were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
OPERATING REVENUES:
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ 4,873,623 $ 6,108,779 $ 2,274,524
Canada -- -- 219,088
------------ ------------ ------------
4,873,623 6,108,779 2,493,612
REFINING AND MARKETING
Eastern Europe 10,203,252 661,880 --
INTERSEGMENT ELIMINATIONS (906,545) -- --
------------ ------------ ------------
TOTAL $ 14,170,330 $ 6,770,659 $ 2,493,612
============ ============ ============
In 2001, the Company sold its oil and gas production in Eastern Europe to five
(2000 - five, 1999 - five) customers. In 2001 sales to three third party
customers represented 67%, 12% and 12% of oil and gas revenue respectively. In
-29-
2000 sales to three third party customers represented 43%, 25% and 14% of oil
and gas revenue respectively. In 1999 sales to three third party customers
represented 38%, 34% and 11% of oil and gas revenue respectively.
Operating profit (loss) for the years ended December 31, 2001, 2000 and 1999 by
business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
OPERATING PROFIT (LOSS):
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ (6,630,886) $ 871,896 $ (6,154,404)
Canada -- -- (7,926)
------------ ------------ ------------
(6,630,886) 871,896 (6,162,330)
REFINING AND MARKETING
Eastern Europe (3,832,529) (294,156) --
CORPORATE AND OTHER EXPENSES (4,793,047) (2,974,791) (1,957,020)
------------ ------------ ------------
TOTAL $(15,256,462) $ (2,397,051) $ (8,119,350)
============ ============ ============
As a result of application of the ceiling test limitation, CanArgo recorded a
write-down in 2001 of oil and gas properties of $7,300,000. In 2001, refining
assets and generating equipment were written-down to their estimated net
realizable value by $3,359,795 and $500,000 respectively. The write-down of oil
and gas properties and generating equipment was recorded in operating profit
(loss) for oil and gas, exploration and production. The write-down of refining
assets was recorded in profit (loss) for refining and marketing activities.
Identifiable assets as of December 31, 2001 and 2000 by business segment and
geographical area were as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
CORPORATE
Eastern Europe $ 3,926,930 $ 695,909
Western Europe (principally cash) 8,163,244 30,979,777
------------ ------------
TOTAL CORPORATE 12,090,174 31,675,686
------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe 52,424,569 45,957,601
REFINING AND MARKETING
Eastern Europe 5,260,141 4,519,743
OTHER ENERGY PROJECTS
Eastern Europe 1,085,922 606,010
Canada -- 90,364
------------ ------------
TOTAL OTHER ENERGY PROJECTS 1,085,922 696,374
------------ ------------
TOTAL IDENTIFIABLE ASSETS $ 70,860,806 $ 82,849,404
============ ============
COMPETITION
The oil and gas industry is highly competitive. CanArgo encounters competition
from other oil and gas companies in all phases of its operations, including:
o the acquisition of producing properties;
o obtaining scarce resources and services including oil field services; and
-30-
o the sale of crude oil.
CanArgo's competitors include integrated oil and gas companies, independent oil
and gas companies, individuals and drilling and income programs. Many of these
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than CanArgo and which, in many
instances, have been engaged in the energy business for a much longer time than
CanArgo. Such competitors may be able to outperform CanArgo on a number of
dimensions including:
o development of information;
o analysis of available information;
o ability to pay for productive oil and gas properties and exploratory
prospects; and
o commitment of resources to define, evaluate, bid for and purchase oil and
gas properties and prospects.
In the competition to acquire oil and gas properties, CanArgo has relied
substantially on the relationships its officers and directors have developed in
the international oil and gas industry and in its areas of operation and
interest. As a result of the termination of employment of various former
officers, CanArgo's ability to benefit from such relationships outside of
Georgia has been significantly reduced. CanArgo's management believes that
CanArgo's relatively small size has enabled it to consider projects that would
be deemed to be too small for consideration by many larger competitors.
GOVERNMENTAL AUTHORIZATIONS
CanArgo's business in Eastern Europe operates pursuant to licenses, concession
agreements or other authorizations granted by the local governmental
authorities. These authorizations impose various requirements upon CanArgo,
either directly or indirectly. The failure to satisfy the requirements of any
authorization could result in its termination or cancellation. In addition, as
sovereign agencies, the governmental authorities that have granted
authorizations may have greater power than private parties to terminate such
authorizations arbitrarily. Loss of such authorizations could have a material
adverse effect upon the financial condition, results of operations, cash flows
and prospects of CanArgo.
ENVIRONMENTAL AND REGULATORY MATTERS
The development of oil and gas fields and the production of hydrocarbons
inherently involve environmental risks. These risks can be minimized, but not
eliminated, through use of various engineering and other technological methods,
and CanArgo intends to employ such methods to industry standards. The potential
environmental problems are enhanced when the oil and gas development and
production activities involve the rehabilitation of fields where the practices
and technologies employed in the past have not embodied the highest standards
then in effect, which has been the case in the Eastern European oil fields in
which CanArgo has commenced operations.
CanArgo's business is subject to various national, provincial, state and local
laws and regulations relating to the exploration for and the development,
production and transportation of oil and natural gas, as well as environmental
and safety matters. Many of these laws and regulations have become more
stringent in recent years, imposing greater liability on a larger number of
potentially responsible parties. In addition, CanArgo expects the trend towards
more burdensome regulation of its business to result in increased costs and
operational delays. CanArgo believes it has complied in all material respects
with these laws and regulations. Because the requirements imposed by such laws
and regulations are frequently changed, CanArgo is unable to predict the
ultimate cost of compliance with these requirements or their effect on its
operations.
LEGAL PROCEEDINGS
CanArgo has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring, developing and operating oil
and gas properties and ventures. From time to time CanArgo and its operating
subsidiaries may also be subject to legal proceedings in the ordinary course of
business. At this time CanArgo is not party to any such material proceedings.
-31-
EMPLOYEES
As of December 31, 2001, CanArgo had 235 full time employees. Of its full time
employees, the entity acting as operator of the Ninotsminda oil field for
Ninotsminda Oil Company has 114 full time employees, and substantially all of
that company's activities relate to the production and development of the
Ninotsminda field. CanArgo Standard Oil Products has 101 full time employees at
its office and petrol stations.
-32-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read together with CanArgo's consolidated
financial statements, which appear in this prospectus.
The following discussion contains forward-looking statements that involve risks
and uncertainties. Future events and our actual results could differ materially
from those anticipated in these forward-looking statements. Some of the
important factors that might cause such a difference are discussed in the
various risk factors in the "Risk Factors" and "Forward-Looking Statements"
sections of this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
In November and December 2000 respectively, CanArgo expanded its oil and gas
exploration and development activities 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. In April 2001, CanArgo acquired
Lateral Vector Resources Inc. ("LVR") which according to publicly available
information at the time had concluded with Ukrnafta a Joint Investment
Production Activity (JIPA) agreement to develop the Bugruvativske Field in
Eastern Ukraine.
On February 12, 2002, CanArgo completed a private placement of 5,210,000 common
shares at NOK 2.95 per share (approximately US$0.33 per share) to certain
institutions and qualified purchasers for gross proceeds of approximately
$1,719,000. After completion of the placement, CanArgo has 97,218,446 common and
Exchangeable shares issued and issuable.
In July 2001, CanArgo closed a private placement of 16,057,765 new shares at NOK
4.25 per share (approximately US$0.45 per share) to certain institutions and
qualified purchasers. Gross proceeds from the placement were some NOK 68 million
(approximately US$7.2 million). From the net proceeds, CanArgo was required to
pay subscribers to the private placement a cash fee of 3.33% of the purchase
price of their shares for each full 30 day period after closing until a
registration statement registering such shares was declared effective by the
Securities and Exchange Commission. The cash fee paid was 3.33% of the purchase
price.
CanArgo's management believes that cash and cash equivalents at December 31,
2001 should be sufficient to cover CanArgo's near term funding requirements with
respect to its activities in the Republic of Georgia. Existing cash and cash
equivalents at December 31, 2001, however, are not sufficient to adequately
finance the acquisition and subsequent development of the Bugruvativske and
Stynawske field in Eastern Ukraine. The July 2001 private placement of
16,057,765 new shares to certain institutions and qualified purchasers provided
CanArgo with funds necessary to begin development of the Bugruvativske field,
but both the Bugruvativske field and the Stynawske field in Western Ukraine are
in the early stage of evaluation and development and are themselves relatively
new to CanArgo and additional financing will be required to fully develop and
exploit these fields. In addition, CanArgo is in the process of establishing its
own administrative and finance infrastructure in the Ukraine. Establishment of
this infrastructure may result in a diversion, temporary or otherwise, of time
and other resources from other operating activities.
Prior to the acquisition of LVR CanArgo had directed substantially all of its
efforts and most of its 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. Immediate plans are for the completion
of wells N100 and M11, two deep exploration wells in the Republic of Georgia.
Drilling of a third exploration well, in the Norio block in the Republic of
Georgia, has also commenced and quantification of the reserve and production
potential of discoveries in the Sarmatian and Upper Eocene sequences continues.
In Ukraine, an assessment of both the Bugruvativske and Stynawske fields and
preparation of a development programme with Ukrnafta continues.
While a considerable amount of infrastructure for the Ninotsminda, Bugruvativske
and Stynawske fields has already been put in place, CanArgo cannot provide
assurance that:
-33-
o for the Bugruvativske and Stynawske fields, an adequate investment
agreement and development plan can be put in place;
o funding of field development plans will be timely;
o that development plans will be successfully completed or will increase
production; or
o that field operating revenues after completion of the development plan
will exceed operating costs.
To pursue all of its existing projects and new opportunities, CanArgo will
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 institutions, 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.
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.
CHANGES IN FINANCIAL POSITION
As of December 31, 2001, CanArgo had working capital of $9,589,000, compared to
working capital of $22,687,000 as of December 31, 2000. The $13,098,000 decrease
in working capital from December 31, 2000 to December 31, 2001 is principally
due to a reduction in cash as a result of the acquisition of LVR, capital and
operating expenditures.
Cash and cash equivalents decreased from $29,697,000 at December 31, 2000 to
$5,891,000 at December 31, 2001. The decrease was primarily due to the cost of
the Cretaceous exploration programme currently underway in Georgia, workovers,
expansion of marketing activities and the acquisition of LVR. The December 2000
closing cash position was high due to the timing of proceeds received from the
2000 private placements.
-34-
Accounts receivable increased from $395,000 at December 31, 2000 to $2,646,000
at December 31, 2001. The increase is primarily a result of accounts receivable
generated from oil, natural gas and refined product sales in 2001, rental income
due from the lease of one of CanArgo's drilling rigs to a third party and
$1,000,000 due from AES Gardabani relating to the announced termination of their
participation in a planned three well exploration programme in the Republic of
Georgia. Formal documentation, while completed, is not binding until such time
as payment of the $1,000,000 termination fee is made. Should AES Gardabani not
comply with the terms of the Termination Agreement, then CanArgo may at its sole
option seek further compensation from AES for the full amount of AES's share of
exploration costs under the original Participation Agreement. Prior to the
announcement of the termination of the Participation Agreement, AES owed
approximately $2,725,000 for its share of costs to January 31, 2002. The
residual balance of $1,725,000 has been classified within unproved oil and gas
properties.
Prepayments and other current assets increased from $686,000 at December 31,
2000 to $2,236,000 at December 31, 2001 primarily as a result of increased
prepaid expenditures to suppliers related to the Cretaceous and Norio
exploration programmes.
Other currents assets increased from $201,000 at December 31, 2000 to $733,000
at December 31, 2001 as a result of the reclassification of power generating
equipment held for resale as a current asset.
Inventory decreased from $696,000 at December 31, 2000 to $584,000 at December
31, 2001 primarily as result of the sale of refined product inventory following
the suspension of operations at Georgian American Oil Refinery. At December 31,
2001, the majority of inventory relates to approximately 77,000 barrels of oil
held in storage by Ninotsminda Oil Company at December 31, 2001 for sale to the
Georgian domestic, region or international market.
Capital assets, net increased from $50,477,000 at December 31, 2000 to
$57,685,000 at December 31, 2001, primarily as a result of investment of
$15,739,000 in capital assets including oil and gas properties and equipment,
principally related to the Ninotsminda field. Capital assets also increased as a
result of construction of new petrol stations and the acquisition of LVR and
CanArgo Power in April 2001. During 2001, CanArgo wrote down its oil and gas
properties in the Ninotsminda field by an aggregate $7,300,000 on application of
the full cost ceiling test as a result of a decline in Brent oil prices at
December 31, 2001, lower reserve quantities following production declines in
2001 and reduced development plans. If oil prices or production levels further
decline, CanArgo may experience additional impairment of this property. As a
result of both product stability and continued difficulties addressing excise
taxes on refined products, refinery and related equipment was written-down by
$3,360,000 to reflect, under current conditions, the estimated net recoverable
amount of the refinery. While efforts to change the current excise tax regime as
well other opportunities to utilize the refinery are being pursued, no assurance
can be given that these activities will be successful. CanArgo further
wrote-down during 2001, other oil and gas related equipment by $500,000
following a decision to dispose of a power generating unit which CanArgo has
identified as surplus to its existing requirements. This write-down is
classified in the statement of operations within Impairment of other assets.
Investments in and advances to oil and gas and other ventures, net increased
from $696,000 at December 31, 2000 to $1,086,000 at December 31, 2001. The
increase is primarily due to advances to Boryslaw Oil Company of $550,000
relating to a three well workover programme on the Stynawske field and
investment in two petrol station sites in which CanArgo Standard Oil Products
Ltd. has a 50% joint interest. These investments were partially offset by the
sale in April 2001 of CanArgo's investment in Uentech and the purchase of a 50%
interest in CanArgo Power resulting in CanArgo Power becoming a wholly owned
subsidiary of CanArgo.
Accounts payable decreased to $1,618,000 at December 31, 2001 from $2,630,000 at
December 31, 2000 primarily as a result of payments in 2001 of liabilities at
December 31, 2000 related to the 2000 Norio seismic programme. To fund
construction of new petrol stations in Georgia, bank loans by CanArgo Standard
Oil Products in Tbilisi, Georgia were drawn at an effective interest rate of 18%
per annum, repayable over two years. Accrued liabilities decreased to $400,000
at December 31, 2001 from $409,000 at December 31, 2000 as identified in note 7
to the consolidated financial statements.
Advances from joint venture partner decreased to nil at December 31, 2001
compared to $5,889,000 at December 31, 2000 as capital expenditures were
incurred under the proposed three well exploration programme with AES
-35-
Gardabani in the Republic of Georgia. The Participation Agreement with AES
Gardabani has been agreed to be terminated and the agreed settlement amount of
$1,000,000 is included in accounts receivable.
Minority shareholder advances increased due to the receipt of $450,000 in 2001
on issuance of convertible loans from the other 50% shareholders of CanArgo's
subsidiary, CanArgo Norio Limited ("Norio"). The cash amount received represents
part of their share of the cost of drilling an exploration well under the Norio
and North Kumisi production sharing agreement ("PSA"). CanArgo anticipates
increasing its interest to over 60% in CanArgo Norio Limited through an
increased level of funding of this well.
The convertible loans are non interest bearing and will convert into ordinary
share capital of CanArgo Norio Limited 30 days after the final cost of the well
is known. It is at this point when the final ownership interest in CanArgo Norio
Limited will be determined and consequently the $450,000 and any subsequent
advances from the other 50% shareholders towards the cost of the well will be
reclassified as minority interest.
Minority interest in subsidiaries increased to $1,531,000 at December 31, 2001
compared to $1,394,000 at December 31, 2000 primarily as a result of expansion
of CanArgo Standard Oil Products in Tbilisi, Georgia and related investment by
CanArgo's partners in this venture. CanArgo consolidates its 50% interest in
CanArgo Standard Oil Products as it has the ability to control the strategic
operating and financial activities of the joint venture.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL TERMS
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. At
December 31, 2001, 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.
Current drilling obligations with respect to CanArgo's oil and gas properties
include under the second phase of the preliminary work programme for the Norio
and Nazvrevi/Block XIII production sharing contracts, the drilling of one well,
unless CanArgo decides to terminate the contracts. The second phase of the
preliminary work programme under the Norio and North Kumisi production sharing
agreement is currently underway with the commencement in January 2002 of the
first exploration well at an estimated cost of up to $4.2 million of which
CanArgo's estimated share of costs is $3.0 million. In addition certain
obligations must be met by June 2002 in order for Boryslaw Oil Company to retain
the field licence including the drilling of one new well. CanArgo is currently
seeking an extension to the licence to allow a proper assessment of the
workovers and development plans. If no extension is obtained Boryslaw Oil
Company's rights to the Synawske field could be at risk and substantially reduce
Boryslaw Oil Company's ability to repay amounts advanced to it by CanArgo.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
CanArgo recorded operating revenue of $14,778,000 during the year ended December
31, 2001 compared with $7,136,000 for the year ended December 31, 2000. The
increase is primarily due to refining and marketing revenue from Georgian
American Oil Refinery and CanArgo Standard Oil Products.
Ninotsminda Oil Company generated $3,967,000 of oil and gas revenue in the year
ended December 31, 2001. Its net share of the 414,000 barrels (1,133 barrels per
day) of gross oil production for sale from the Ninotsminda field in the period
amounted to 247,179 barrels. In 2001, 38,731 barrels of oil were added to
storage. For the year ended December 31, 2000, Ninotsminda Oil Company's net
share of the 479,000 barrels (1,312 barrels per day) of gross oil production was
245,947 barrels.
Ninotsminda Oil Company's entire 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
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Georgian local and regional market generally yield relatively higher net sales
prices to Ninotsminda Oil Company than sales to other customers. Net sale prices
for Ninotsminda oil sold during 2001 averaged $19.43 per barrel as compared with
an average of $20.14 per barrel in 2000. Its net share of the 1,110,390 thousand
cubic feet (mcf) of gas delivered was 721,754 mcf at an average net sale price
of $1.14 per mcf of gas. For the year ended December 31, 2000, Ninotsminda Oil
Company's net share of the 1,764,000 mcf of gas delivered was 1,146,000 mcf at
an average net sales price of $1.16 per mcf of gas.
Refining and marketing revenue for the year ended December 31, 2001 relates to
operating activities of Georgian American Oil Refinery and CanArgo Standard Oil
Products. In 2001, sales from the refinery continued to be nominal following the
imposition of restrictions and subsequent excise tax on feedstock and refined
product. Although in April 2001 new legislation addressing indigenous refining
activities was passed by the Republic of Georgia that removed or reduced excise
taxes on feedstock and refined product, the refinery has since experienced
unexpected technical difficulties which have effectively curtailed the
production of gasoline. As a result, only naphtha, diesel and mazut can
currently be produced by the refinery and of these products, an excise tax on
naphtha sales remains in place. Due to these taxes, production of naphtha is
currently commercially uneconomic and refining activity has been suspended.
CanArgo has initiated discussions with authorities in the Republic of Georgia to
remove or reduce the excise tax to a level that would support the recommencement
of refining operations. While CanArgo believes from discussions to date that
such changes are possible, no assurance can be given that any such changes will
be made. As a result, CanArgo recorded a write-down of $3,360,000 to reflect,
under current conditions, the estimated net recoverable amount of the refinery.
CanArgo had revenue from equipment rentals in 2001 of $608,000 compared to other
revenue from equipment rentals of $365,000 for the year ended, December 31,
2000. In September 2001, CanArgo entered into an agreement to provide drilling
services to a third party using one of CanArgo's rigs. Commercial drilling
operations commenced in October 2001 and continued through February 2002.
The operating loss for the year ended December 31, 2001 amounted to $15,256,000
compared with an operating loss of $2,397,000 for 2000. The increase in
operating loss is attributable primarily to the impairment of oil and gas
properties, lower oil and gas revenue as a result of lower production and
significant increases in operating and corporate activity.
Field operating expenses increased to $1,568,000 ($2.62 per BOE) for the year
ended December 31, 2001 as compared to $1,287,000 ($1.66 per BOE) for 2000. The
increase is primarily a result of increased activity at the Ninotsminda field.
Operating costs per BOE increased as day to day field operations in Georgia
include a proportionately higher fixed to variable cost component combined with
lower production rates.
Purchases of crude oil and products and refinery operating expenses of
$7,627,000 and $791,000 respectively for the year ended December 31, 2001 relate
to operating activities of Georgian American Oil Refinery and CanArgo Standard
Oil Products. The increase is due to a full year of consolidation of these
activities in 2001.
Direct project costs increased to $1,300,000 for the year ended December 31,
2001, from $738,000 for the year ended December 31, 2000, reflecting project
cost associated with an agreement to provide drilling services to a third party
using CanArgo rig equipment, increased activity within Georgia, reestablishment
of activity with respect to the license Boryslaw Oil Company holds in the
Stynawske field, Ukraine and the acquisition of LVR.
LVR negotiated and concluded a Joint Investment Production Activity (JIPA)
agreement in 1998 to develop the Bugruvativske field in eastern Ukraine together
with Ukrnafta. CanArgo believes that under the terms of this JIPA, LVR has
certain rights to incremental production from the field. Ukrnafta and LVR are
required under the terms of the JIPA to make a total initial contribution of $2
million prior to December 31, 2000. LVR's portion of the initial contribution
was $960,000, which it failed to make. Furthermore, until such time as an
investment agreement and valuation of the assets to be contributed by Ukrnafta
is completed and accepted by LVR, LVR is not entitled to any of this production
and any sharing of future production is to be determined after consideration of
base oil. CanArgo is presently evaluating LVR's interest and obligations under
the JIPA and information regarding the field, and is in discussions with
Ukrnafta to resolve these and other open issues under the JIPA. There is no
assurance as to whether such discussions will be successfully completed or, if
completed, on what terms.
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Selling, general and administrative costs increased to $4,221,000 for the year
ended December 31, 2001, from $3,055,000 for the year ended December 31, 2000.
The increase is primarily attributable to significant increased operating and
corporate activity, higher costs attributed to the London office following the
move of administrative and finance functions from Calgary to London in 2000, an
allowance for $200,000 against a potential bad debt and general and
administrative costs of $746,000 related to refining and marketing activities.
The decrease in depreciation, depletion and amortization expense to $3,351,000
for the year ended December 31, 2001 from $3,876,000 for the year ended December
31, 2000 is attributable principally to lower depletion resulting from lower
sales of oil and gas during the year.
During 2001, CanArgo wrote down its oil and gas properties in the Ninotsminda
field by an aggregate $7,300,000 on application of the full cost ceiling test as
a result of a decline in Brent oil prices at December 31, 2001, lower reserve
quantities following production declines in 2001 and reduced development plans.
The write-down was a non-cash write-down. If oil prices or production levels
decline further, CanArgo may experience additional impairment of this property.
As a result of both product instability and continued difficulties addressing
excise taxes on refined products, refinery and related equipment was
written-down by $3,360,000 to reflect, under current conditions, the estimated
net recoverable amount of the refinery. During 2001, CanArgo further wrote down
other oil and gas related equipment by $500,000 following a decision to dispose
of a power generating unit which CanArgo has identified as surplus to its
existing requirements. This equipment is included in current assets as at
December 31, 2001.
CanArgo recorded net other income of $290,000 for the year ended December 31,
2001, as compared to net other income of $210,000 during the year ended December
31, 2000. The principal reason for the increase in net other income is a
decrease in loss from equity investments.
Equity loss from investments primarily relate to expenses related to operation
by East Georgian Pipeline Company of the gas pipeline from Ninotsminda to the
Gardabani power station and Rustavi industrial complex. Equity loss from
investments decreased to $160,000 for the year ended December 31, 2001, from a
loss of $240,000 for the year ended December 31, 2000 as a result of equity
income from production and sales of crude oil by Boryslaw Oil Company and the
sale of CanArgo's small investment in Uentech International Corporation. No
material gain resulted from the sale of Uentech International Corporation.
The net loss of $13,218,000 or $0.16 per share for the year ended December 31,
2001 compares to a net loss of $2,152,000, or $0.04 per share for the year ended
December 31 2000. The weighted average number of common shares outstanding was
substantially higher during the year ended December 31, 2001 than during the
year ended December 31, 2000, due in large part to private placements in April,
June and August 2000 and July 2001.
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 was 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
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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 by CanArgo Standard Oil Products to be opened 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 $2,397,000
compared with an operating loss of $8,119,000 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.
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.
Selling, general and administrative costs increased to $3,055,000 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 $210,000 for the year ended December 31,
2000, as compared to net other expenses of $535,000 during the year ended
December 31, 1999. The principal reason for the increase is interest
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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.
RELATED PARTY TRANSACTIONS
The majority of refined product purchased by CanArgo Standard Oil Products for
resale at its petrol stations is purchased from a company controlled by the
shareholders who own the 50% interest in CanArgo Standard Oil Products not held
by CanArgo. Total product purchases from the related company in 2001 were
$4,941,000. Certain equipment is provided to Georgian British Oil Company
Ninotsminda by a company owned by significant employees of Georgian British Oil
Company Ninotsminda. Total rental payments for this equipment in 2001 was
$124,078.
In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex
Acquisition Corporation the remaining 50% interest it did not own in CanArgo
Power for cash consideration of $425,000. In a related but separate transaction,
CanArgo sold in April 2001 all of its voting and non-voting shares of Uentech
International Corporation to a wholly owned subsidiary of Terrenex Acquisition
Corporation. Proceeds from the sale of Uentech International Corporation were
$125,000. On completion of the acquisition, CanArgo Power became a wholly owned
subsidiary of CanArgo. The transactions were approved by an independent
committee of the Board of Directors. Two members of the Board of Directors of
CanArgo who were also members of the Board of Directors of Terrenex Acquisition
Corporation abstained from voting on the transactions.
SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to establish accounting policies and
make estimates and assumptions that affect the reported amounts of assets and
liabilities. Such accounting policies include the method used to account for
capital assets such as oil and gas properties, property and equipment and
refining and marketing 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 expenses 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 expenses 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
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unevaluated properties, less (c) income tax effects related to differences in
the book and tax basis of the oil and gas properties.
Estimated undiscounted future site restoration, dismantlement and abandonment
costs of $820,000 at December 31, 2001 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.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria, which must be met, for intangible assets
acquired in a purchase method business combination to be recognized and reported
apart from goodwill. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values.
CanArgo has adopted the provisions of Statement 141 and Statement 142 effective
January 1, 2002. Furthermore, any goodwill and any intangible asset determined
to have an indefinite useful life that are acquired in a purchase business
combination will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Based on present circumstances Statement 141 and 142 will currently
not have any material effect on CanArgo's financial statements.
In August 2001, FASB issued Statement No. 143 Accounting for Asset Retirement
Obligations. Statement 143 requires companies to record the fair value of a
liability for an asset retirement obligation in the period in which the
liability is incurred concurrent with an increase in the long-lived assets
carrying value. The increase and subsequent adjustments in the related
long-lived assets carrying value is amortised over its useful life. Upon
settlement of the liability a gain or loss is recorded for the difference
between the settled liability and the recorded amount. This standard will be
effective for CanArgo on January 1, 2003. We are in the process of assessing the
impact that the adoption of this standard will have on our financial position
and results of operations.
In August 2001, FASB issued Statement No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary
Unusual and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business (as previously defined in that Opinion). Among other
provisions, the new rules change the criteria for classifying an asset as
held-for-sale. The standard also broadens the scope of businesses to be disposed
of that qualify for reporting as discontinued operations, and changes the timing
of recognizing losses on such operations. Statement 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The Company will adopt Statement 144 in 2002, but based on present
circumstances it is not expected to have a material effect on CanArgo's
financial statements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CanArgo's principal exposure to market risk is due to changes in oil and gas
prices and currency fluctuations. As indicated elsewhere in this Report, as a
producer of oil and gas CanArgo is exposed to changes in oil and gas prices as
well as changes in supply and demand which could affect its revenues. CanArgo
does not engage in any commodity hedging activities. Due to the ready market for
its production in the Republic of Georgia, CanArgo does not believe that any
current exposures from this risk will materially affect CanArgo's financial
position at this time, but there can be no assurance that changes in such market
will not affect CanArgo adversely in the future.
Also as indicated elsewhere in this Report, because all of CanArgo's operations
are being conducted in Eastern Europe, CanArgo is potentially exposed to the
market risk of fluctuations in the relative values of the currencies in areas in
which it operates. At present CanArgo does not engage in any currency hedging
operations since, to the extent it receives payments for its production,
refining and marketing activities in local currencies, it is utilizing such
currencies to pay for its local operations. In addition, it currently has
contracts to sell its production from the Ninotsminda field in the Republic of
Georgia which provide for payment in dollars.
While CanArgo Standard Oil Products marketing revenue is denominated in Lari,
the local Georgian currency, and is used to pay Lari denominated operating
costs, its long term debt is denominated in dollars. As a result, changes in the
exchange rate could have a material adverse effect on its ability to pay off
non-Lari denominated indebtedness such as its existing credit facility. The
sensitivity to changes in exchange rates for CanArgo Standard Oil Products was
determined using current market pricing models. We estimate that a 10%
appreciation or devaluation in the foreign exchange rate of the Lari against the
dollar in 2001 would not have had a significant impact on operations.
CanArgo had no material interest in investments subject to market risk during
the period covered by this report.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE OFFICE OR OFFICES
---- --- -----------------
Roger Brittain (1) (2) 64 Non-Executive Chairman of the Board
David Robson 44 Managing Director and Chief Executive Officer
Russell Hammond (1) (2) 60 Director
Nils N. Trulsvik (1) (2) 53 Director
Murray Chancellor 49 Chief Operating Officer
Vincent McDonnell 43 Chief Commercial Officer
Anthony J. Potter 37 Chief Financial Officer
-----------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
ROGER BRITTAIN, a resident of the UK, joined the Company on September 1, 2000 as
non-executive Chairman of the Board of Directors. Mr. Brittain is an experienced
investment banker having worked for many years in the oil and gas sector. He
began his career in the Foreign Service, working in the Middle East, before
moving to London, where he has worked with several investment banks with a focus
on the oil and gas sector. He was involved in the establishment of TR Energy and
Guinness Mahon Energy Services Limited and was from 1994 until March 31, 2001, a
Director of Corporate Finance at Guinness Mahon and Co. Limited (GM & Co.) and
investment company Investec Henderson Crosthwaite respectively, following the
acquisition of GM & Co. by Investec Henderson Crosthwaite in 1998. Mr Brittain
is also a non-executive Director of Soco International plc and Transmeridian
Exploration Inc. and an adviser to Devon Energy Corporation.
DAVID ROBSON, a resident of Guernsey, was elected a Director, Chairman of the
Board and Chief Executive Officer of the Company on July 15, 1998 and
subsequently Managing Director and Chief Executive Officer. He has also served
as a Director, Chairman of the Board and Chief Executive Officer of the
Company's subsidiary, CanArgo Oil & Gas Inc., since July 1997, as President of
CanArgo Oil & Gas Inc.'s subsidiary, Ninotsminda Oil Company, since 1996, and as
Managing Director and sole owner of Vazon Energy Limited, a company which
provides consulting services to the energy industry, since March 1997. From
April 1992 until March 1997, Dr. Robson was a senior officer of JKX Oil & Gas
plc and it's predecessor companies, including service as Managing Director and
Chief Executive Officer. Prior to this he was employed in technical and
commercial positions in Britoil plc, Hamilton Oil and Mobil. He holds a B.Sc.
(Hons) in Geology and a Ph.D. in Geochemistry from the University of Newcastle
upon Tyne, and an MBA from the University of Strathclyde.
RUSSELL HAMMOND, a resident of the UK, was elected a Director of the Company on
July 15, 1998. He has also served as a Director of the Company's subsidiary,
CanArgo Oil & Gas Inc., since June 1997. For over five years, Mr. Hammond has
been an investment advisor to Provincial Securities Ltd., a private investment
company. Mr. Hammond has been Chairman of Terrenex Acquisition Corporation, an
oil and gas and joint venture company since 1992 and a director of Cadiz Inc., a
Nasdaq National Market listed company, from 1989 to January 1999.
NILS N. TRULSVIK, a resident of the UK, was elected a Director of the Company on
August 17, 1994. He has served the Company as President and Chief Executive
Officer from February 4, 1997 to July 15, 1998 and from November 21, 1994 to
March 9, 1995; and as Executive Vice President from March 9, 1995 to February 4,
1997 and from September 8, 1994 until November 21, 1994. Since January 2, 1999
Mr. Trulsvik has served as the Chief Executive Officer of Force Petroleum. From
August 1998 Mr. Trulsvik has been a partner in a consulting company, The Bridge
Group, located in Norway. Mr. Trulsvik is a petroleum explorationist with
extensive experience in petroleum exploration and development throughout the
world. Prior to joining the Company, he held various positions with Nopec a.s. a
Norwegian petroleum consultant group of companies of which he was a founder,
including Managing Director from 1987 to 1993 and Special Advisor from 1993 to
August 1994.
Murray Chancellor, a resident of the UK, was elected Chief Operating Officer of
the Company on September 11, 2000. Mr. Chancellor joined the company from Aminex
PLC, a UK oil and gas exploration company, where he was most recently involved
as General Director of Russian Operations from April 1998 until September 2000.
From
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1996 until April 1998, Mr. Chancellor served as Deputy General Director and
Technical Director of Poltava Petroleum Company. Mr. Chancellor has an extensive
experience in the oil and gas sector having worked in the UK, Norway, Australia,
North America, the Middle East and the Former Soviet Union. An engineer by
profession, he has been involved in engineering and project management
activities both onshore and offshore. He has held senior management positions in
oil and gas development projects in both Russia and Ukraine, as well as having
extensive experience in the North Sea. Mr. Chancellor holds a Bachelor of
Engineering (Civil) degree.
Vincent McDonnell, a resident of the UK, was elected Chief Commercial Officer of
the Company on April 1, 2001. Prior thereto, he served CanArgo as Commercial
Manager from December 2000. Prior to joining the Company, he was an independent
oil and gas consultant from May 1998 until October 2000. From 1997 until April
1998, Mr. McDonnell served as Oil and Gas Exploration and Production Commercial
Manager. Prior to 1997, Mr. McDonnell worked in various business, commercial and
technical roles with a number of companies, including Mobil Oil and Britoil. He
holds a Bachelor of Science (Hons.) degree in Geology, a Master of Science
degree in Geophysics together with a Master of Business Administration (MBA)
degree.
Anthony J. Potter, a resident of the UK, was elected Chief Financial Officer of
the Company on September 30, 2000. Prior thereto, he was elected and served as
Vice President, Finance from July 15, 1998. He also served the Company as Group
Controller and served as Vice President, Finance and Group Controller of the
Company's subsidiary, CanArgo Oil & Gas Inc., since May 1998. From September
1986 to April 1998, Mr. Potter was employed with PricewaterhouseCoopers
Chartered Accountants. Mr. Potter is a member of the Institute of Chartered
Accountants of Alberta and holds a Bachelor of Commerce degree in Accounting.
Directors hold office until the next annual meeting of stockholders and until
their successors are duly elected and qualified. Officers serve at the pleasure
of the directors.
INDEMNIFICATION AND INSURANCE
CanArgo's Bylaws require CanArgo to indemnify its officers and directors to the
full extent permitted by Delaware law. The Bylaws also require CanArgo to
advance payment of expenses to an indemnified party so long as he agrees to
repay the amount advanced if it is later determined that he is not entitled to
indemnification. CanArgo carries directors' and officers' liability insurance
covering losses arising from claims based on breaches of duty, negligence, error
and other wrongful acts.
INFORMATION CONCERNING BOARD AND COMMITTEE MEETINGS
CanArgo's Board of Directors held eight meetings during the year ended December
31, 2001. No director has attended less than 75% of all meetings of the Board
and those committees on which he served in 2001. The Board has two standing
committees: the Audit Committee and the Compensation Committee. The members of
the Audit Committee at the end of 2001 were Roger Brittain, Nils N. Trulsvik and
Russell Hammond. The members of the Compensation Committee at the end of 2001
were Roger Brittain, Nils N. Trulsvik and Russell Hammond. The Board of
Directors has not designated a nominating committee, the functions of such
committee being performed by the Board as a whole.
The Audit Committee of the Board of Directors is responsible for the review and
oversight of CanArgo's performance with respect to its financial
responsibilities and the integrity of CanArgo's accounting and reporting
practices. The Audit Committee also recommends to the Board of Directors the
selection of CanArgo's independent auditors. The Audit Committee is composed of
three non-employee directors and operates under a written charter.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee's Responsibilities
The Compensation Committee of the Board of Directors is composed entirely of
non-employee directors. The Compensation Committee is responsible for setting
and administering policies which govern CanArgo's executive compensation
programs. The purpose of this report is to summarize the compensation philosophy
and policies that the Compensation Committee applied in making executive
compensation decisions in 2001.
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Compensation Philosophy
The Compensation Committee has approved compensation programs intended to:
o Attract and retain talented executive officers and key employees by
providing total compensation competitive with that of other executives
employed by companies of similar size, complexity and lines of
business;
o Motivate executives and key employees to achieve strong financial and
operational performance;
o Emphasize performance-based compensation, which balances rewards for
short-term and long-term results;
o Reward individual performance;
o Link the interests of executives with shareholders by providing a
significant portion of total pay in the form of stock incentives;
o Encourage long-term commitment to CanArgo.
The Compensation Committee held four meetings during fiscal 2001.
Stock Based Compensation Plan
At December 31, 2001, stock options and warrants had been issued from the
following stock based compensation plans:
o 1995 Long-Term Incentive Plan. Adopted by CanArgo in February 1996,
this plan allows for 7,500,000 shares of CanArgo's Common Stock to be
issued to officers, directors, employees, consultants and advisors. As
of December 31, 2001, 4,065,334 options were outstanding.
o CAOG Plan. Adopted by CanArgo following the acquisition by CanArgo of
CanArgo Oil & Gas Inc. in 1998, this plan allowed for 988,000 shares
of CanArgo's Common Stock to be issued to employees, consultants and
advisors. As of December 31, 2001, 806,667 options were outstanding.
o Special Stock Options and Warrants. Adopted by CanArgo in September
2000, this plan was created to allow CanArgo to retain and provide
incentives to existing executive officers and directors and to allow
recruitment of new officers and directors following the Company's
decision to relocate finance and administrative functions from
Calgary, Canada to London, England. As of December 31, 2001, 2,220,000
special stock options and warrants were outstanding.
Compensation Methodology
Each year the Compensation Committee reviews data from market surveys, proxy
statements issued by competitors and independent consultants to assess CanArgo's
competitive position with respect to the following three components of executive
compensation:
o base salary;
o annual incentives; and
o long-term incentives.
The Compensation Committee also considers individual performance, level of
responsibility, and skills and experience in making compensation decisions for
each executive.
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Components of Compensation
Base Salary: Base salaries for executives are determined based upon job
responsibilities, level of experience, individual performance, comparisons to
the salaries of executives in similar positions obtained from market surveys,
and competitive data obtained from consultants and staff research. The goal for
the base pay component is to compensate executives at a level which approximates
the median salaries of individuals in comparable positions with comparable
companies in the oil and gas industry. The Compensation Committee approves all
salary increases for executive officers. No base pay increases were approved in
2001 for executive officers of CanArgo.
Annual Incentives: Annual cash incentives have been developed in conjunction
with performance objectives for CanArgo Energy Corporation and the executive's
particular business unit. In 2000, the Compensation Committee approved an annual
cash incentive for the Chief Executive Officer and in 2001 approved an annual
cash incentive for other executives.
Long-Term Incentive Compensation: The Compensation Committee has structured
long-term incentive compensation to provide for an appropriate balance between
rewarding performance and encouraging employee retention. Long-term incentives
are granted primarily in the form of stock options. The purpose of stock options
is to align compensation directly with increases in shareholder value. The
number of options granted is determined by reviewing survey data to determine
the compensation made to other executives and management employees in comparable
positions with comparable companies in the oil and gas sector. In determining
the number of options to be awarded, the Compensation Committee also considers
the grant recipient's qualitative and quantitative performance, the size of
stock option awards in the past, and expectations of the grant recipient's
future performance.
In 2001, the Compensation Committee approved a series of new stock options to a
broad range of employees. The stock option awards were granted under the various
plans available in the company.
Compliance with Section 162(m) of the Internal Revenue Code
Under Section 162(m) of the Internal Revenue Code, CanArgo Energy Corporation
may not deduct annual compensation in excess of $1 million paid to certain
employees, generally its Chief Executive Officer and its four other most highly
compensated executive officers, unless that compensation qualifies as
performance-based compensation. While the Compensation Committee intends to
structure performance-related awards in a way that will preserve the maximum
deductibility of compensation awards, the Compensation Committee may from time
to time approve awards which would vest upon the passage of time or other
compensation which would not result in qualification of those awards as
performance-based compensation. It is not anticipated that compensation realized
by any executive officer under CanArgo Energy Corporation plans and programs now
in effect will result in a material loss of tax deductions.
Compensation of the Chief Executive Officer
The Compensation Committee reviews annually the compensation of the Chief
Executive Officer and recommends any adjustments to the Board of Directors for
approval. The Chief Executive Officer participates in the same programs and
receives compensation under the same programs as other executives. However, the
Chief Executive Officer's compensation reflects the greater policy and
decision-making authority that the Chief Executive Officer holds and the higher
level of responsibility he has with respect to the strategic direction of
CanArgo Energy Corporation and its financial and operating results. For 2001,
the components of Dr. Robson's compensation were:
o Base Salary: After considering CanArgo's overall performance and
competitive practices, and the signing of a 3 year contract, the
Compensation Committee recommended, and the Board of Directors
approved, a base salary of (pound)150,000 (approx $217,500) for Dr.
Robson, effective July 1, 2000.
o Short-Term Incentives: In 2001, incentive compensation for Dr. Robson
was based solely upon increase in cash flow per quarter. Based on 2001
cash flow performance each quarter, Dr. Robson qualified for a
quarterly bonus in 2001 of $15,075. The bonus is capped at one times
salary for a given quarter.
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o Long-Term Incentives: In 2001, Dr. Robson received 585,000 performance
share awards all under the CanArgo Energy Corporation 1995 Long-Term
Incentive Plan. The optioned shares have a term of five years, with
438,750 currently vested and the remainder vesting on 30 June 2002.
In August 2000, the Compensation Committee elected to schedule its annual review
of Chief Executive Officer performance and compensation for April of each year,
to assure thorough consideration of year-end results. Actions taken by the Board
of Directors in April 2002 with respect to Dr. Robson's 2002 compensation will
be reflected in the proxy statement for the 2003 meeting of shareholders.
It is the Compensation Committee's intention that, when taken together, the
components of Dr. Robson's pay, including base salary, annual incentives,
short-term incentive opportunity and long-term incentives, will result in
compensation which approximates compensation paid by companies of similar size
and industry.
This report has been provided by the Compensation Committee.
Nils N. Trulsvik, Chairman
Roger Brittain
Russell Hammond
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, CanArgo's Compensation Committee consisted of Messrs. Trulsvik,
Brittain, Hammond and to June 7, 2001 Messr. Paus, all of whom are or were
non-employee directors. See the section entitled "Certain Relationships and
Related Transactions".
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all compensation paid or accrued by CanArgo and its
subsidiaries during the years ended December 31, 2001, 2000 and 1999 to certain
executive officers of CanArgo (the "Named Officers").
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- --------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND YEAR OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION ENDED SALARY ($) BONUS ($) (#) ($)(5)
--------------------- ----- ---------- --------- ------------ ------------
David Robson (1) 12/01 217,500 15,075 585,000 19,575
12/00 197,420 37,500 1,295,000 9,941
12/99 144,000 - 1,000,000 -
Murray Chancellor (2) 12/01 174,000 - 200,000 15,660
12/00 50,750 - 250,000 4,568
Vincent McDonnell (3) 12/01 137,750 - 100,000 12,398
Anthony J. Potter (4) 12/01 210,000 - 100,000 -
12/00 120,116 - 117,000 1,333
12/99 60,152 6,667 125,000 1,600
(1) Mr. Robson has served as Chief Executive Officer of the Company since
July 15, 1998 and provides services to CanArgo through Vazon Energy
Limited, of which he is the Managing Director.
(2) Mr. Chancellor has served as Chief Operating Officer of the Company since
September 12, 2000.
(3) Mr. McDonnell has served as Chief Commercial Officer of the Company since
April 1, 2001. Prior thereto he served as Chief Commercial Manager from
December 1, 2000.
(4) Mr. Potter has served as Chief Financial Officer of the Company since
September 30, 2000. Prior thereto he served as Vice-President Finance and
Group Controller from July 15, 1998.
(5) Primarily CanArgo's contributions to or accruals with respect to individual
retirement and pension plans.
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OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 2001
The following table sets forth information concerning options granted to the
Named Officers who were employed during the year ended December 31, 2001.
NUMBER OF % OF TOTAL GRANT DATE
SECURITIES OPTIONS PRESENT VALUE (5)
UNDERLYING GRANTED TO ---------------------
OPTIONS EMPLOYEES EXERCISE EXPIRATION PER
NAME GRANTED IN 2001 PRICE DATE SHARE TOTAL
---- ---------- ------------ -------- ---------- ------- -------
David Robson (1) 585,000 30% $0.687 08/07/2006 $0.1378 $80,613
Murray Chancellor (2) 200,000 10% $0.687 08/07/2006 $0.2224 $44,480
Vincent McDonnell (3) 100,000 5% $0.687 08/07/2006 $0.2224 $22,240
Anthony Potter (4) 100,000 5% $0.687 08/07/2006 $0.2224 $22,240
(1) The options were granted at an exercise price in excess of the fair market
value of CanArgo's Common Stock on the date of grant. The options vest 3/4
on 09/07/2001 and 1/4 on 30/06/2002.
(2) The options were granted at an exercise price in excess of the fair market
value of CanArgo's Common Stock on the date of grant. The options vest 1/3
on 30/06/2002, 1/3 on 30/06/2003 and 1/3 on 30/06/2004.
(3) The options were granted at an exercise price in excess of the fair market
value of CanArgo's Common Stock on the date of grant. The options vest 1/3
on 30/06/2002, 1/3 on 30/06/2003 and 1/3 on 30/06/2004.
(4) The options were granted at an exercise price in excess of the fair market
value of CanArgo's Common Stock on the date of grant. The options vest 1/3
on 30/06/2002, 1/3 on 30/06/2003 and 1/3 on 30/06/2004.
(5) These values were derived using the Black-Scholes option pricing model
applying the following assumptions:
RISK-FREE
INTEREST
EXERCISE PRICE DIVIDEND YIELD VOLATILITY RATE EXPECTED TERM
-------------- -------------- ---------- --------- -------------
$0.687 0% 75.15% 4.61% 3.37 years
Pursuant to the terms of CanArgo's various stock option plans, the Compensation
Committee may, subject to each plan's limits, modify the terms of outstanding
options, including the exercise price and vesting schedule thereof. These values
are not intended to forecast future appreciation of CanArgo's stock price. The
actual value, if any, that an executive officer may realize from his options
(assuming that they are exercised) will depend solely on the increase in the
market price of the shares acquired through option exercises over the exercise
price, measured when the shares are sold.
OPTION VALUES AT DECEMBER 31, 2001
The following table sets forth information concerning option exercises and the
number and hypothetical value of stock options held by the Named Officers at
December 31, 2001.
NUMBER OF SHARES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL
NUMBER OPTIONS HELD AT FISCAL YEAR END (2) YEAR END ($) (3)
ACQUIRED ON REALIZED ----------------------------------- -----------------------------
NAME EXERCISE ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
David Robson - - 1,640,416 1,026,251 150 150
Murray Chancellor - - 83,333 366,667 - -
Vincent McDonnell - - 33,333 200,000 - -
Anthony Potter - - 64,500 152,500 - -
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---------------
(1) The amounts in this column have been calculated based upon the difference
between the quoted market price of the securities underlying each stock
option on the date of exercise and its exercise price.
(2) The exercise of stock options is not dependent on performance criteria and
may be exercised in full when vested.
(3) The amounts in this column have been calculated based upon the difference
between the quoted market price of CanArgo's common stock on December 31,
2001 and the exercise price per share.
COMPENSATION OF DIRECTORS
In 2001 CanArgo paid directors' fees on a quarterly basis at a rate of $36,000
per year plus (pound)1,000 for each meeting of the Audit Committee and
Compensation Committee that they attend. CanArgo also reimburses ordinary
out-of-pocket expenses for attending Board and Committee meetings. The Chairman
of the Board of Directors is paid 35,000 Pound Sterling per year payable on a
quarterly basis.
The following table shows the compensation paid to all persons who were
non-employee directors, including their respective affiliates, during the year
ended December 31, 2001:
DIRECTORS FEES OPTIONS AND
AND OTHER CONSULTING WARRANTS
NAME COMPENSATION PAYMENTS GRANTED
---- --------------- ---------- -----------
$ $
Roger Brittain 59,450 - -
Russell Hammond 37,450 - -
Peder Paus 21,276 - -
Nils N. Trulsvik 44,700 - -
STOCK OPTION PLANS
CanArgo has adopted the 1995 Long-Term Incentive Plan pursuant to which it has
awarded and may in the future award stock options, including re-load options,
and stock appreciation rights, to employees, directors, consultants and advisors
of CanArgo or any subsidiary of CanArgo. On June 7, 2001, shareholders approved
an increase in the number of shares that may be issued under the 1995 Long
Incentive Plan from 4,000,000 shares to 7,500,000 shares of CanArgo common
stock. Under the 1995 Plan, 4,065,334 options were outstanding at December 31,
2001.
In connection with the July 1998 combination with CanArgo Oil and Gas Inc.,
CanArgo assumed the CanArgo Oil and Gas Inc. Stock Option Plan ("CAOG Plan")
under which 988,000 shares may be issued. Persons who are eligible to receive
options under this stock option plan are full time employees and consultants of
CanArgo or any 50% or more owned subsidiary of CanArgo (including a director of
any subsidiary) who are not officers or directors of CanArgo. Under the CAOG
Plan, 806,667 options were outstanding at December 31, 2001.
The Compensation Committee of the Board of Directors administers CanArgo's stock
option plans. The exercise price and vesting schedule of awards under these
plans are determined by the Compensation Committee when the award is granted,
provided that the option price for any incentive stock option or any option
granted under the CanArgo Oil and Gas Inc. stock option plan may not be less
than 100% of the fair market value of CanArgo common stock on the date of grant.
The term of options granted under these plans may not exceed ten years from the
date of grant. In the case of an incentive option granted to a person who owns
10% or more of CanArgo's common stock, the exercise price of the option may not
be less than 110% of the fair market value on the date of grant and the term of
the option may not exceed five years.
The Compensation Committee may modify or amend the terms of outstanding awards,
including a change or acceleration of the vesting of an award, and it may
exchange, cancel or substitute awards, subject to the consent of the holders of
the awards.
Unless a surviving or acquiring entity agrees to assume the outstanding awards,
each outstanding award under these plans will terminate on the date of:
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o CanArgo's liquidation or dissolution,
o a reorganization, merger or consolidation in which CanArgo is not the
survivor,
o the sale of substantially all of the assets of CanArgo, or
o the sale of more than 80% of the then outstanding stock of CanArgo to
another corporation or entity.
No awards may be granted under the incentive plan after November 2005. The Board
of Directors may discontinue either plan at any time and may amend either plan
without stockholder approval unless the amendment would increase the total
number of shares issuable under that plan or, with respect to the CanArgo Oil
and Gas Inc. stock option plan, would change the manner of determining the
minimum exercise price of options.
Under Section 162(m) of the Internal Revenue Code of 1986, CanArgo may be
precluded from claiming a federal income tax deduction for total remuneration in
excess of $1,000,000 for its chief executive officer or any of its other four
highest paid officers. Based on the current market price of CanArgo's common
stock and the number of options held by such persons, CanArgo does not believe
that any compensation derived from the exercise of awards granted under these
plans, together with other compensation to CanArgo's executive officers, will
exceed $1,000,000 in any year for any such officer. Neither of the stock option
plans, however, meets the requirements of an exception from Section 162(m) for
"performance-based compensation."
RELATED TRANSACTIONS
In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex
Acquisition Corporation the remaining 50% interest it did not own in CanArgo
Power for cash consideration of $425,000. In a related but separate transaction,
CanArgo sold in April 2001 all of its voting and non-voting shares of Uentech
International Corporation to a wholly owned subsidiary of Terrenex Acquisition
Corporation. Proceeds from the sale of Uentech International Corporation were
$125,000. On completion of the acquisition, CanArgo Power became a wholly owned
subsidiary of CanArgo. The transactions were approved by an independent
committee of the Board of Directors. Two members of the Board of Directors of
CanArgo who were also members of the Board of Directors of Terrenex Acquisition
Corporation abstained from voting on the transactions. Dr. David Robson, Chief
Executive Officer, provides all of his services to CanArgo through Vazon Energy
Limited of which he is the Managing Director.
OWNERSHIP OF VOTING SECURITIES
DESCRIPTION OF VOTING SECURITIES
The voting securities of CanArgo consist of common stock and special voting
stock. Generally, the common stock and special voting stock are voted together
as a single class on all matters. The common stock is entitled to one vote per
share. The special voting stock is entitled generally to a number of votes equal
to the number of outstanding exchangeable shares issued by CanArgo Oil & Gas
Inc., a subsidiary of CanArgo. The special voting stock is held of record by
Montreal Trust Company of Canada, which holds the stock in trust for the benefit
of the holders of the exchangeable shares. The special voting stock is voted in
the manner directed by the holders of the exchangeable shares. The exchangeable
shares may be exchanged for shares of common stock on a share-for-share basis.
For purposes of the following tables, the term "voting securities" refers to the
common stock and the exchangeable shares as though they were a single class of
voting securities.
SECURITY OWNERSHIP BY MANAGEMENT
The following table sets forth information as of March 31, 2002 with respect to
aggregate beneficial ownership of outstanding shares of Common Stock and shares
of Common Stock that would be issued upon exchange of Exchangeable Shares either
outstanding or issuable for no additional consideration, by each person known by
CanArgo to be the beneficial owner of more than 5% of the aggregate of such
shares, by each Director and Named Officer of CanArgo and by all Directors and
executive officers of CanArgo as a group.
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AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------ -------------------- ----------------
Roger Brittain 122,133 (1) *
David Robson 1,938,750 (2) 2.0%
Nils N. Trulsvik 391,366 (3) *
Russell Hammond 317,916 (4) *
Murray Chancellor 83,333 (5) *
Vincent McDonnell 41,666 (6) *
Anthony Potter 117,000 (7) *
All Directors and executive officers
as a group (7 persons) 3,012,164 (8) 3.1%
---------------
* Less than 1%.
(1) Includes 83,333 shares underlying presently exercisable options.
(2) Includes 1,818,750 shares underlying presently exercisable options.
(3) Includes 317,916 shares underlying presently exercisable options.
(4) Includes 317,916 shares underlying presently exercisable options.
(5) Includes 83,333 shares underlying presently exercisable options.
(6) Includes 41,666 shares underlying presently exercisable options.
(7) Includes 117,000 shares underlying presently exercisable options.
(8) Includes 2,779,914 shares underlying presently exercisable options
held by directors and executive officers as a group.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
At March 31, 2002, the following registered holders held over 5% of the
outstanding CanArgo common stock:
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------ -------------------- ----------------
Morgan Stanley & Co. Intl. Ltd.
25 Cabot Sq., London, E14 4QA UK 9,622,000 9.9%
Caldwell Associates
PO Box 198,Valley House
Hirzel Street, St. Peter Port, Guernsey
GY1 4HU 5,299,899 (1) 5.5%
---------------
(1) Held on behalf of several clients.
DESCRIPTION OF CAPITAL STOCK
CanArgo's current authorized share capital consists of 150,000,000 shares of
common stock having a par value of US $0.10 each and 5,000,000 shares of
preferred stock having a par value of US $0.10 each. CanArgo has authorized a
class of preferred stock, "Series Voting Preferred Stock," which we refer to in
this prospectus as "special voting stock." As of April 15, 2002, there were
97,070,580 shares of common stock issued and issuable, 147,866 shares issuable
upon exchange of CanArgo Oil & Gas Inc. Exchangeable Shares without receipt of
further consideration and 100 shares of special voting stock outstanding.
COMMON STOCK
Holders of common stock have no preferences or preemptive, conversion or
exchange rights. Subject to any preferential rights of any shares of preferred
stock which may be outstanding, holders of common stock are entitled to receive
dividends approved by the Board of Directors and to share ratably in CanArgo's
assets legally available for distribution to its stockholders in the event of
its liquidation, dissolution or winding-up. CanArgo may not pay dividends on its
common stock unless its subsidiary, CanArgo Oil & Gas Inc., simultaneously pays
an equivalent dividend on the exchangeable shares described below.
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Holders of common stock are entitled to one vote per share on all matters voted
on generally by the stockholders, including the election of directors.
Cumulative voting for the election of directors is not permitted. Except as
otherwise required by law or except as any series or class of preferred stock,
such as the special voting stock, may provide, the holders of common stock
possess all voting power.
The shares of common stock to be issued in this offering, when issued and paid
for, will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized to issue, without stockholder approval,
shares of preferred stock in one or more classes or series. The Board of
Directors may set the terms and provisions of each class or series by
resolution, including provisions regarding voting, liquidation preference,
redemption, conversion and the right to receive dividends. The Board of
Directors has authorized one class of preferred stock, "Series Voting Preferred
Stock," which we refer to in this prospectus as "special voting stock." The
Board of Directors has no present plans to issue any additional shares of
preferred stock.
The ability to issue preferred stock provides CanArgo with flexibility in
connection with possible acquisitions, financings and other corporate
transactions. The issuance of preferred stock may also, however, have the effect
of discouraging, delaying or preventing a change in control of CanArgo. For
example, the Board of Directors can create a series of preferred stock with
disproportionate voting power or with the right to vote separately as a class on
important corporate matters, like mergers or the election of directors. The
preferred stock could also be convertible into a large number of shares of
common stock or have other terms which could make it more difficult or costly
for a third party to acquire a significant interest in CanArgo. Also, shares of
preferred stock could be privately placed with purchasers who might side with
the management of CanArgo in opposing a hostile tender offer or other attempt to
obtain control. As a result, the issuance of preferred stock as an anti-takeover
device might preclude stockholders from taking advantage of a situation, which
might be favorable to their interests.
SPECIAL VOTING STOCK
In connection with the July 1998 business combination with CanArgo Oil & Gas
Inc., the Board of Directors authorized a class of preferred stock, "Series
Voting Preferred Stock," referred to as "special voting stock", consisting of
100 shares. The shares of special voting stock were issued to Montreal Trust
Company of Canada, which is holding the shares as trustee for the benefit of the
holders of the exchangeable shares described below. Except as otherwise required
by law or CanArgo's Certificate of Incorporation, each share of special voting
stock is entitled to a number of votes equal to the quotient (rounded down to
the nearest whole number) obtained by dividing the number of outstanding
exchangeable shares by the number of outstanding shares of special voting stock.
The special voting stock may be voted in the election of directors and on all
other matters submitted to a vote of stockholders of CanArgo. The holders of
common stock and the holder of the special voting stock vote together as a
single class on all matters, except to the extent voting as a separate class is
required by applicable law or CanArgo's Certificate of Incorporation.
In the event of any liquidation, dissolution or winding up of CanArgo, the
holder of the special voting stock will be entitled to receive the sum of $1.00
per share of special voting stock from any assets of CanArgo available for
distribution to its stockholders. The holder of the special voting stock is not
entitled to receive dividends. CanArgo may redeem the special voting stock for a
price of $1.00 per share at any time when there are no exchangeable shares
outstanding and none which are issuable under options, warrants or other
obligations.
EXCHANGEABLE SHARES
In connection with the July 1998 business combination, the outstanding common
shares of CanArgo Oil & Gas Inc. were exchanged for exchangeable shares issued
by that corporation. The holders of the exchangeable shares may exchange them at
any time for CanArgo common stock on a share-for-share basis. The following is a
summary of the principal terms and rights of the exchangeable shares.
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o Dividends - Holders of exchangeable shares are entitled to receive
dividends equal to the dividends paid by CanArgo on shares of its common
stock.
o Voting Rights - The holders of exchangeable shares are entitled to provide
directions to the holder of the special voting stock as to the manner in
which the special voting stock should be voted with respect to any matter
on which holders of the common stock are entitled to vote, as described
under "Special Voting Stock" above.
o Exchange Events - Exchangeable shares must be exchanged for shares of
common stock on a share-for-share basis, plus an amount equal to all
declared and unpaid dividends on the exchangeable shares, whenever:
-- The holder requests CanArgo Oil & Gas Inc. to redeem his exchangeable
shares;
-- CanArgo Oil & Gas Inc. is liquidated, dissolved or wound-up;
-- Requested by the holder of the special voting stock, in the event
CanArgo Oil & Gas Inc. becomes insolvent or bankrupt, has a receiver
appointed or similar event occurs;
-- CanArgo Energy Corporation becomes involved in voluntary or
involuntary liquidation, dissolution or winding-up proceedings;
-- Either CanArgo Oil & Gas Inc. or CanArgo Energy Corporation elects to
redeem all of the exchangeable shares, provided the election is made
after January 30, 2004 or at the time of the election the number of
outstanding exchangeable shares is less than 853,071; or
-- A holder of exchangeable shares instructs the holder of the special
voting stock to require CanArgo to purchase his exchangeable shares.
o Protection Rights - Without the prior approval of CanArgo Oil & Gas Inc.
and the holders of the exchangeable shares, CanArgo may not (1) distribute
additional shares of its common stock, subscription rights or other
property or assets to all or substantially all holders of its common stock,
or (2) subdivide, combine, reclassify or otherwise change the common stock,
unless the same or an economically equivalent action is taken with respect
to the exchangeable shares. The CanArgo Oil & Gas Inc. Board of Directors
decides in its sole discretion whether the exchangeable shares are being
treated on an economically equivalent basis with the common stock. In the
event of any proposed tender offer, share exchange offer, issuer bid,
take-over bid or similar transaction affecting the common stock, CanArgo
must use reasonable efforts to enable holders of exchangeable shares to be
treated the same as the holders of the common stock. CanArgo has also
agreed to protect the rights of the holders of the exchangeable shares to
receive the same dividends as are paid on the common stock and to exchange
shares of common stock for exchangeable shares.
On January 24, 2002 CanArgo announced that it has established May 24, 2002 as
the redemption date for all of the Exchangeable Shares of CAOG. Each
Exchangeable Share will be purchased by CanArgo for shares of CanArgo Common
Stock on a share-for-share basis. No cash consideration will be issued by
CanArgo and the purchase will not increase the total number of shares of Common
Stock of CanArgo deemed issued and issuable.
AMENDMENT TO GOVERNING DOCUMENTS
General Corporation Law of the State of Delaware, generally requires a vote of
the corporation's board of directors followed by the affirmative vote of a
majority of the outstanding stock entitled to vote for any amendment to the
certificate of incorporation, unless a greater level of approval is required by
the certificate of incorporation. The CanArgo Certificate of Incorporation does
not require a greater level of approval for amendments. If an amendment would
have the effect of altering the powers, preferences or special rights of a
particular class or series of stock, the class or series must be given the power
to vote as a class notwithstanding the absence of any specifically enumerated
power in the certificate of incorporation. General Corporation Law of the State
of Delaware also states that stockholders entitled to vote have the power to
adopt, amend or repeal the bylaws of a corporation unless the corporation in its
certificate of incorporation confers such power on its board of directors. The
CanArgo Certificate of Incorporation expressly authorizes the CanArgo Board and
its stockholders to adopt, amend or repeal the CanArgo Bylaws.
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VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
General Corporation Law of the State of Delaware, generally requires the
affirmative vote of a majority of the outstanding stock entitled to vote thereon
to authorize any merger, consolidation, dissolution or sale of substantially all
of the assets of a corporation. No authorizing stockholder vote is required of a
corporation surviving a merger if such corporation's certificate of
incorporation is not amended by the merger, each share of stock of such
corporation will be an identical share of the surviving corporation after the
merger, and the number of shares to be issued in the merger does not exceed 20%
of such corporation's outstanding common stock immediately prior to the
Effective Date of the merger. Additionally, no authorizing stockholder vote is
required of a corporation to authorize a merger with or into a single direct or
indirect wholly-owned subsidiary of such corporation unless required by its
certificate of incorporation (provided certain other limited circumstances
apply). The CanArgo Certificate of Incorporation does not require a greater
percentage vote for such actions. Finally, General Corporation Law of the State
of Delaware does not require stockholder approval for mergers or consolidations
in which a parent corporation merges or consolidates with a subsidiary of which
it owns at least 90% of the outstanding shares of each class of stock.
DISSENTERS' RIGHTS
Under General Corporation Law of the State of Delaware, holders of shares of any
class or series have the right in certain circumstances to dissent from a merger
or consolidation by demanding payment in cash for their shares equal to the fair
value (excluding any appreciation or depreciation as a consequence or in
expectation of the transaction) of such shares, as determined by agreement with
the corporation or by an independent appraiser appointed by a court in an action
timely brought by the corporation or the dissenters. General Corporation Law of
the State of Delaware grants dissenters' appraisal rights only in the case of
mergers or consolidations and not in the case of a sale or transfer of assets, a
purchase of assets for stock, or any other stock issuance, such as in connection
with the Transaction, regardless of the number of shares being issued. Further,
no appraisal rights are available for shares of any class or series listed on a
national securities exchange or NASDAQ or held of record by more than 2,000
stockholders, unless the agreement of merger or consolidation converts such
shares into anything other than some combination of stock of the surviving
corporation, stock of another corporation which is either listed on a national
securities exchange or NASDAQ or held of record by more than 2,000 stockholders
or cash in lieu of fractional shares.
DERIVATIVE ACTION
Derivative actions may be brought in Delaware by a stockholder on behalf of, and
for the benefit of, the corporation. General Corporation Law of the State of
Delaware provides that a stockholder must assert in the complaint that he or she
was a stockholder of the corporation at the time of the transaction of which he
or she complains. A stockholder may not sue derivatively unless he or she first
makes demand on the corporation that it bring suit and such demand has been
refused unless it is shown that such demand would have been futile.
LIMITATION ON LIABILITY
CanArgo's Certificate of Incorporation limits or eliminates the liability of
CanArgo's directors or officers to CanArgo or its stockholders for monetary
damages to the fullest extent permitted by the Delaware General Corporation Law.
Delaware law provides that a director of CanArgo will not be personally liable
to CanArgo or its stockholders for monetary damages for a breach of fiduciary
duty as a director, except for liability: (1) for any breach of the director's
duty of loyalty; (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law; (3) for the payment of
unlawful dividends and some other actions prohibited by Delaware corporate law;
and (4) for any transaction resulting in receipt by the director of an improper
personal benefit.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law, which is applicable to
CanArgo as a Delaware corporation, prohibits various business combinations
between a Delaware corporation and an "interested stockholder," that is, anyone
who beneficially owns, alone or with other related parties, at least 15% of the
outstanding voting shares of a Delaware corporation. Business combinations
subject to Section 203 include mergers, consolidations, sales or other
-54-
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and some transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation. Section 203 prohibits this type of business combination for three
years after a person becomes an interested stockholder, unless:
-- the business combination is approved by the corporation's board of
directors prior to the date the person becomes an interest stockholder;
-- the interested stockholder acquired at least 85% of the voting stock of the
corporation, other than stock held by directors who are also officers or by
specified employee stock plans, in the transaction in which it becomes an
interested stockholder; or
-- the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Signature Stock
Transfer, Inc., Dallas, Texas, and the Norwegian sub-registrar for the common
stock is Den norske Bank ASA, Oslo, Norway.
SHARES ELIGIBLE FOR FUTURE RESALE
As of April 15, 2002, CanArgo has 97,070,580 shares of common stock issued and
issuable, 147,866 shares issuable upon exchange of CanArgo Oil & Gas Inc.
Exchangeable Shares without receipt of further consideration and 100 shares of
special voting stock outstanding.
The only material restriction on the approximately 232,250 shares of common
stock outstanding held by affiliates is the limitation on the number of shares
that may be sold in any three-month period under Rule 144. In general, under
Rule 144, a person who has beneficially owned restricted shares for at least one
year, including persons who are affiliates, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
-- 1% of the then outstanding shares of our common stock, approximately
970,000 shares; or
-- the reported average weekly trading volumes of our common stock during the
four calender weeks preceding a sale by such person.
-- Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information.
Under Rule 144(k), a person who has not been one of our affiliates during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is free to sell such shares without regard to the
volume, manner-of-sale or certain other limitations contained in Rule 144.
We can make no prediction as to the effect, if any, that sales of shares of
common stock or the availability of shares for sale will have on the market
price of our common stock. Nevertheless, sales of significant amounts of our
common stock could adversely affect the prevailing market price of the common
stock, as well as impair our ability to raise capital through the issuance of
additional equity securities.
An "affiliate" is generally considered to be an executive officer, director or
holder of enough of the equity securities of a company to be able to influence
the policies of that company.
In addition to the outstanding shares, at April 15, 2002 CanArgo had reserved
the following shares for possible future issuance:
-- 147,866 shares issuable upon exchange of exchangeable shares which are now
outstanding
-- 7,012,001 shares issuable upon exercise of outstanding stock options;
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-- 2,191,335 shares that may be issued upon exercise of options available for
future grant under CanArgo's stock option plans;
-- 187,500 shares issuable in connection with an oil and gas project.
Of the foregoing shares, all but 187,500 shares will be freely tradeable without
restriction or further registration under the Securities Act, except for shares
which may be acquired by affiliates of CanArgo which would be subject to Rule
144 as described above.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of the material U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock by
a non-U.S. holder. In general, a non-U.S. holder is:
o an individual who is neither a citizen nor a resident of the U.S. (as
determined for U.S. federal income tax purposes);
o a corporation or other entity taxed as a corporation organized or
created under non-U.S. law;
o an estate that is not taxable in the U.S. on its worldwide income; or
o a trust that is either not subject to primary supervision by a U.S.
court or not subject to the control of a U.S. person with respect to
substantial trust decisions.
If a partnership holds common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding common stock, we
suggest that you consult your tax advisor.
If you are an individual, you may, in many cases, be deemed to be a resident of
the U.S. by virtue of being present in the United States for at least 31 days in
the calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year (counting for such purposes all of
the days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the second
preceding year). Resident aliens are subject to U.S. federal income tax as if
they were U.S. citizens.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code") and administrative interpretations of the Code as of the date of this
prospectus, all of which are subject to change, including changes with
retroactive effect.
This discussion does not address all aspects of U.S. federal taxation or other
tax considerations that may be relevant to you, and in particular is limited in
the ways that follow:
o The discussion assumes that you hold your common stock as a capital
asset and that you do not have a special tax status.
o The discussion does not consider tax consequences that depend upon
your particular tax situation in addition to your ownership of the
common stock.
o The discussion does not consider special tax provisions that may be
applicable to you if you have relinquished U.S. citizenship or
residence.
o The discussion does not cover state, local or foreign law.
o We have not requested a ruling from the Internal Revenue Service
("IRS") on the tax consequences of owning the common stock. As a
result, the IRS could disagree with portions of this discussion.
Each prospective purchaser of common stock is advised to consult a tax advisor
with respect to current and possible future tax consequences of purchasing,
owning and disposing of our common stock as well as any tax consequences that
may arise under the laws of any United States state, municipality or other
taxing jurisdiction.
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DISTRIBUTIONS
Distributions paid on the shares of common stock generally will constitute
dividends for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. To the extent that the amount of any distribution exceeds
our current and accumulated earnings and profits for a taxable year, the
distribution will be treated first as a tax-free return of your basis in the
shares of common stock, causing a reduction in the adjusted basis of the common
stock, and the balance in excess of adjusted basis will be treated as capital
gain recognized on a disposition of the common stock (as discussed below).
As discussed under "Dividend Policy," CanArgo does not currently expect to pay
dividends. In the event that CanArgo does pay dividends, subject to the
discussion below, dividends paid to a non-U.S. holder of common stock generally
will be subject to withholding tax at a 30% rate or a reduced rate specified by
an applicable income tax treaty. A non-U.S. holder generally must file IRS Form
W-8BEN to certify its entitlement to the benefit of a reduced rate of
withholding under an income tax treaty. If common stock is held through a
foreign partnership or a foreign intermediary, the partnership or intermediary,
as well as the partners or beneficial owners, may need to meet certification
requirements.
The withholding tax does not apply to dividends paid to a non-U.S. holder that
provides a Form W-8ECI certifying that the dividends are effectively connected
with the non-U.S. holder's conduct of a trade or business within the United
States. Instead, the effectively connected dividends generally will be subject
to regular U.S. income tax as if the non-U.S. holder were a U.S. resident. If
the non-U.S. holder is eligible for the benefits of a tax treaty between the
U.S. and the holder's country of residence, any effectively connected income
generally will be subject to U.S. federal income tax only if it is attributable
to a permanent establishment in the U.S. maintained by the holder and such
treaty-based tax position is disclosed to the IRS. A non-U.S. corporation
receiving effectively connected dividends also may be subject to an additional
"branch profits tax" imposed at a rate of 30% (or a lower treaty rate) on an
earnings amount that is net of the regular tax.
You may obtain a refund of any excess amounts withheld by filing an appropriate
claim for refund along with the required information with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax on
gain realized on a sale or other disposition of common stock unless:
o the gain is effectively connected with a trade or business of the
non-U.S. holder in the United States and, if certain tax treaties
apply, is attributable to a permanent establishment in the U.S.
maintained by such holder;
o in the case of a non-resident alien individual who holds the common
stock as a capital asset, the individual is present in the United
States for 183 or more days in the taxable year of the disposition and
certain conditions are met; or
o unless an exception applies, CanArgo is or has been a U.S. real
property holding corporation at any time within the five-year period
preceding the disposition or during the non-U.S. holder's holding
period, whichever period is shorter.
The tax relating to stock in a U.S. real property holding corporation does not
apply to a non-U.S. holder whose holdings, actual and constructive, at all times
during the applicable period, amount to 5% or less of the common stock of a U.S.
real property holding corporation, provided that the common stock is regularly
traded on an established securities market. Generally, a corporation is a U.S.
real property holding corporation if the fair market value of its U.S. real
property interests, as defined in the Code and applicable regulations, equals or
exceeds 50% of the aggregate fair market value of its worldwide real property
interests and its other assets used or held for use in a trade or business.
CanArgo may be, or prior to a non-U.S. holder's disposition of common stock may
become, a U.S. real property holding corporation.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
CanArgo must report annually to the IRS the amount of dividends paid, the name
and address of the recipient, and the amount of any tax withheld. A similar
report is sent to the non-U.S. holder. Under tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence. A non-U.S. holder will generally be required to certify
its non-U.S. status in order to avoid backup withholding on dividends (although,
as noted above, such dividends distributed to a non-U.S. holder may be subject
to the regular withholding rules).
U.S. information reporting and backup withholding generally will not apply to a
payment of proceeds of a disposition of common stock where the transaction is
effected outside the United States through a non-U.S. office of a non-U.S.
broker. However, information reporting requirements, but not backup withholding,
generally will apply to such a payment if the broker is:
o a U.S. person;
o a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the U.S.;
o a controlled foreign corporation as defined in the Code; or
o a foreign partnership with certain U.S. connections.
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain conditions are met or the holder otherwise establishes an
exemption.
A non-U.S. holder will be required to certify its non-U.S. status, in order to
avoid information reporting and backup withholding on disposition proceeds,
where the transaction is effected by or through a U.S. office of a broker.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. When withholding results in an overpayment of taxes, a refund may be
obtained if the required information is furnished to the IRS.
FEDERAL ESTATE TAX
An individual non-U.S. holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the common stock will be required
to include the value of the stock in his gross estate for U.S. federal estate
tax purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON
STOCK BY NON-U.S. HOLDERS. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF OWNERSHIP AND DISPOSITION
OF COMMON STOCK, INCLUDING THE EFFECT OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS, AND ANY APPLICABLE INCOME OR ESTATE TAX TREATIES.
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATION OF LIABILITY
Our Certificate of Incorporation limits or eliminates the liability of our
directors or officers to us or our stockholders for monetary damages to the
fullest extent permitted by the Delaware General Corporation Law. Delaware law
provides that a director of CanArgo will not be personally liable to CanArgo or
our stockholders for monetary damages for a breach of fiduciary duty as a
director, except for liability: (1) for any breach of the director's duty of
loyalty; (2) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law; (3) for the payment of unlawful
dividends and some other actions prohibited by Delaware corporate law; and (4)
for any transaction resulting in receipt by the director of an improper personal
benefit.
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INDEMNIFICATION
Delaware General Corporation Law provides that a corporation may indemnify our
present and former directors, officers, employees and agents (each, an
"indemnitee") against all reasonable expenses (including attorneys' fees)
judgments, fines and amounts paid in settlement incurred in an action, suit or
proceeding, other than in actions initiated by or in the right of the
corporation, to which the indemnitee is made a party by reason of service as a
director, officer, employee or agent, if such individual acted in good faith and
in a manner which he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation and, in the case of a criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. A Delaware
corporation shall indemnify an indemnitee to the extent that he or she is
successful on the merits or otherwise in the defense of any claim, issue or
matter associated with an action, suit or proceeding, including one initiated by
or in the right of the corporation. Our Bylaws provide for indemnification of
directors and officers to the fullest extent permitted by Delaware General
Corporation Law.
Delaware General Corporation Law allows and our Bylaws provide for the advance
payment of an indemnity for expenses prior to the final disposition of an
action, provided that the indemnitee undertakes to repay any such amount
advanced if it is later determined that the indemnitee is not entitled to
indemnification with regard to the action for which the expenses were advanced.
Our directors and officers are insured, under policies of insurance maintained
by us, within the limits and subject to the limitations of the policies, against
certain expenses in connection with the defense of actions, suits or
proceedings, to which they are parties by reason of being or having been such
directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons who may control us pursuant to
the foregoing provisions, we have been informed that in the opinion of the SEC
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus was passed
upon for us by Satterlee Stephens Burke & Burke LLP, New York, New York.
EXPERTS
The consolidated financial statements of CanArgo Energy Corporation as of
December 31, 2001 and 2000 and for each of three years in the period ended
December 31, 2001 included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers, independent auditors, given on the
authority of said firm as experts in accounting and auditing.
Information from a report prepared by Ashton Jenkins Mann, a firm of independent
petroleum consultants, has been included in this prospectus in reliance on the
fact that Ashton Jenkins Mann is an expert in the evaluation of oil and gas
reserves.
AVAILABLE INFORMATION
This prospectus is part of a registration statement on Form S-1 (file no.
333-67814) filed by CanArgo with the SEC. This prospectus does not contain all
of the information set forth in the registration statement. Additional
information about CanArgo and its common stock is contained in the registration
statement and its exhibits. This prospectus contains summary descriptions of
some of the documents that are filed as exhibits to the registration statement.
You should read the entire document filed as an exhibit and not rely solely on
the summaries in this prospectus.
CanArgo files reports with the SEC such as annual and quarterly reports, proxy
and information statements, and other information. The public may read and copy
any materials CanArgo files with the SEC, including the registration statement
and its exhibits, at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
-59-
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers, such as CanArgo, that file
electronically with the SEC. The address of that site is: http://www.sec.gov.
From the SEC home page, click on "Search Edgar Archives", then "Quick Forms
Lookup."
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INDEX TO FINANCIAL STATEMENTS
CANARGO ENERGY CORPORATION:
Consolidated Balance Sheet as at December 31, 2001 and 2000 F-3
Consolidated Statement of Operations for the years ended December 31, F-4
2001, 2000 and 1999
Consolidated Statement of Cash Flows for the years ended December 31, F-5
2001, 2000 and 1999
Consolidated Statement of Stockholders' Equity for the years ended F-6
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements F-8
Supplemental Financial Information: Quarterly Results of Operations - F-24
Unaudited
Supplemental Financial Information: Supplemental Oil and Gas
Disclosures - Unaudited F-25
F-1
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, 2001 and 2000, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 2001 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
--------------------------
London, England PRICEWATERHOUSECOOPERS
March 18, 2002 Chartered Accountants
F-2
CANARGO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 5,891,292 $ 29,697,267
Accounts receivable 2,646,110 395,457
Inventory 583,849 695,909
Prepayments 2,235,712 685,991
Other current assets 733,211 201,062
------------ ------------
Total current assets $ 12,090,174 $ 31,675,686
Capital assets, net 57,684,710 50,477,344
Investments in and advances to oil and gas and other
ventures - net 1,085,922 696,374
------------ ------------
TOTAL ASSETS $ 70,860,806 $ 82,849,404
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,618,308 $ 2,630,118
Advances from joint venture partner - 5,888,573
Current portion of long term debt 392,408 -
Income taxes payable 90,456 61,000
Accrued liabilities 400,221 409,144
------------ ------------
Total current liabilities $ 2,501,393 $ 8,988,835
Long term debt 514,352 -
Provision for future site restoration 64,290 40,990
Minority shareholder advances 450,000 -
Minority interest in subsidiaries 1,531,191 1,393,915
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, par value $0.10 per share - -
Common stock, par value $0.10 per share 9,200,845 7,595,069
Capital in excess of par value 144,057,517 139,071,031
Accumulated deficit (87,458,782) (74,240,436)
------------ ------------
Total stockholders' equity $ 65,799,580 $ 72,425,664
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,860,806 $ 82,849,404
============ ============
The accompanying notes are an integral part of the
consolidated financial statements
F-3
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31,
2001 2000 1999
------------- ------------ ------------
Operating Revenues from Continuing Operations:
Oil and gas sales $ 3,967,078 $ 6,108,779 $ 2,493,612
Refining and marketing 10,203,252 661,880 -
Other 608,032 364,900 289,321
------------- ------------ ------------
14,778,362 7,135,559 2,782,933
============= ============ ============
Operating Expenses:
Field operating expenses 1,568,011 1,287,035 1,062,610
Purchases of crude oil and products 7,627,253 138,144 -
Refinery operating expenses 791,139 439,037 -
Direct project costs 1,300,423 737,731 766,424
Selling, general and administrative 4,220,844 3,054,675 2,192,728
Depreciation, depletion and amortization 3,351,229 3,875,988 1,145,029
Impairment of oil and gas properties 7,300,000 - 233,957
Impairment of oil and gas ventures - - 5,459,793
Impairment of other assets 3,859,795 - -
Loss on disposition of assets 16,130 - 41,742
------------- ------------ ------------
30,034,824 9,532,610 10,902,283
============= ============ ============
OPERATING LOSS FROM CONTINUING OPERATIONS (15,256,462) (2,397,051) (8,119,350)
============= ============ ============
Other Income (Expense):
Interest, net 575,883 549,749 (199,604)
Other (126,162) (99,469) (74,172)
Equity income (loss) from investments (160,000) (240,070) (261,234)
------------- ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 289,721 210,210 (535,010)
============= ============ ============
NET LOSS BEFORE INCOME TAX AND MINORITY INTEREST (14,966,741) (2,186,841) (8,654,360)
Income taxes 46,203 - -
Minority interest in loss of consolidated subsidiaries 1,794,598 35,237 181,500
------------- ------------ ------------
NET LOSS AND COMPREHENSIVE LOSS $ (13,218,346) $ (2,151,604) $ (8,472,860)
============= ============ ============
Weighted average number of
common shares outstanding 83,869,579 54,950,630 26,370,235
------------- ------------ ------------
NET LOSS PER COMMON SHARE - BASIC $ (0.16) $ (0.04) $ (0.32)
------------- ------------ ------------
NET LOSS PER COMMON SHARE - DILUTED $ (0.16) $ (0.04) $ (0.32)
------------- ------------ ------------
The accompanying notes are an integral part of the
consolidated financial statements
F-4
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31,
2001 2000 1999
------------- ------------ ------------
Operating activities:
Net loss $ (13,218,346) $ (2,151,604) $ (8,472,860)
Depreciation, depletion and amortization 3,351,229 3,875,988 1,145,029
Impairment of oil and gas properties 7,300,000 - 233,957
Impairment of other assets 3,859,795 - 5,459,793
Issuance of common stock for services - 112,700 298,872
Equity loss (income) from investments 160,000 240,070 261,234
Loss (gain) on disposition of assets 16,130 - 41,742
Allowance for doubtful accounts 200,000 100,000 76,921
Minority interest in loss of consolidated subsidiaries (1,794,598) (35,237) (181,500)
Changes in assets and liabilities:
Accounts receivable (2,184,137) 221,678 (121,429)
Inventory 112,060 19,256 (18,095)
Prepayments (130,300) (628,853) 271,442
Other current assets (532,149) (144,222) 277,539
Accounts payable (2,508,286) 204,624 322,536
Income taxes payable 29,456 - -
Accrued liabilities (281,318) 62,225 (805,053)
Receipt (use of) advances from joint venture partner (5,888,573) 5,888,573 -
------------- ------------ ------------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES (11,509,037) 7,765,198 (1,209,872)
============= ============ ============
Investing activities:
Capital expenditures (15,738,868) (12,485,506) (3,504,840)
Proceeds from disposition of assets 19,383 13,408 1,166,234
Acquisitions, net of cash acquired (4,044,973) - -
Proceeds from disposition of investment 125,000 - -
Investments in and advances to oil and gas and other
ventures (1,198,017) (236,074) (649,603)
Change in non working capital items (1,340,359) (150,000) 150,000
------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (22,177,834) (12,858,172) (2,838,209)
============= ============ ============
Financing Activities:
Proceeds from sales of common stock 7,235,337 33,283,873 6,392,739
Share issue costs (643,075) (2,848,505) (828,300)
Minority shareholder advances 450,000
Advances from minority interest 1,931,874 500,000 -
Increase in long term debt 906,760 - -
Cash acquired - 207,470 -
------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,880,896 31,142,838 5,564,439
============= ============ ============
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23,805,975) 26,049,864 1,516,358
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,697,267 3,647,403 2,131,045
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,891,292 $ 29,697,267 $ 3,647,403
============= ============ ============
The accompanying notes are an integral part of the
consolidated financial statements
F-5
\
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK
----------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
----------- ------------ ------------- ------------- -------------
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
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AN 1999
(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
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 private placements 31,355,916 3,135,592 29,565,876 -- 32,701,468
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
=========== ============ ============= ============= ============
Less shares issuable at
beginning of year (423,791) (42,379) (795,712) -- (838,091)
Issuance of common stock upon
exchange of CanArgo Oil & Gas
Inc. Exchangeable Shares 274,965 27,497 516,276 -- 543,772
Issuance of common stock
pursuant to private placement 16,057,765 1,605,776 5,629,561 -- 7,235,337
Share issue costs -- -- (643,075) -- (643,075)
Net loss -- -- -- (13,218,346) (13,218,346)
----------- ------------ ------------- ------------- ------------
BALANCE, DECEMBER 31, 2001 91,859,620 $ 9,185,962 $ 143,778,081 $ (87,458,782) $ 65,505,261
=========== ============ ============= ============= ============
Shares issuable upon exchange
of CanArgo Oil & Gas Inc.
Exchangeable Shares without
receipt of further consideration 148,826 14,883 279,436 -- 294,319
----------- ------------ ------------- ------------- ------------
TOTAL, DECEMBER 31, 2001 92,008,446 $ 9,200,845 $ 144,057,517 $ (87,458,782) $ 65,799,580
=========== ============ ============= ============= ============
The accompanying notes are an integral part of the
consolidated financial statements
F-7
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. 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.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes
term-deposits with original maturity terms not exceeding 90 days.
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.
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.
F-8
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oil And Gas Properties - CanArgo and the unconsolidated entities for which
it accounts using the equity method account for oil and gas properties and
interests under the full cost method. Under this accounting method, costs,
including a portion of internal costs associated with property acquisition
and exploration for and development of oil and gas reserves, are
capitalized within cost centers established on a country-by-country basis.
Capitalized costs within a cost center, as well as the estimated future
expenditures to develop proved reserves and estimated net costs of
dismantlement and abandonment, are amortized using the unit-of-production
method based on estimated proved oil and gas reserves. All costs relating
to production activities are charged to expense as incurred.
Capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, are limited
to an amount (the 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 undiscounted future site restoration, dismantlement and
abandonment costs of $820,000 at December 31, 2001 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.
ADVANCES - Advances received by CanArgo from joint venture partners, which
are to be spent by CanArgo on behalf of the joint venture partners, are
classified within operating inflows on the basis they do not meet the
definition of finance or investing activities. When the cash advances are
spent, the payable is reduced accordingly. These advances do not contribute
to CanArgo's operating profits and are accounted for/disclosed as balance
sheet entries only ie. within cash and payable to joint venture partner.
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
F-9
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 CanArgo's upstream and refining operations and the Lari is the
functional currency for marketing operations. 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,
2001, 2000 and 1999 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. See
Capital Assets, Oil and Gas Properties above.
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. The application of APB Opinion 25 has further been
clarified by Financial Accounting Standards Board ("FASB") Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation".
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 July 2001, FASB issued Statement No.
141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001 as well as all purchase method business combinations completed after
June 30, 2001. Statement 141 also specifies criteria, which must be met,
for intangible assets acquired in a purchase method business combination to
be recognized and reported apart from goodwill. Statement 142 will require
that goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values.
CanArgo is required to adopt the provisions of Statement 141 immediately
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and
any intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Based on present circumstances Statement 141 and 142 would not have any
material effect on CanArgo's financial statements.
In August 2001, FASB issued Statement No. 143 Accounting for Asset
Retirement Obligations. Statement 143 requires companies to record the fair
value of a liability for an asset retirement obligation in the period
F-10
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in which the liability is incurred concurrent with an increase in the
long-lived assets carrying value. The increase and subsequent adjustments
in the related long-lived assets carrying value is amortised over its
useful life. Upon settlement of the liability, a gain or loss is recorded
for the difference between the settled liability and the recorded amount.
This standard will be effective for CanArgo on January 1, 2003. We are in
the process of assessing the impact that the adoption of this standard will
have on our financial position and results of operations.
In August 2001, FASB issued Statement No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets. Statement 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a
business (as previously defined in that Opinion). Among other provisions,
the new rules change the criteria for classifying an asset as
held-for-sale. The standard also broadens the scope of businesses to be
disposed of that qualify for reporting as discontinued operations, and
changes the timing of recognizing losses on such operations. Statement 144
is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years,
with early application encouraged. The Company will adopt Statement 144 in
2002, but based on present circumstances is not expected to have any
material effect on CanArgo's 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.
4. INVENTORY
Inventory at December 31, 2001 consisted of the following:
DECEMBER 31, December 31,
2001 2000
------------ ------------
Crude oil $373,818 $186,685
Refined products 210,031 509,224
-------- --------
$583,849 $695,909
======== ========
F-11
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CAPITAL ASSETS
Capital assets, net of accumulated depreciation and impairment, at
December 31, 2001 include the following:
ACCUMULATED
DEPRECIATION NET
COST AND IMPAIRMENT CAPITAL ASSETS
----------- -------------- --------------
OIL AND GAS PROPERTIES
Proved properties $31,900,462 $(15,230,771) $16,669,691
Unproved properties 24,570,886 -- 24,570,886
----------- ------------ -----------
56,471,348 (15,230,771) 41,240,577
PROPERTY AND EQUIPMENT
Oil and gas related equipment 13,928,639 (3,306,868) 10,621,771
Office furniture, fixtures and
equipment and other 1,038,451 (476,230) 562,221
----------- ------------ -----------
14,967,090 (3,783,098) 11,183,992
REFINING AND MARKETING 9,431,528 (4,171,387) 5,260,141
----------- ------------ -----------
$80,869,966 $(23,185,256) $57,684,710
=========== ============ ===========
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
=========== =========== ===========
OIL AND GAS PROPERTIES
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. As a result of application of the ceiling test
limitation, CanArgo recorded a write-down in 2001 of oil and gas properties
of $7,300,000. In 2001, refining assets and generating equipment were
written-down to their estimated net realizable value by $3,359,795 and
$500,000 respectively.
F-12
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CanArgo generally has the principal responsibility for arranging financing
for the oil and gas properties and ventures in which it has an interest,
including the Bugruvativske field. There can be no assurance, however, that
CanArgo or the entities that are developing the oil and gas properties and
ventures will be able to arrange the financing necessary to develop the
projects being undertaken or to support the corporate and other activities
of CanArgo or that such financing as is available will be on terms that are
attractive or acceptable to or are deemed to be in the best interests of
CanArgo, such entities or their respective stockholders or participants.
The consolidated financial statements of CanArgo do not give effect to any
additional impairment in the value of CanArgo's investment in oil and gas
properties and ventures or other adjustments that would be necessary if
financing cannot be arranged for the development of such properties and
ventures or if they are unable to achieve profitable operations. Failure to
arrange such financing on reasonable terms or failure of such properties
and ventures to achieve profitability would have a material adverse effect
on the financial position, including realization of assets, results of
operations, cash flows and prospects of 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.
6. 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, 2001 and 2000 is set out below:
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES DECEMBER 31, December 31,
2001 2000
------------ ------------
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company $ 6,698,062 $6,086,254
Republic of Georgia - Ninotsminda
Through 50.0% effective ownership CanArgo Power Corporation -- 676,583
Republic of Georgia - Ninotsminda
Through an effective 50% ownership of East Georgian Pipeline Co. 192,500 90,500
Uentech International Corporation
Through an effective 45% voting interest -- 304,943
Other Investments 441,614 75,001
----------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES $ 7,332,176 $7,233,281
----------- ----------
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw (593,961) (626,461)
Republic of Georgia - CanArgo Power Corporation -- (186,074)
Republic of Georgia - East Georgian Pipeline Co. (192,500) (50,000)
Uentech International Corporation -- (214,579)
----------- ----------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES $ (786,461) (1,077,114)
IMPAIRMENT - STYNAWSKE FIELD (5,459,793) (5,459,793)
----------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 1,085,922 $ 696,374
=========== ==========
F-13
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex
Acquisition Corporation the remaining 50% interest it did not own in
CanArgo Power for cash consideration of $425,000. In a related but separate
transaction, CanArgo sold in April 2001 all of its voting and non-voting
shares of Uentech International Corporation to a wholly owned subsidiary of
Terrenex Acquisition Corporation. Proceeds from the sale of Uentech
International Corporation were $125,000. On completion of the acquisition,
CanArgo Power became a wholly owned subsidiary of CanArgo. The transactions
were approved by an independent committee of the Board of Directors.
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. At present, certain obligations must be met by June 2002 in order
for Boryslaw Oil Company to retain the field licence including the drilling
of one new well. CanArgo is currently seeking an extension to the licence
to allow a proper assessment of the workovers and development plans. If
Boryslaw Oil Company does not proceed with the Stynawske field development
programme or if an extension to the current licence cannot be obtained, it
may be in breach of obligations it has with regard to the field license and
an impairment charge against CanArgo's investment in and advances to
Boryslaw Oil Company may be required.
Other investments include CanArgo's 10% interest in a potential Caspian Sea
exploration project and two petrol station sites in Tbilisi, Georgia in
which CanArgo has a 50% non-controlling interest. CanArgo accounts for its
interest in the two petrol station sites using the equity method.
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.
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2001 and 2000 include the following:
DECEMBER 31, December 31,
2001 2000
------------ ------------
Professional fees $150,000 $175,000
Office relocation -- 126,666
Operating costs 90,000 --
Other 160,221 107,448
-------- --------
$400,221 $409,114
======== ========
8. LONG TERM DEBT
Bank loans at December 31, 2001 and 2000 include the following:
DECEMBER 31, December 31,
2001 2000
------------ ------------
Outstanding bank loan $ 906,760 $ --
Less current portion (392,408) --
-------- ---------
Long term debt $ 514,352 $ --
========= =========
In November 2001, CanArgo Standard Oil Products Limited entered into a $1
million credit facility agreement with a commercial lender in Georgia to
fund further expansion of its petrol station network. In 2001, the full
amount of the facility was drawn of which $906,760 was outstanding as at
December 31,
F-14
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001. The loan bears interest at 18% per annum and is secured by the assets
of three petrol stations. The full amount of the loan is to be repaid by
December 2003. No parent company guarantees have been provided by CanArgo
with respect to this loan.
9. MINORITY SHAREHOLDER ADVANCES
In 2001 CanArgo received $450,000 on issuance of convertible loans from the
other 50% shareholders of CanArgo's subsidiary, CanArgo Norio Limited
("Norio"). The cash amount received represents part of their share of the
cost of drilling an exploration well under the Norio and North Kumisi
production sharing agreement. CanArgo anticipates increasing its interest
to over 60% in CanArgo Norio Limited through an increased level of funding
of this well.
The convertible loans are non interest bearing and will convert into
ordinary share capital of CanArgo Norio Limited 30 days after the final
cost of the well is known. It is at this point when the final ownership
interest in CanArgo Norio Limited will be determined and consequently the
$450,000 and any subsequent advances from the other 50% shareholders
towards the cost of the well will be reclassified as minority interest.
10. COMMITMENTS AND CONTINGENCIES
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring and developing oil and
gas properties and ventures. At December 31, 2001, 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,
2001, 2000 and 1999 was $353,594, $178,745 and $115,425 respectively.
Future minimum rental payments over the next five years for the Company's
lease obligations as of December 31, 2001, are as follows:
2002 $ 250,000
2003 $ 250,000
2004 $ 250,000
2005 $ 220,000
2006 $ 220,000
11. 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.
F-15
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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.
On January 24, 2002 CanArgo announced that it has established May 24, 2002
as the redemption date for all of the Exchangeable Shares of CAOG. Each
Exchangeable Share will be purchased by CanArgo for shares of CanArgo
Common Stock on a share-for-share basis. No cash consideration will be
issued by CanArgo and the purchase will not increase the total number of
shares of Common Stock of CanArgo issued and issuable.
As of December 31, 2001, 91,859,620 shares of Common Stock, 148,826
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, 2001, 2000 and 1999, 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, 2001
o In 2001, CanArgo issued 274,965 shares upon exchange by holders of
Exchangeable Shares.
o In July 2001, CanArgo issued 16,057,765 shares at $0.41 per share upon
completion of a private placement.
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.
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.
F-16
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
13. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the years ended December
31, 2001, 2000 and 1999 were based on the weighted average number of common
shares outstanding during those periods. The weighted average number of
shares used was 83,869,579, 54,950,630 and 26,370,235 respectively. Options
to purchase CanArgo's Common Stock were outstanding during the years ended
December 31, 2001, 2000 and 1999 but were not included in the computation
of diluted net loss per common share because the effect of such inclusion
would have been anti-dilutive.
14. 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, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
Income tax benefit at statutory rate $(4,494,238) $(731,545) $(2,880,772)
Benefit of losses not recognized 4,494,238 731,545 2,880,772
Foreign tax provision 46,203 -- --
Other, net -- -- --
----------- --------- ----------
Provision for income taxes $ 46,203 $ -- $ --
=========== ========= ==========
Effective tax rate 0.3% 0% 0%
=========== ========= ==========
F-17
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred tax assets as of December 31, 2001 and 2000
were as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Net operating loss carryforwards $ 11,256,000 $ 13,172,000
Foreign net operating loss carryforwards 4,844,000 6,268,000
Net timing differences on impairments and accelerated
------------ ------------
25,081,000 27,828,000
Valuation allowance (25,081,000) (27,828,000)
------------ ------------
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 $413,000 per year on a cumulative basis. As of December
31, 2001, total U.S. net operating loss carryforwards were
approximately $33,107,000. Of that amount, approximately $322,000 was
incurred subsequent to the ownership change in 2000, $32,785,000 was
incurred prior to 2000 and therefore is subject to the IRC Section 382
limitation. See Note 1 of Notes to Consolidated Financial Statements.
The net operating loss carryforwards expire from 2002 to 2021 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
$14,247,000 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.
15. SEGMENT AND GEOGRAPHICAL DATA
During the year ended December 31, 1999 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, 2001, 2000 and 1999
by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
OPERATING REVENUES: ------------ ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ 4,873,623 $ 6,108,779 $ 2,274,524
Canada -- -- 219,088
------------ ------------ ------------
4,873,623 6,108,779 2,493,612
REFINING AND MARKETING
Eastern Europe 10,203,252 661,880 --
INTERSEGMENT ELIMINATIONS (906,545) -- --
------------ ------------ ------------
TOTAL $ 14,170,330 $ 6,770,659 $ 2,493,612
============ ============ ============
F-18
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2001, the Company sold its oil and gas production in Eastern Europe
to five (2000 - five, 1999 - five) customers. In 2001 sales to three
third party customers represented 67%, 12% and 12% of oil and gas
revenue respectively. In 2000 sales to three third party customers
represented 43%, 25% and 14% of oil and gas revenue respectively. In
1999 sales to three third party customers represented 38%, 34% and 11%
of oil and gas revenue respectively.
Operating profit (loss) for the years ended December 31, 2001, 2000 and
1999 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
OPERATING PROFIT (LOSS): ------------ ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ (6,630,886) $ 871,896 $ (6,154,404)
Canada -- -- (7,926)
------------ ------------ ------------
(6,630,886) 871,896 (6,162,330)
REFINING AND MARKETING
Eastern Europe (3,832,529) (294,156) --
CORPORATE AND OTHER EXPENSES (4,793,047) (2,974,791) (1,957,020)
------------ ------------ ------------
TOTAL $(15,256,462) $ (2,397,051) $ (8,119,350)
============ ============ ============
As a result of application of the ceiling test limitation, CanArgo
recorded a write-down in 2001 of oil and gas properties of $7,300,000.
In 2001, refining assets and generating equipment were written-down to
their estimated net realizable value by $3,359,795 and $500,000
respectively. The write-down of oil and gas properties and generating
equipment was recorded in operating profit (loss) for oil and gas,
exploration and production. The write-down of refining assets was
recorded in profit (loss) for refining and marketing activities.
Identifiable assets as of December 31, 2001 and 2000 by business
segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31,
CORPORATE 2001 2000
----------- -----------
Eastern Europe $ 3,926,930 $ 695,909
Western Europe (principally cash) 8,163,244 30,979,777
----------- -----------
TOTAL CORPORATE 12,090,174 31,675,686
----------- -----------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe 52,424,569 45,957,601
REFINING AND MARKETING
Eastern Europe 5,260,141 4,519,743
OTHER ENERGY PROJECTS
Eastern Europe 1,085,922 606,010
Canada -- 90,364
----------- -----------
TOTAL OTHER ENERGY PROJECTS 1,085,922 696,374
----------- -----------
TOTAL IDENTIFIABLE ASSETS $70,860,806 $82,849,404
=========== ===========
F-19
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL CASH FLOW INFORMATION AND
NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the
years ended December 31, 2001, 2000 and 1999:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
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
=========== ========== ==========
17. 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, 7,500,000 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, 2001. The exercise price and vesting schedule of
stock appreciation rights are determined at the date of grant. Under
the 1995 Plan, 4,065,334 options were outstanding at December 31, 2001.
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
F-20
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exceed 10 years from the date of grant. Under the CAOG Plan, 806,667
options were outstanding at December 31, 2001.
In 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. At December 31, 2001, all 2,220,000 special stock options and
warrants remained outstanding.
The purpose of the Company's stock option plans is to further the
interest of the Company by enabling officers, directors, employees,
consultants and advisors of the Company to acquire an interest in the
Company by ownership of its stock through the exercise of stock options
and stock appreciation rights granted under its various stock option
plans.
A summary of the status of stock options granted under the 1994 Plan,
the 1995 Plan, CAOG Plan and special stock options and warrants is as
follows:
WEIGHTED
SHARES ISSUABLE AVERAGE
SHARES AVAILABLE UNDER OUTSTANDING EXERCISE
FOR ISSUE OPTIONS PRICE
---------------- ----------------- ---------
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 436,250 (436,250) 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 468,000 5,235,336 1.02
Options (1995 Plan):
Increase in shares available for issue 3,500,000 --
Granted at market (1,795,000) 1,795,000 0.68
Exercised -- --
Canceled (123,335) (123,335) 1.44
CAOG Plan Authorization:
Granted at market (185,000) 185,000 1.02
F-21
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exercised -- --
Canceled -- --
---------- --------- ----
BALANCE, DECEMBER 31, 2001 2,111,335 7,092,001 0.92
========== ========== ====
Shares issuable upon exercise of vested options and the corresponding
weighted average exercise price are as follows:
SHARES ISSUABLE WEIGHTED AVERAGE
UNDER EXERCISABLE EXERCISE
OPTIONS PRICE
----------------- ----------------
December 31, 1999 672,277 $ 1.85
December 31, 2000 725,329 $ 0.99
December 31, 2001 3,452,831 $ 0.91
The weighted average fair value of options granted during the year was
$0.71, $1.26 and $0.22 for the years ended December 31, 2001, 2000 and
1999 respectively.
The following table summarizes information about stock options
outstanding at December 31, 2001:
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 2001 TERM PRICE 2001 PRICE
------------------------ -------------- ------- ------- -------------- -------
$0.275 to $0.69 2,790,001 4.64 0.65 1,511,249 0.48
$0.70 to $0.99 175,000 3.97 0.88 61,667 0.88
$1.00 to $1.85 4,127,000 2.50 1.30 1,879,915 1.26
--------- ---- ---- --------- ----
$0.275 to $1.85 7,092,001 3.38 0.92 3,452,831 0.91
========= ==== ==== ========= ====
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 $14,553,000 and $0.17
respectively for the year ended December 31, 2001, $3,077,000 and $0.05
respectively for the year ended December 31, 2000 and $8,806,000 and
$0.34 respectively for the year ended December 31, 1999.
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, 2001,
2000 and 1999: dividend yield of 0.00%, risk-free interest rate of
4.61% for the year ended December 31, 2001, dividend yield of 0.00%;
risk-free interest rate of 5.98% for the year ended December 31, 2000,
and dividend yield of 0.00%; risk-free interest rate of 5.86% for the
year ended December 31, 1999, the average expected lives of options of
3.37 years, 3.51 years and 4.0 years respectively; and volatility of
75.15% for the year ended December 31, 2001, 75.07% for the year ended
December 31, 2000 and 80.0% for the year ended December 31, 1999.
F-22
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RELATED PARTY TRANSACTIONS
The majority of refined product purchased by CanArgo Standard Oil
Products for resale at its petrol stations is purchased from a company
controlled by the shareholders who own the 50% interest in CanArgo
Standard Oil Products Ltd. not held by CanArgo. Total product
purchasers from the related company in 2001 were $4,941,000. At
December 31, 2001, accounts payable included $223,725 with respect to
these purchases. In 2001 the related company also contributed petrol
station sites to CanArgo Standard Oil Products at negotiated arms
length amounts.
Certain equipment is provided to Georgian British Oil Company
Ninotsminda by a company owned by significant employees of Georgian
British Oil Company Ninotsminda. Total rental payments for this
equipment in 2001 was $124,078.
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.
19. SUBSEQUENT EVENTS
On February 12, 2002, CanArgo completed a private placement of
5,210,000 common shares at NOK 2.95 per share (approximately US$0.33
per share) for gross proceeds of approximately $1,719,000.
F-23
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2001
------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Operating Revenue $ 3,597,803 $ 2,963,636 $ 4,082,422 $ 4,134,501 $ 14,778,362
Operating Loss from
Continuing Operations (545,801) (1,254,982) (698,675) (12,757,004) (15,256,462)
Net Loss (326,081) (1,203,440) (487,364) (11,201,461) (13,218,346)
Net Loss per Common Share -
basic and diluted (0.00) (0.02) (0.01) (0.12) (0.16)
2000
------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Operating Revenue $ 2,080,976 $ 1,515,095 $ 1,163,277 $ 2,376,211 $ 7,135,559
Operating Profit (Loss) from
Continuing Operations 122,707 (187,392) (788,199) (1,544,167) (2,397,051)
Net Profit (Loss) 100,462 (279,952) (712,729) (1,259,585) (2,151,604)
Net Profit (Loss) per Common
Share - basic and diluted 0.00 (0.01) (0.01) (0.02) (0.04)
F-24
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, 2001 is believed to have caused a material change in the estimates of proved
or proved developed reserves as of that date.
The following tables sets forth the Company's net proved oil and gas reserves,
including the changes therein, and net proved developed reserves at December 31,
2001, 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, 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
Purchase of properties -- --
Revisions of previous estimates (5,522) -- (5,522)
Extension, discoveries, other additions -- -- --
Production (414) -- (414)
Disposition of properties -- -- --
------ ------ ------
DECEMBER 31, 2001 3,729 -- 3,729
====== ====== ======
NET PROVED DEVELOPED OIL RESERVES
December 31, 2001 2,928 -- 2,928
====== ====== ======
F-25
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
NET PROVED RESERVES - GAS REPUBLIC OF
(In Million Cubic Feet) GEORGIA
-------
Purchase of properties --
Revisions of previous estimates --
Extension, discoveries, other additions 8,417
Production (83)
-------
DECEMBER 31, 1999 8,334
Purchase of properties 1,658
Revisions of previous estimates --
Extension, discoveries, other additions 4,654
Production (1,146)
Disposition of properties --
-------
DECEMBER 31, 2000 13,500
Purchase of properties --
Revisions of previous estimates (7,365)
Extension, discoveries, other additions --
Production (1,110)
Disposition of properties --
-------
DECEMBER 31, 2001 5,025
=======
NET PROVED DEVELOPED GAS RESERVES
December 31, 2001 3,863
=======
Net proved oil reserves in the Republic of Georgia as at December 31, 2001 and
2000 were as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------------------- --------------------------
PSC PSC
OIL RESERVES ENTITLEMENT OIL RESERVES ENTITLEMENT
- GROSS VOLUMES - GROSS VOLUMES
(MSTB) (MSTB)(1) (MSTB) (MSTB)(1)
------------ ----------- ------------ -----------
Proved Developed Producing 3,985 2,928 3,800 2,570
Proved Undeveloped 1,076 801 14,500 7,095
------ ------ ------ ------
TOTAL PROVEN 5,061 3,729 18,300 9,665
====== ====== ====== ======
Net proved gas reserves in the Republic of Georgia as at December 31, 2001 and
2000 were as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------------------- --------------------------
PSC PSC
OIL RESERVES ENTITLEMENT OIL RESERVES ENTITLEMENT
- GROSS VOLUMES - GROSS VOLUMES
(MMCF) (MMCF)(1) (MMCF) (MMCF)(1)
------------ ----------- ------------ -----------
Proved Developed Producing 12,878 3,863 15,200 4,560
Proved Undeveloped 3,873 1,162 29,800 8,940
------ ------ ------ ------
TOTAL PROVEN 16,751 5,025 45,000 13,500
====== ====== ====== ======
________
(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.
F-26
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, 2001, 2000 and 1999 are as follows:
REPUBLIC OF
YEAR ENDED DECEMBER 31, 2001 GEORGIA
------------
Revenues $ 4,873,623
Operating expenses 1,568,011
Depreciation, depletion and amortization 10,167,368
------------
Operating Income/(Loss) (6,861,756)
Income tax provision --
------------
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES $ (6,861,756)
============
REPUBLIC OF
YEAR ENDED DECEMBER 31, 2000 GEORGIA
------------
Revenues $6,108,779
Operating expenses 1,287,035
Depreciation, depletion and amortization 3,099,000
----------
Operating Income 1,722,744
Income tax provision --
----------
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES $1,722,744
==========
REPUBLIC OF
YEAR ENDED DECEMBER 31, 1999 GEORGIA CANADA TOTAL
---------- ---------- ----------
Revenues $2,274,524 $ 219,088 $2,493,612
Operating expenses 703,430 205,495 908,925
Depreciation, depletion and amortization 968,203 -- 968,203
---------- ---------- ----------
Operating Income (Loss) 602,891 13,593 616,484
Income tax provision -- -- --
---------- ---------- ----------
RESULTS OF OPERATIONS FOR OIL AND GAS
PRODUCING ACTIVITIES $ 602,891 $ 13,593 $ 616,484
========== ========== ==========
F-27
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, 2001, 2000 and 1999 are as follows:
EASTERN
EUROPE CANADA TOTAL
----------- ----------- -----------
DECEMBER 31, 2001
Property Acquisition
Unproved* $ 5,186,002 $ -- $ 5,186,002
Proved -- -- --
Exploration 5,851,306 -- 5,851,306
Development 2,054,989 -- 2,054,989
----------- ----------- -----------
Total costs incurred $13,092,297 $ -- $13,092,297
=========== =========== ===========
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,$79 S 39,101 $ 2,030,880
=========== =========== ===========
*These amounts represent costs incurred by CanArgo and excluded from the
amortization base until proved reserves are established or impairment
is determined.
F-28
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, 2001 (IN THOUSANDS) GEORGIA
--------
Future cash inflows $61,922
Less related future:
Production costs 26,177
Development and abandonment costs 6,284
-------
Future net cash flows before income taxes 29,461
Future income taxes (1) (740)
-------
Future net cash flows 28,721
10% annual discount for estimating timing of cash flows 12,026
-------
Standardized measure of discounted future net cash flows $16,695
=======
F-29
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
REPUBLIC OF
DECEMBER 31, 2000 (IN THOUSANDS) GEORGIA
-----------
Future cash inflows $219,531
Less related future:
Production costs 37,356
Development and abandonment costs 63,049
--------
Future net cash flows before income taxes 119,126
Future income taxes (1) (5,063)
--------
Future net cash flows 114,063
10% annual discount for estimating timing of cash flows 51,097
--------
Standardized measure of discounted future net cash flows $ 62,966
========
---------------
(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. 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.
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 2001 2000 1999
----------- ----------- ------------
Beginning of year $ 62,966 $ 40,168 $ 15,040
Purchase (sale) of reserves in place -- 11,316 (437)
Revisions of previous estimates (36,196) (409) --
Development costs incurred during the period 2,055 9,262 1,992
Additions to proved reserves resulting from
extensions, discoveries and improved recovery -- -- --
Accretion of discount -- -- --
Sales of oil and gas, net of production costs (2,327) (4,822) (1,410)
Net change in sales prices, net of production
costs (12,865) 4,393 29,256
Changes in production rates (timing) and other 3,062 3,058 (4,273)
-------- -------- --------
Net increase (decrease) (46,271) 22,798 25,128
-------- -------- --------
End of year $ 16,695 $ 62,966 $ 40,168
======== ======== ========
F-30
================================================================
8,027,706 SHARES
(CANARGO LOGO)
CANARGO ENERGY CORPORATION
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
o, 2002
================================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On February 12, 2002, CanArgo completed a private placement of 5,210,000 common
shares at NOK 2.95 per share (approximately US$0.33 per share) to certain
institutions and qualified purchasers identified in a prospectus filed as part
of a registration statement on Form S-1 (file no. 333-85116) in a private
placement intended to qualify for the exemption from registration under the
Securities Act afforded by Regulation S promulgated thereunder. Gross proceeds
from the placement were approximately $1,719,000.
ITEM 16. EXHIBITS.
Management Contracts, Compensation Plans and Arrangements are identified by an
asterisk (*)
*10(22) Employment Agreements between CanArgo Energy Corporation and
Vincent McDonnell dated December 1, 2000 (Incorporated herein by
reference from December 31, 2001 Form 10-K).
23(2) Consent of PricewaterhouseCoopers
23(3) Consent of Ashton Jenkins Mann
25(1) Power of attorney of certain signatories (contained on the
signature page included in Part II of the Registration Statement
on Form S-1 filed with the SEC on August 24, 2001 (File No. 333-
67814))
II-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in London, England on April 15, 2002.
CANARGO ENERGY CORPORATION
By: /s/ Anthony J. Potter
---------------------
Anthony J. Potter
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Anthony J. Potter Date: April 15, 2002
-------------------------------------------
Anthony J. Potter, Chief Financial
Principal Financial and Accounting Officer
By: /s/Roger Brittain* Date: April 15, 2002
-------------------------------------------
Chairman of the Board
By: /s/David Robson* Date: April 15, 2002
-------------------------------------------
David Robson, Chief Executive Officer and
Director Principal Executive Officer
By: /s/Russell Hammond* Date: April 15, 2002
-------------------------------------------
Russell Hammond, Director
By: /s/Nils N. Trulsvik* Date: April 15, 2002
-------------------------------------------
Nils N. Trulsvik, Director
*By: /s/Anthony J. Potter Date: April 15, 2002
-------------------------------------------
Anthony J. Potter, Attorney-in-Fact
II-2
EXHIBIT INDEX
FILED
HEREWITH EXHIBIT
------------------- ---------------- -------------------------------------------
*10(22) Employment Agreements between CanArgo
Energy Corporation and Vincent McDonnell
dated December 1, 2000 (Incorporated herein
by reference from December 31, 2001 Form
10-K).
------------------- ---------------- -------------------------------------------
X 23(2) Consent of PricewaterhouseCoopers
------------------- ---------------- -------------------------------------------
X 23(3) Consent of Ashton Jenkins Mann
------------------- ---------------- -------------------------------------------
X 25(1) Power of attorney of certain signatories
(contained on signature page included in
Part II of the Registration Statement on
Form S-1 filed with the SEC on August 24,
2001 (File No. 333-67814))
------------------- ---------------- -------------------------------------------