================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
-----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ________________
Commission File Number 0-9147
CANARGO ENERGY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 91-0881481
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CanArgo Services (UK) Limited
150 Buckingham Palace Road, London, England SW1W 9TR
----------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (44) 207 808 4700
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated herein by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: Common Stock, $0.10 par value,
97,356,206 shares outstanding as of December 16, 2002.
The aggregate market value of the common equity held by non-affiliates of the
registrant, as of December 16, 2002, was $4,186,317.
DOCUMENTS INCORPORATED BY REFERENCE
PART III -- None
================================================================================
PART I
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
The United States Private Securities Litigation Reform Act of 1995 provides a
"safe harbour" for certain forward looking statements. Such forward looking
statements are based upon the current expectations of CanArgo and speak only as
of the date made. These forward looking statements involve risks, uncertainties
and other factors. The factors discussed in Item 1. "Business - Risks Associated
with CanArgo's Oil and Gas Activities", Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Annual Report on Form 10-K are among those factors that in some cases have
affected CanArgo's historic results and could cause actual results in the future
to differ significantly from the results anticipated in forward looking
statements made in this Annual Report on Form 10-K, future filings by CanArgo
with the Securities and Exchange Commission, in CanArgo's press releases and in
oral statements made by authorized officers of CanArgo. When used in this Annual
Report on Form 10-K, the words "estimate," "project," "anticipate," "expect,"
"intend," "believe," "hope," "may" and similar expressions, as well as "will,"
"shall" and other indications of future tense, are intended to identify forward
looking statements.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
CanArgo Energy Corporation was formed in 1994 to continue, through
re-incorporation in Delaware, the business of a predecessor Oklahoma corporation
which was formed in 1980. CanArgo changed its name from Fountain Oil
Incorporated to CanArgo Energy Corporation in connection with a business
combination with CanArgo Oil & Gas Inc. completed on July 15, 1998. CanArgo
conducts its principal operations through subsidiaries, and unless otherwise
indicated by the context, the term CanArgo refers to CanArgo Energy Corporation
and its consolidated subsidiaries, including Ninotsminda Oil Company.
CanArgo initially operated as an oil and gas exploration and production company.
It altered its principal focus to the application of electrically enhanced heavy
oil recovery technology in 1988, and that focus continued through 1994. In early
1995, CanArgo shifted its principal activities to acquiring and developing
interests in Eastern European oil and gas properties. From 1995 to 1997 CanArgo,
then known as Fountain Oil Incorporated, established significant ownership
interests in four Eastern European oil and gas development projects. As a result
of disappointing results and other negative indications, CanArgo during the
fourth quarter of 1997 wrote-off its entire investment in three of 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.
1
CanArgo's principal activities are oil and gas exploration, development and
production of oil and gas. These 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 and the Norio (Block XIc) and North Kumisi Production Sharing
Agreement. In late 2000 CanArgo also began to engage in oil and gas marketing
and refining activities in Georgia. In November 2000, CanArgo acquired a 51%
interest in Georgian American Oil Refinery which held a refurbished American
refinery with a design capacity of approximately 4,000 barrels per day. Shortly
thereafter, in December 2000, CanArgo expanded its interest in Georgia to
include a 50% controlling interest in CanArgo Standard Oil Products with the
objective of developing within Georgia a chain of retail petrol stations. In
September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to
finance Georgian and Ukrainian development projects and in October 2002, CanArgo
agreed to sell its 50% holding with legal ownership being transferred upon
receipt of final payment due in August 2003. Discontinued Operation activity and
segment and geographical information for refining including revenue from
external customers, operating profit (loss) and total assets is incorporated
herein by reference from notes 14 and 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 (Nazvrevi) Limited, and the Norio (Block XIc)
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.
[EXPLORATION, DEVELOPMENT & PRODUCTION ACTIVITIES MAP]
2
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.
OTHER PROJECTS
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.
[OTHER PROJECTS MAP]
3
BUSINESS STRUCTURE
CanArgo and its active subsidiaries are as follows:
[BUSINESS STRUCTURE FLOW CHART]
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.
These priority rights represented 49%, 48%, 21% and 8% of gross production
respectively. 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.
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. Thus, while
4
Ninotsminda Oil Company is responsible for all of the costs associated with
development of the Ninotsminda field, it is only entitled to receive 30% of
production after cost recovery and Georgian Oil's priority allocation. The
allocation of a share of production to Georgian Oil, however, 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.
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 production obtainable from the Ninotsminda field had in the past
been hampered by, among other factors, a lack of funding, civil strife and
utilization of old technology and methods.
Ninotsminda Oil Company's initial approach to Ninotsminda field development was
to produce oil from one zone or underground formation, the Middle Eocene. This
development included repairing and adding perforations to existing wells,
obtaining additional seismic data and a limited drilling programme. The first
exploration well in search of a new reservoir 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 exploration 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 drilling 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 as a result of
difficult drilling conditions, the well could not be completed to the deeper
Cretaceous zone as originally planned but rather would be tested in the newly
discovered Sarmatian zone. 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
zones of other areas currently under license in Georgia. See "Other Georgian
Licenses".
5
While most of the exploration and development of the Ninotsminda field prior to
2000 focused on oil, a layer of gas above the oil or 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 natural gas produced 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. Drilling of the second well in the exploration
programme, M11, began in June 2001 is currently at a depth of 3,436 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 (rock older than the Middle Eocene sequence) 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 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 oil and gas 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.
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.
6
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 thirteen 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
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. The reserve information in the table below has also been
filed with the Oslo Stock Exchange.
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
============== ===============
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 developed reserves (producing and non-producing
reserves) and proved undeveloped reserves.
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved undeveloped reserves are reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively major
expenditures is required for recompletion. Reserves on undrilled acreage are
limited to those drilling units offsetting productive wells that are reasonably
certain of production when drilled.
Uncertainties exist 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 estimating process requires educated decisions relating to the
evaluation of all available geological, engineering and economic data for each
reservoir. The amount and timing of cost recovery is a function of oil and gas
prices. The oil and gas price used in the report by Ashton Jenkins Mann as of
January 1, 2002 were $15.08 per barrel and $1.13 per mcf respectively. Having
considered the geological and engineering data in the interpretation process,
the Company believes with reasonable certainty that the stated proven reserves
represent the estimated quantities of oil and gas to be recoverable in future
years under existing operating and economic conditions.
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
8
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%
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
9
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. Thus, while
CanArgo is responsible for all of the costs associated with development of the
Nazvrevi field, it is only entitled to receive 30% of production after cost
recovery. The allocation of a share of production to Georgian Oil, however,
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, 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. As the
Nazvrevi and Block XIII license is an exploration area and no discoveries have
been made on this license, it is not possible to estimate the expenditures
needed to discover and if discovered, produce commercial quantities of oil and
gas.
Norio (Block XIc) 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. Thus, while CanArgo is
responsible for all of the costs associated with development of the Norio field,
it is only entitled to receive 40% of production after cost recovery. 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 commenced in January 2002 with the first
exploration well at an estimated cost of up to $4.4 million of which CanArgo's
estimated share of costs is $3.2 million. The State Agency for Oil and Gas
Regulations in Georgia has confirmed that CanArgo has satisfied all drilling and
work obligations under the terms of the Norio and Kumisi production sharing
agreement. The well is currently suspended while CanArgo actively seeks partners
for funding to deepen the well to the target zone.
10
In November 2002, CanArgo reached agreement with the other shareholders in
CanArgo's subsidiary, CanArgo Norio Limited (Norio), on increasing CanArgo's
interest in Norio. Under the agreement CanArgo's interest increased from 50% to
64% in Norio and its existing Norio and North Kumisi production sharing
agreement.
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. As the area in which CanArgo is currently drilling is an
exploration area with no discoveries, it is not possible to estimate the
expenditures needed to discover and if discovered, produce commercial quantities
of oil and gas.
Norio Block XIG (Tbilisi) and Block XIH (Rustavi)
In November 2002, CanArgo's subsidiary, CanArgo Norio Limited (Norio), won the
tender for the oil and gas exploration and production rights to Block XIG
(Tbilisi) and Block XIH (Rustavi) in Eastern Georgia. By successfully winning
the tender, under the tender conditions issued by the Georgian State Agency for
Regulation of Oil and Gas Resources, CanArgo should be awarded a licence for
these blocks following negotiation of a Production Sharing Agreement with the
Georgian State authorities.
REFINING AND OTHER ACTIVITIES
CanArgo also engages in oil and gas, refining and other activities in Georgia.
Segment and geographical information including revenue from continuing
operations from external customers, operating profit (loss) from continuing
operations and total assets is incorporated herein by reference from note 15 to
the consolidated financial statements.
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 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 quality concerns which has effectively curtailed the
enhancement of the basic product stream into gasoline. As a result, the refinery
can only produce straight distillation products such as naptha, diesel and mazut
and not high octane gasoline as required by petrol stations. Due to the presence
of excise tax on naphtha, there is limited economic demand
11
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.
Currently only naptha, diesel and mazut can be produced and of these products,
an excise tax on naptha sales remains in place. As a result of these taxes and
the local market for naptha in the Republic of Georgia, CanArgo deemed
production of naptha as commercially uneconomic and suspended refining activity
in the fourth quarter of 2001. In January 2002, GAOR entered into a short-term
lease of the refinery to a third party for nominal revenue. During the lease
period, all operating costs of the refinery were borne by the lessee. This lease
expired in May 2002 and has not been renewed. CanArgo continues to monitor
demand for product able to be produced by the refinery and is seeking changes to
the legislation in support of indigenous refining activities, although no
assurance can be given that such changes can be made. 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. The refinery is now in a care
and maintenance condition.
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.
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.
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. In 2001 an agreement was
reached to undertake a limited investment and development program by June 2002
in respect of Boryslaw Oil Company to increase production and to meet certain
work commitments under the Stynawske field licence. These obligations have not
been fully met, however, Boryslaw Oil Company is seeking modifications to the
licence agreement to allow a proper assessment of the workovers and development
plans completed to date. A repayment schedule of CanArgo's advances to Boryslaw
Oil Company has also been agreed of which
12
$250,000 was repaid by September 30, 2002. Boryslaw Oil Company has so far not
been given notice by the Ukrainian licensing body of early termination of the
license. CanArgo is actively seeking to farm-out part of its interest in
Boryslaw Oil Company in return for finance to carry out the work programme. 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. The reserve
information in the table below has also been filed with the Oslo Stock Exchange.
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 and considerations with respect to estimations of proved
reserves, see the description of Ninotsminda reserves.
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.
In September 2002 CanArgo agreed terms with Ukrnafta, the Ukrainian State Oil
Company, on revisions to the existing Joint Investment Production Activity
agreement (JIPA) for the development of the Bugruvativske field in Ukraine and
reached an agreement with Gals-K Limited, an unaffiliated local Ukrainian oil
and gas
13
company on the terms of a farm-in to the JIPA. The terms of the farm-in, arrived
at in arms-length negotiations, are that the local Ukrainian oil and gas company
will invest approximately $3 million in the Bugruvativske field over the course
of 12 months in order to drill two new wells and will bear the financial risk
under the JIPA during this period. CanArgo can match up to the amount invested
by the local Ukrainian oil and gas company, prior to December 31, 2003.
Additionally, agreement has been reached with Ukrnafta, on revisions to the
commercial terms of the JIPA. The revised JIPA provides that (assuming CanArgo
matches the local Ukrainian oil and gas company's initial expenditure) the
financing risk shall be shared between CanArgo and a subsidiary of the local
Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all
net profits distributed to the parties to the JIPA and the remainder shall be
shared between CanArgo and IPEC. Assuming that CanArgo matches the local
Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to
approximately 34.5% of net profits generated under the JIPA (or a proportionally
smaller amount if the amount invested is less than that invested by IPEC). In
the event that CanArgo decides not to invest in the project by December 31,
2003, it will receive an ongoing project fee of between 3-4 % of the net profits
generated under the JIPA in recognition of its earlier involvement in the
project. To date, CanArgo has not made any investment in the Bugruvativske field
and subsequently, hydrocarbon reserves are classified as unproved until
CanArgo's investment is made.
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.
DISCONTINUED OPERATIONS
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. Of the
remaining 50%, 41.65% is held by Standard Oil Products, an unrelated third party
entity, and 8.35% is held by an individual, Mr Levan Pkhakadze, who is one of
the founders of Standard Oil Products and is an officer and director of CanArgo
Standard Oil Products.
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products
to finance Georgian and Ukrainian development projects and in October 2002,
CanArgo agreed to sell its 50% holding to Westrade Alliance LLC, an unaffiliated
company, for $4 million in an arms-length transaction, with legal ownership
being transferred upon receipt of final payment due in August 2003. The minority
interest related to CanArgo Standard Oil Products has not been reclassified for
any of the periods presented in the Consolidated Financial Statements included
herein; however net income from discontinued operations is disclosed net of
taxes and minority interest. Additional financial information with respect
thereto is incorporated herein by reference from note 14 to the Consolidated
Financial Statements included herein. See "Selected Financial Data" herein.
14
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 licences/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.
RISKS ASSOCIATED WITH CANARGO'S ACTIVITIES
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, our focus on
the Ninotsminda field has over the past several years resulted in overall losses
for CanArgo and CanArgo has yet to be profitable. 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.
Minimum Investment Requirements in Ukraine Have Not Been Met
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.
In September 2002 CanArgo agreed terms with Ukrnafta, the Ukrainian State Oil
Company, on revisions to the existing Joint Investment Production Activity
agreement (JIPA) for the development of the Bugruvativske field in Ukraine and
reached an agreement with Gals-K Limited, an unaffiliated local Ukrainian oil
and gas company on the terms of a farm-in to the JIPA. The terms of the farm-in,
arrived at in arms-length negotiations, are that the local Ukrainian oil and gas
company will invest approximately $3 million in the Bugruvativske field over the
course of 12 months in order to drill two new wells and will bear the financial
risk under the JIPA during this period. CanArgo can match up to the amount
invested by the local Ukrainian oil and gas company, prior to December 31, 2003.
Additionally, agreement has been reached with Ukrnafta, on revisions to the
commercial terms of the JIPA. The revised JIPA provides that (assuming CanArgo
matches the local Ukrainian oil and gas company's initial expenditure) the
financing risk shall be shared between CanArgo and a subsidiary of the local
Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all
net profits distributed to the parties to the JIPA and the remainder shall be
shared between CanArgo and IPEC. Assuming that CanArgo matches the local
Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to
approximately 34.5% of net profits generated under the JIPA (or a proportionally
smaller amount if the amount invested is less than that invested by IPEC). In
the event that CanArgo decides not to invest in the project by December 31,
2003, it will receive an ongoing project fee of between 3-4 % of the net profits
generated under the JIPA in recognition of its earlier involvement in the
project. To date, CanArgo has not made any investment in the Bugruvativske field
and subsequently, hydrocarbon reserves are classified as unproved until
CanArgo's investment is made.
15
In 2001 an agreement was reached to undertake a limited investment and
development program by June 2002 in order for Boryslaw Oil Company, a company in
which CanArgo has a 45% ownership interest, to retain the field licence
including the drilling of one new well. These obligations have not been fully
met, however, Boryslaw Oil Company is seeking modifications to the licence
agreement to allow a proper assessment of the workovers and development plans
completed to date. A repayment schedule of CanArgo's advances to Boryslaw Oil
Company has also been agreed of which $250,000 was repaid at September 30, 2002.
Boryslaw Oil Company has so far not been given notice by the Ukrainian licensing
body of early termination of the license. CanArgo is actively seeking to
farm-out part of its interest in Boryslaw Oil Company in return for financing to
carry out the work programme. 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.
Ukraine Projects in Early Stage of Evaluation and Development
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.
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 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. 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.
Possible Inability to Finance Present Oil and Gas Projects
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 or 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 fluctuation 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.
16
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 comparison with alternative opportunities.
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. While expected to be substantial, without further
exploration work and evaluation the amount of funds needed to fully develop all
of our oil and gas properties cannot at present, be quantified.
Oil and 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.
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 Political Instability with Respect to Foreign Operations
Our principal oil and gas properties and activities are in the Republic of
Georgia, Ukraine and Russia all of which 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 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.
17
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.
Risk of 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. Due to this instability, Eastern European countries are subject
to certain additional risks including the following:
o Enforceability of contracts;
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
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.
Inadequate or Deteriorating Infrastructure in Eastern Europe
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.
Currency Risks in Eastern Europe
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 enter into contracts with suppliers in Eastern European countries to
purchase goods and services in U.S. dollars. We may also obtain from lenders
credit facilities or other debt denominated in U.S. dollars. If we cannot
receive payment for oil and oil products 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.
18
Tax Risks in Eastern Europe
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. While CanArgo is not aware of any recent or
proposed tax changes which could materially affect our operations, such changes
could occur.
Conflicting Interests with our Partners
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.
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-ventures 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. Demands by or expectations of
governments, co-venturers, customers, and others may affect CanArgo's strategy
regarding the various projects. Failure to meet such demand or expectations
could adversely affect CanArgo's participation in such projects or our ability
to obtain or maintain necessary licenses and other approvals.
Demand 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.
Governmental Registration
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.
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. In 2002 the spot price for Brent crude oil increased
from $19.29 per barrel at December 31, 2001 to
19
$26.23 per barrel at December 10, 2002. CanArgo may also not benefit from rapid
increases in oil prices as have occurred in the first quarter of 2002 as the
market for the levels of crude oil produced in Georgia by Ninotsminda Oil
Company can in such an environment be relatively inelastic and contract prices
are often set at a specified price determined with reference to Brent when the
contract is entered into or over a short period when the crude oil is delivered.
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:
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.
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. CanArgo 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.
20
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 Chairman of the Board and Chief Executive
Dr. David Robson, the Chairman of the Board and 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
through his company, Vazon Energy Limited, has signed a comprehensive Management
Services 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.
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.
ITEM 2. PROPERTIES
CanArgo does not have through its production sharing contracts outright
ownership of any real property. Its real property interests are limited to
contractual leasehold and mineral interests.
The refinery owned by CanArgo's subsidiary Georgian American Oil Refinery, is
located next to Georgian Oil's central processing facility at Sartichala,
Georgia.
PRODUCTIVE WELLS AND ACREAGE
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 SQUARE NUMBER SQUARE
OF WELLS ACREAGE KILOMETRES OF WELLS ACREAGE KILOMETRES
-------- ------- ---------- -------- ------- ----------
Ninotsminda field 13 2,500 10 13 2,500 10
On December 31, 2001, there were no productive wells or developed acreage on any
of CanArgo's other Georgian properties, except for one well on the West Rustavi
field which was shut-in at that date.
Undeveloped Acreage
The following table summarizes the gross and net undeveloped acreage held under
the Ninotsminda, Nazvrevi/Block XIII and Norio/North Kumisi production sharing
contracts as of December 31, 2001. The information regarding net acreage
represents the interest of CanArgo based on its 100% interest in
21
Ninotsminda Oil Company and the subsidiary holding the Nazvrevi/Block XIII
contract and its current 50% interest in the subsidiary holding the Norio/North
Kumisi contract.
GROSS NET
---------------------- ----------------------
SQUARE SQUARE
PSC ACREAGE KILOMETRES ACREAGE KILOMETRES
------- ---------- ------- ----------
Ninotsminda Manavi and West Rustavi 27,739 113 27,739 113
Nazvrevi and Block XIII 492,914 2,008 492,914 2,008
Norio (Block XIc) and North Kumisi 378,523 1,542 189,262 771
------- ----- ------- -----
Total 899,176 3,663 709,915 2,892
======= ===== ======= =====
CanArgo leases office space in London, England; Calgary, Alberta; Tbilisi,
Republic of Georgia and Kiev, Ukraine. The leases have remaining terms varying
from three months to nine years and annual rental charges ranging from $7,000 to
$243,000.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 2001 there were no legal proceedings pending involving CanArgo
which, if adversely decided, would have a material adverse effect on CanArgo's
financial position or business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of CanArgo's security holders during the
fourth quarter of the year ended December 31, 2001.
22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 30, 1999, CanArgo's common stock commenced trading on the OTC Bulletin
Board after trading from April 6, 1995 through March 29, 1999 on the NASDAQ
National Market System under the symbol "GUSH". The common stock was delisted
from the NASDAQ Stock Market following the failure to meet Nasdaq's continued
listing requirement that the bid price for a listed security be at least $1.00
per share. CanArgo's common stock is also listed on the Oslo Stock Exchange and
has traded there under the symbol "CNR" since May 1995. As a result of the shift
in the principal domestic market for CanArgo common stock from the NASDAQ
National Market System to the OTC Bulletin Board, stockholders may:
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 securities laws when raising capital. The listing of
CanArgo common stock on the Oslo Stock Exchange had until October 2000, been a
secondary listing, with the primary listing being on The NASDAQ Stock Market. In
October 2000, CanArgo obtained a primary listing on the Oslo Stock Exchange
where it is now included on the main list.
The following table sets forth the high and low sales prices of the common stock
on the 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/OTCBB 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 0.36 0.25 550,687
June 30, 2002 0.38 0.19 3,508 0.32 0.14 250,000
September 30, 2002 0.20 0.05 9,156 0.20 0.05 256,500
December 31, 2002 (through
December 16, 2002) 0.10 0.04 33,208 0.08 0.04 615,700
At December 16, 2002, the closing price of our common stock on the OTC Bulletin
Board and Oslo Stock Exchange was $0.045 and $0.043 respectively.
On October 30, 2002 the number of holders of record of our common stock was
approximately 8,150. We have not paid any cash dividends on our common stock. We
currently intend to retain future earnings, if
23
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.
On July 4, 2001, CanArgo closed a private placement of 16,057,765 shares of its
common stock at NOK 4.25 per share (approximately US$0.45 per share) for net
proceeds of $6,592,262. Such proceeds were used to replenish cash resources used
to acquire LVR, to initiate development of its Ukrainian properties and for
working capital purposes. Sundal Collier & Co ASA and Den norske Bank ASA, DnB
Markets acted as placement agents for this transaction and received a success
fee of 5.75% of the gross proceeds of $7,235,337. The shares issued in
connection with this placement were issued in reliance on the exemption from
registration under the United States Securities Act of 1933 ("Securities Act")
afforded by Regulation S promulgated thereunder. In August 2001, a registration
statement on Form S-1 registering resales of the common shares issued in the
private placement under the Securities Act was declared effective by the United
States Securities and Exchange Commission.
ITEM 6. SELECTED FINANCIAL DATA
Reference is hereby made to the Section entitled "QUALIFYING STATEMENT WITH
RESPECT TO FORWARD-LOOKING INFORMATION" with respect to certain qualifications
regarding the following information.
The following data reflect the historical results of operations and selected
balance sheet items of CanArgo and should be read in conjunction with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements included in Item 8.
"Financial Statements and Supplementary Data" herein.
Reported in $000's except for YEAR ENDED
per common share amounts DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
------- ------ ------ ------ -------
FINANCIAL PERFORMANCE
Total revenue from continuing
operations 7,171 7,010 2,783 821 313
Operating income (loss) from
continuing operations (16,091) (2,401) (8,119) (6,357) (25,583)
Other income (expense) 2,529 258 (354) 247 (2,100)
Net income (loss) from
continuing operations (13,562) (2,143) (8,473) (6,110) (27,683)
Net income (loss) from
discontinued operations, net
of taxes and minority
interest(1) 344 (8) -- -- --
Net income (loss) (13,218) (2,152) (8,473) (6,110) (27,683)
Net loss per common share -
basic and diluted from
continuing operations (0.16) (0.04) (0.32) (0.39) (2.47)
Net loss per common share -
basic and diluted
from discontinued
operations (0.00) (0.00) -- -- --
Net loss per common share -
basic and diluted (0.16) (0.04) (0.32) (0.39) (2.47)
Cash generated by (used in)
operations (12,364) 7,881 (1,210) (14,718) (4,176)
24
Reported in $000's except for YEAR ENDED
per common share amounts DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
------- ------ ------ ------ -------
Working capital 9,948 23,322 2,729 1,366 13,971
Total assets 70,312 82,849 43,948 46,618 37,434
Minority shareholder advances 450 -- -- -- --
Stockholders' equity 65,800 72,426 37,863 40,031 26,779
Cash dividends per common
share -- -- -- -- --
(1) In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil
Products to finance Georgian and Ukrainian development projects and in
October 2002, CanArgo agreed to sell its 50% holding to Westrade Alliance
LLC, an unaffiliated company, for $4 million in an arms-length transaction,
with legal ownership being transferred upon receipt of final payment due in
August 2003. The agreed consideration to be exchanged does not result in an
impairment of the carrying value of assets held for sale. The assets and
liabilities of CanArgo Standard Oil Products have been classified as
"Assets of subsidiary held for sale" and "Liabilities of subsidiary held
for sale" for all periods presented. The results of operations of CanArgo
Standard Oil Products have been classified as discontinued for all periods
presented. The minority interest related to CanArgo Standard Oil Products
has not been reclassified for any of the periods presented, however net
income from discontinued operations is disclosed net of taxes and minority
interest. CanArgo Standard Oil Products was purchased in 2000 and
operations were developed in 2001, therefore prior to 2000 there is no
effect on the financial statements in respect of discontinued operations.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING INFORMATION. See "Qualifying
Statement With Respect To Forward-Looking Information" above and "Forward
Looking Statements" below.
LIQUIDITY AND CAPITAL RESOURCES
CanArgo's activities and investment in CanArgo common stock involves a high
degree of risk. Each of the risks in Item 1 may have a significant impact on
CanArgo's future financial condition and results of operations.
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 for common share consideration in the amount of
$1,667,000 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") for total cash consideration of $3,421,000 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. Funding for the LVR acquisition was
provided from existing cash resources.
As of December 31, 2001, CanArgo had working capital from continuing operations
of $9,948,000, compared to working capital from continuing operations of
$22,587,000 as of December 31, 2000. The $12,639,000 decrease in working capital
from continuing operations from December 31, 2000 to December 31, 2001 is
principally due to a reduction in cash as a result of cash used in operations,
capital and operating expenditures.
Cash used in continuing operations in 2001 was $12,364,000 compared to cash from
continuing operations in 2000 of $7,881,000 in 2000. Cash used in continuing
operations increased significantly due to the acquisition of LVR and the use of
cash received from AES related to CanArgo's exploration programme in Georgia.
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 an institution
and another qualified purchaser for gross proceeds of approximately $1,719,000.
As of September 30, 2002, CanArgo had working capital from continuing operations
of $1,658,000 compared to working capital from continuing operations of
$9,948,000 as of December 31, 2001. The $8,290,000 decrease in working capital
from continuing operations from December 31, 2001 to September 30, 2002 is
principally due to a reduction in cash and prepayments related to capital
expenditures on the Ninotsminda, Manavi and Norio projects.
As a result of unexpected mechanical difficulties drilling exploration wells M11
and MK72 and delays in testing well N100, capital expenditures have exceeded
initial estimates and production volumes available for sale are less than
anticipated. These events have resulted in lower than expected cash resources
from which CanArgo can continue its development activities in Georgia. In order
to preserve available cash resources while still maintaining essential field
operations and development activities in Georgia, a significant cost reduction
plan is being implemented. Both direct project and general and administrative
costs are to be reduced. CanArgo's management believes that these reductions
together with a prepayment on the sale of crude oil, the selective sale of
certain non-core assets including CanArgo's generator and a portion or all of
CanArgo's drilling equipment should provide CanArgo the working capital
necessary to cover CanArgo's immediate and near term funding requirements with
respect to its activities in the Republic of Georgia. Provided funds are
available, immediate and near term development plans include the completion of
testing of well N100 and the continued drilling of wells M11 and Norio MK72, two
deep
26
exploration wells. CanArgo has temporarily suspended further drilling of well
M11 below its current casing point at 4,182 metres in order to fully review
available technical data, and to estimate the cost to complete the well. Norio
MK72, has been cased at a depth of 2,932 metres in the Lower Sarmatian. Farm-in
partners are currently being sought to provide additional capital for completing
these wells.
In September 2002 CanArgo agreed terms with Ukrnafta, the Ukrainian State Oil
Company, on revisions to the existing Joint Investment Production Activity
agreement (JIPA) for the development of the Bugruvativske field in Ukraine and
reached an agreement with Gals-K Limited, an unaffiliated local Ukrainian oil
and gas company on the terms of a farm-in to the JIPA. The terms of the farm-in,
arrived at in arms-length negotiations, are that the local Ukrainian oil and gas
company will invest approximately $3 million in the Bugruvativske field over the
course of 12 months in order to drill two new wells and will bear the financial
risk under the JIPA during this period. CanArgo can match up to the amount
invested by the local Ukrainian oil and gas company, prior to December 31, 2003.
Additionally, agreement has been reached with Ukrnafta, on revisions to the
commercial terms of the JIPA. The revised JIPA provides that (assuming CanArgo
matches the local Ukrainian oil and gas company's initial expenditure) the
financing risk shall be shared between CanArgo and a subsidiary of the local
Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all
net profits distributed to the parties to the JIPA and the remainder shall be
shared between CanArgo and IPEC. Assuming that CanArgo matches the local
Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to
approximately 34.5% of net profits generated under the JIPA (or a proportionally
smaller amount if the amount invested is less than that invested by IPEC). In
the event that CanArgo decides not to invest in the project by December 31,
2003, it will receive an ongoing project fee of between 3-4 % of the net profits
generated under the JIPA in recognition of its earlier involvement in the
project.
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products
to finance Georgian and Ukrainian development projects and in October 2002,
CanArgo agreed to sell its 50% holding to Westrade Alliance LLC, an unaffiliated
company, for $4 million in an arms-length transaction, with legal ownership
being transferred upon receipt of final payment due in August 2003. The agreed
consideration to be exchanged does not result in an impairment of the carrying
value of assets held for sale.
In 2001 an agreement was reached to undertake a limited investment and
development program by June 2002 in respect of Boryslaw Oil Company to increase
production and to meet certain work commitments under the Stynawske field
licence. These obligations have not been fully met, however, Boryslaw Oil
Company is seeking modifications to the licence agreement to allow a proper
assessment of the workovers and development plans completed to date. A repayment
schedule of CanArgo's advances to Boryslaw Oil Company has also been agreed of
which $250,000 was repaid at September 30, 2002. Boryslaw Oil Company has so far
not been given notice by the Ukrainian licensing body of early termination of
the license. CanArgo is actively seeking to farm-out part of its interest in
Boryslaw Oil Company in return for financing to carry out the work programme. If
Boryslaw Oil Company does not proceed with the Stynawske field development
programme or if modifications to the current licence agreement 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.
Despite limited funding an assessment of both the Bugruvativske and Stynawske
fields and preparation of a development program with Ukrnafta continues. Based
on its efforts to date and should funding be available, CanArgo plans to
significantly increase production from these fields by investing in both
remedial workover activity and potential infill drilling, horizontal drilling
and pressure maintenance utilising appropriate technologies.
While a considerable amount of infrastructure for the Ninotsminda, Bugruvativske
and Stynawske fields has already been put in place, CanArgo cannot provide
assurance that:
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.
27
To pursue existing projects beyond CanArgo's immediate development plan and to
pursue new opportunities, CanArgo will require additional capital. While
expected to be substantial, without further exploration work and evaluation the
exact amount of funds needed to fully develop all of our oil and gas properties
cannot at present, be quantified. 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.
Should such funding not be forthcoming and CanArgo be unable to sell some or all
of its non-core assets, further cost reductions will be required in order for
CanArgo to remain a going concern.
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
may also, 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.
Subject to the raising of additional capital, above, 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 unforeseen circumstances occur or 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 should 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.
STATEMENT OF CASH FLOWS
All balances represent results from continuing operations, unless disclosed
otherwise.
Cash and cash equivalents decreased $23,806,000 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.
28
Operating Activities
Net cash used in operating activities in the year ended December 31, 2001 was
$12,364,000 compared to net cash generated from operating activities in 2000 of
$7,881,000. Cash used in operating activities increased primarily due to the use
of cash received from AES Gardabani with respect to its participation in a three
well exploration programme, increases in accounts receivable and decreases in
accounts payable.
Accounts receivable increased from $317,000 at December 31, 2000 to $2,007,000
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 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 $698,000
at December 31, 2001 as a result of the reclassification of power generating
equipment held for resale as a current asset.
Inventory decreased from $668,000 at December 31, 2000 to $406,000 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.
Accounts payable decreased to $828,000 at December 31, 2001 from $2,684,000 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.
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 Gardabani
in the Republic of Georgia. In 2002 the Participation Agreement with AES
Gardabani was terminated and the agreed settlement amount of $1,000,000 is
included in accounts receivable at December 31, 2001.
Investing Activities
Net cash used in investing activities increased to $17,189,000 in the year ended
December 31, 2001 from $12,230,000 in the year ended December 31, 2000. The
increase in cash used in investing activities was primarily due to capital
expenditures related to the Ninotsminda field and the acquisition of LVR.
Capital assets, net increased from $49,849,000 at December 31, 2000 to
$52,535,000 at December 31, 2001, primarily as a result of investment of
$11,117,000 in capital assets including oil and gas properties and equipment,
principally related to the Ninotsminda field. Capital assets also increased as a
result of 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
29
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 $719,000 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 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.
Financing Activities
Cash from financing activities decreased to $8,974,000 for the year ended
December 31, 2001 from $31,143,000 for the year ended December 31, 2000 due
primarily to fewer sales of common stock partially offset by an increase in
advances from minority shareholders.
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.
On February 12, 2002, CanArgo completed an offering 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 $1,762,000 in
transactions intended to qualify for an exemption from registration under the
Securities Act of 1933 afforded by Regulation S promulgated thereunder.
On May 28, 2002, CanArgo completed an offering of 137,760 common shares at NOK
1.68 per share (approximately US$0.21 per share) to David Robson, CanArgo's
Chief Executive Officer, for gross proceeds of approximately $29,000 in
transactions intended to qualify for an exemption from registration under
Section 4(2) of the Securities Act of 1933 afforded by Regulation S promulgated
thereunder.. The shares have not been registered under the Securities Act of
1933 and are "restricted" as that term is defined in Rule 144 under the
Securities Act. The shares may not be offered for sale, sold or otherwise
transferred except pursuant to an effective registration statement under the
Securities Act or pursuant to an exemption from registration under the
Securities Act, the availability of which is to be established to the
satisfaction of CanArgo.
Minority shareholder advances as at December 31, 2001 related to the receipt of
convertible loans from new minority shareholders of CanArgo's subsidiary,
CanArgo Norio Limited (Norio). The cash amount received represented part of the
new minority shareholder's share of the cost of drilling an exploration well
under the Norio and North Kumisi production sharing agreement. In November 2002,
CanArgo reached agreement with the other shareholders in Norio on increasing
CanArgo's interest in Norio. Under the agreement CanArgo's interest increased
from 50% to 64% in Norio and its existing Norio and North Kumisi production
sharing agreement. Subsequently, the convertible loans have been reclassified as
minority interest on finalisation of respective equity shares.
30
Minority interest in continuing and discontinued subsidiaries increased to
$1,531,000 at December 31, 2001 compared to $1,394,000 at December 31, 2000
primarily as a result of CanArgo Standard Oil Products in Tbilisi, Georgia and
related investment of $1,932,000 by CanArgo's partners in this venture.
Discontinued Operations
Assets of subsidiary held for sale, as a result of discontinued operations,
increased by $5,085,000 to $5,820,000 at December 30, 2001 from $735,000 at
December 31, 2000 primarily due to activity at CanArgo Standard Oil Products
relating to the addition of new petrol stations in Georgia.
Liabilities of subsidiaries held for sale, of discontinued operations, increased
by $1,170,000 to $1,177,000 at December 30, 2001 from $7,000 at December 31,
2000 primarily due to additional bank loans drawn by CanArgo Standard Oil
Products in Tbilisi at an effective interest rate of 18% per annum, in order to
fund the construction of new petrol stations in Georgia.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL TERMS
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 on our rights under the production
sharing contracts. However the Norio (Block XIc) 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 that the Ninotsminda production sharing contract and the mineral
usage license issued prior to the introduction in 1999 of the Petroleum Law were
validly issued, 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.
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 September 30, 2002, 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
31
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 third phase of the preliminary work programme for the
Nazvrevi/Block XIII production sharing contract, the drilling of one well,
unless CanArgo decides to terminate the contract. There is no depth or financial
commitment relating to this well. The second phase of the preliminary work
programme under the Norio and North Kumisi production sharing agreement
commenced in January 2002 with the first exploration well at an estimated cost
of up to $4.4 million of which CanArgo's estimated share of costs is $3.2
million. The State Agency for Oil and Gas Regulations in Georgia has confirmed
that CanArgo has satisfied all drilling and work obligations under the terms of
the Norio and Kumisi production sharing agreement. The well is currently
suspended while CanArgo actively seeks partners for funding to deepen the well
to the target zone.
The shareholders agreement with the other shareholder of Norio calls for a bonus
payment of $800,000 to be paid by CanArgo should commercial production be
obtained from the Middle Eocene or older strata and a second bonus payment of
$800,000 should production from the Block from the Middle Eocene or older strata
exceed 250 tonnes of oil per day over any 90 day period.
In 2001 an agreement was reached to undertake a limited investment and
development program by June 2002 in respect of Boryslaw Oil Company to increase
production and to meet certain work commitments under the Stynawske field
licence. These obligations have not been fully met, however, Boryslaw Oil
Company is seeking modifications to the licence agreement to allow a proper
assessment of the workovers and development plans completed to date. A repayment
schedule of CanArgo's advances to Boryslaw Oil Company has also been agreed of
which $250,000 was repaid by September 30, 2002. Boryslaw Oil Company has so far
not been given notice by the Ukrainian licensing body of early termination of
the license. CanArgo is actively seeking to farm-out part of its interest in
Boryslaw Oil Company in return for finance to carry out the work programme. If
Boryslaw Oil Company does not proceed with the Stynawske field development
programme or if modifications to the current licence agreement 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.
In August 2002, Ninotsminda Oil Company entered into a 12 month crude oil sales
agreement to sell its monthly share of oil produced under the Ninotsminda
production sharing contract. As security for payment the buyer has paid to
Ninotsminda Oil Company $1 million to be repaid at the end of the twelve month
period through the delivery of additional crude oil equal to the value of the
security. Under the agreement, crude oil will be sold at dated Brent less a
fixed discount per barrel depending on the Brent price. The discount ranges from
a minimum of $6.00 per barrel when dated price is less than $15.00 per barrel to
a maximum $7.50 per barrel when dated Brent is greater than $25.01 per barrel.
RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
CanArgo recorded operating revenue of $7,171,000 during the year ended December
31, 2001 compared with $7,010,000 for the year ended December 31, 2000. The
increase is primarily due to increased refining revenue from Georgian American
Oil Refinery and other revenue, representing rental of CanArgo equipment in
Georgia partially offset by lower oil and gas revenues.
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.
32
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 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 revenue for the year ended December 31, 2001 relates solely to
operating activities of Georgian American Oil Refinery. In 2001, sales from the
refinery continued to be affected 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 from continuing operations for the year ended December 31,
2001 amounted to $16,107,000 compared with an operating loss of $2,401,000 for
2000. The increase in operating loss is attributable primarily to the impairment
of oil and gas properties of $7,300,000, impairment of refinery assets of
$3,860,000, lower oil and gas revenue of $2,141,000 as a result of lower
production and significant increases in operating and corporate activity.
Field operating expenses increased to $1,568,000 ($4.27 per BOE) for the year
ended December 31, 2001 as compared to $1,287,000 ($2.95 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
$1,451,000 and $791,000 respectively for the year ended December 31, 2001 relate
to operating activities of Georgian American Oil Refinery. The increase is due
to a full year of consolidation of activity 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
33
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.
Selling, general and administrative costs increased to $3,742,000 for the year
ended December 31, 2001, from $3,050,000 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 $261,000 related to refining activity.
The decrease in depreciation, depletion and amortization expense to $3,250,000
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 $407,000 for the year ended December 31,
2001, as compared to net other income of $231,000 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 and higher cash balances in 2001.
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 from continuing operations of $13,562,000 or $0.16 per share for
the year ended December 31, 2001 compares to a net loss from continuing
operations of $2,143,000 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 $7,010,000 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
34
marketing revenue from Georgian American Oil Refinery and CanArgo Standard Oil
Products and service revenue from CanArgo's rig equipment.
Ninotsminda Oil Company generated $4,778,000 of oil revenue and $1,331,000 of
gas revenue in the year ended December 31, 2000 compared to $2,365,000 of oil
revenue and $129,000 gas revenue for the year ended December 31, 1999. Its net
share of the 479,000 barrels (1,312 barrels per day) of gross oil production
from the Ninotsminda field in the period amounted to 245,947 barrels. From
production, 8,735 barrels of oil were placed into storage in the year. For the
year ended December 31, 1999, Ninotsminda Oil Company's net share of the 415,400
barrels (1,138 barrels per day) of gross production was 142,900 barrels. During
the year ended December 31, 1999, 50,000 barrels of oil were removed from
storage and sold. Ninotsminda Oil Company's net share of the 1,764,000 thousand
cubic feet (mcf) of gas delivered in the year ended December 31, 2000 was
1,146,000 mcf. Oil production from the Sylvan Lake property in Alberta, Canada,
a property sold in 1999, accounted for $219,000 of revenue in the year ended
December 31, 1999.
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). The net oil sales
price for oil sold from the Sylvan Lake property in Alberta, Canada, a property
sold in 1999, averaged $12.88 per barrel in the year ended December 31, 1999.
Refining revenue for the year ended December 31, 2000 relate solely to operating
activities of Georgian American Oil Refinery 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.
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 from continuing operations for the year ended December 31,
2000 amounted to $2,401,000 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 ($2.95 per BOE ) for the year
ended December 31, 2000 as compared to $1,063,000 ($5.12 per BOE) for the year
ended December 31, 1999. The increase is primarily a result of increased oil and
gas production in the year. Field operating expenses per BOE decreased primarily
as net production increased as a proportion to gross production in the year.
Field operating expenses at Ninotsminda Oil Company and the Sylvan Lake property
in Alberta, Canada, a property sold in 1999, were $4.39 and $12.88 per BOE
respectively for the year ended December 31, 1999.
Purchases of crude oil and products and refinery operating expenses of $21,000
and $439,000 respectively for the year ended December 31, 2000 relate to solely
to operating activity of Georgian American Oil Refinery 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
35
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 $3,050,000 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 $184,000 related
to refining activity.
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 $231,000 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 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 from continuing operations of $2,143,000 or $0.04 per share for the
year ended December 31, 2000 compares to a net loss from continuing operations
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.
RESULTS OF DISCONTINUED OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The net income from discontinued operations, net of taxes and minority interest
for the year ended December 31, 2001 amounted to $344,000 compared with a loss
of $8,000 for the corresponding period in 2000. The increase in net income from
discontinued operations, net of taxes and minority interest is due to additional
operating petrol stations in Georgia and relates entirely to the activities of
CanArgo standard Oil Products.
Year Ended December 31, 2000 Compared to Year Ended December 31,1999
The net loss from discontinued operations, net of taxes and minority interest
for the year ended December 31, 2000 amounted to $8,000 is due to operating
activities of CanArgo Standard Oil Products. CanArgo Standard Oil Products was
purchased in 2000 and operations were developed in 2001.
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 Standard
Oil Products who together with an individual shareholder 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.
J.F. Russell Hammond, a non-executive director of CanArgo, is also an investment
advisor to Provincial Securities who became a minority shareholder in the Norio
and North Kumisi Production Sharing Agreement through a farm-in agreement to the
Norio MK72 well.
36
In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex
Acquisition Corporation, a former shareholder of CanArgo, 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, Messrs. Hammond and
Paus, 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 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 - The refinery and additions thereto are depreciated over the estimated
useful lives of the assets ranging fifteen to twenty years.
37
Discontinued Operations - CanArgo Standard Oil Products petrol stations and
additions thereto were depreciated over the estimated useful lives of the assets
ranging from ten to fifteen years until operations were reclassified as
discontinued.
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. No adjustments were required as a result of adoption.
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.
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 July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS 146"). This standard will require
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The standard replaces the existing guidance provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The statement is effective for fiscal years beginning after
December 31, 2002. CanArgo does not expect the adoption of this standard to have
a material effect on its financial statements.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 7 and elsewhere in this
Annual Report on Form 10-K/A are subject to various risks, uncertainties and
other factors that could cause actual results to differ materially from the
results anticipated in such forward looking statements. Included among the
important risks, uncertainties and other factors are those hereinafter
discussed.
Few of the forward-looking statements in this Annual Report deal with matters
that are within CanArgo's 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 CanArgo's and may conflict with CanArgo's 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.
38
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. Finally, due to the developing
nature of the legal regimes in many Eastern European countries where CanArgo
operates, our contractual rights and remedies may be subject to certain legal
uncertainties.
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:
- world economic conditions;
- international relations;
- the stability and policies of various governments;
- fluctuations in the price of oil and gas, the outlook for the oil and
gas industry and competition for funds; and
- an evaluation of CanArgo and specific projects in which CanArgo has an
interest.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of us and our projects and comparisons with alternative investment
opportunities.
ITEM 7A. 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, although we may not always be able
to continue to demand payment in U.S. dollars.
39
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. No
assurance can be given, however, that changes in exchange rates would be limited
to a 10% appreciation or devaluation in the foreign exchange rate.
CanArgo had no material interest in investments subject to market risk during
the period covered by this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be filed in this Report begin at Page F-1
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements between CanArgo and its principal
accountants during the two most recent fiscal years.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Current Directors and Executive Officers of the Company are as follows:
NAME AGE OFFICE OR OFFICES
----------------------- --- --------------------------------------------
David Robson(1) 44 Chairman of the Board, Managing Director and
Chief Executive Officer
Russell Hammond(2)(3) 60 Director
Nils N. Trulsvik(2)(3) 53 Director
Murray Chancellor 49 Chief Operating Officer
Vincent McDonnell (4) 43 Chief Commercial Officer and Chief Financial
Officer
-----------------
(1) On November 11 2002, Roger Brittain resigned as non-executive Chairman of
the Board and on November 21 2002, the Board appointed Mr. Robson Chairman
and Chief Executive Officer of the Company
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) On September 23 2002, the Board appointed Vincent McDonnell Chief
Commercial Officer and Chief Financial Officer of the Company to replace
Anthony J. Potter who resigned in September 2002 and who previously held
the position of Chief Financial Officer.
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 July 1993, Dr. Robson was General Manager of JP
Kenny/Intershelf Oil & Gas Resources, from July 1993 until December 1993,
Operations Director of JP Kenny Exploration and Production Limited ("JP Kenny"),
from December 1993 until November 1994, Managing Director, JP Kenny and from
November 1994 until March 1997, Dr. Robson was Chief Executive Officer of JKX
Oil &Gas. 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. Dr. Robson devotes substantially all of his
time to CanArgo.
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. Although retired, Mr. Hammond has over
the past five years 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.
41
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 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 1994 until April
1998, Mr. McDonnell served as Oil and Gas Exploration and Production Commercial
Manager of JKX Oil & Gas plc. 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.
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 Board of Directors.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires CanArgo's executive officers and directors, and persons who own
more than 10% of the registered class of CanArgo's equity securities ("Reporting
Persons"), to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Reporting persons are required by SEC
Regulations to furnish CanArgo with copies of all forms they file pursuant to
Section 16(a). Based solely on CanArgo's review of reports filed under Section
16(a) of the Securities Exchange Act of 1934 and certain representations,
CanArgo believes that all filing requirements applicable to its officers,
directors and persons who own more than 10% of a registered class of CanArgo's
securities have been complied with.
42
ITEM 11. 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 since July 15, 1998 and
provides services to CanArgo through Vazon Energy Limited.
(2) Mr. Chancellor has served as Chief Operating Officer since September 12,
2000.
(3) Mr. McDonnell has served as Chief Commercial Officer since April 1, 2001.
Prior thereto he served as Commercial Manager from December 1, 2000.
In September 2002 he was appointed Chief Financial Officer of the Company.
(4) Mr. Potter served as Chief Financial Officer from September 2000 until
September 2002. 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.
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 IN EXERCISE EXPIRATION PER
NAME GRANTED 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.
43
(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
EXERCISE PRICE DIVIDEND YIELD VOLATILITY INTEREST RATE EXPECTED TERM
-------------- -------------- ---------- ------------- -------------
$0.687 0% 75.15% 4.61% 3.37 years
Pursuant to the terms of CanArgo's various stock option plans, the
Compensation Committee may, subject to each plan's limits, modify the terms
of outstanding options, including the exercise price and vesting schedule
thereof. These values are not intended to forecast future appreciation of
CanArgo's stock price. The actual value, if any, that an executive officer
may realize from his options (assuming that they are exercised) will depend
solely on the increase in the market price of the shares acquired through
option exercises over the exercise price, measured when the shares are
sold.
OPTION VALUES AT DECEMBER 31, 2001
The following table sets forth information concerning option exercises and the
number and hypothetical value of stock options held by the Named Officers at
December 31, 2001.
NUMBER OF NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FISCAL
ACQUIRED VALUE HELD AT FISCAL YEAR END(2) YEAR END ($)(3)
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 -- --
-----------------
(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.
44
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 AND CONSULTING OPTIONS AND
NAME OTHER COMPENSATION PAYMENTS WARRANTS GRANTED
-------------------- ------------------ ---------- ----------------
$ $
Roger Brittain 59,450 -- --
Russell Hammond 37,450 -- --
Peder Paus 21,276 -- --
Nils N. Trulsvik 44,700 -- --
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".
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.
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
o At December 31, 2001, stock options and warrants had been issued from
the following stock based compensation plans: 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.
45
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.
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.
46
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.
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
47
PERFORMANCE MEASUREMENT COMPARISON
The chart set forth below shows the value of an investment of $100 on December
31, 1997 in each of CanArgo's Common Stock, the NASDAQ Composite Index and a
peer group of certain oil and gas exploration and development companies. The
peer group consists of the following independent oil and gas exploration
companies: A&B Geoscience Corporation, Aminex plc, Bitech Petroleum Corporation,
Bow Valley Energy Ltd., ASA, EuroGas, JKX Oil & Gas plc, Centurion Energy
International Inc., Lundin Oil AB, Ramco Energy plc and Soco International plc.
All values assume reinvestment of the pre-tax value of dividends paid by
companies included in these indices and are calculated as of December 31 of each
year. The historical stock price performance of the Common Stock shown in the
performance graph below is not necessarily indicative of future stock price
performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
YEAR END CANARGO STOCK PRICE PEER GROUP INDEX NASDAQ COMPOSITE INDEX
-------- ------------------- ---------------- ----------------------
1997 100 100 100
1998 33 69 140
1999 82 82 260
2000 94 80 158
2001 31 75 110
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 2001 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.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------ -------------------- ----------------
Roger Brittain 122,133 (1) *
David Robson 1,760,416 (2) 1.9%
Nils N. Trulsvik 391,366 (3) *
Russell Hammond 317,916 (4) *
Murray Chancellor 83,333 (5) *
Vincent McDonnell 33,333 (6) *
Anthony Potter 64,500 (7) *
All Directors and executive officers
as a group (7 persons) 2,772,997 (8) 3.0%
* Less than 1%.
(1) Includes 83,333 shares underlying presently exercisable options.
(2) Includes 1,640,416 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 33,333 shares underlying presently exercisable options.
(7) Includes 64,500 shares underlying presently exercisable options.
(8) Includes 2,540,747 shares underlying presently exercisable options held by
directors and executive officers as a group.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Of the 50% of CanArgo Standard Oil Products not held by CanArgo, 41.65% is held
by Standard Oil Products, an unrelated third party entity, and 8.35% is held by
an individual, Mr Levan Pkhakadze, who is one of the founders of Standard Oil
Products and is an officer and director of CanArgo Standard Oil Products. The
majority of refined product purchased by CanArgo Standard Oil Products for
resale at its petrol stations is purchased from a company controlled by Standard
Oil Products who together with and an individual shareholder, 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, Messrs. Hammond and Paus, 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.
J.F. Russell Hammond, a non-executive director of CanArgo, is also an investment
advisor to Provincial Securities who became a minority shareholder in the Norio
and North Kumisi Production Sharing Agreement through a farm-in agreement to the
Norio MK72 well.
Transactions with affiliates or other related parties including management of
affiliates are to be undertaken on the same basis as third party arms-length
transactions. Transactions with affiliates are reviewed and voted on solely by
non-interested directors.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(a) EXHIBITS
Management Contracts, Compensation Plans and Arrangements are
identified by an asterisk (*) Documents filed herewith are
identified by a cross (+).
1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on September 9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities
Limited, David Williamson Associates Limited, and Orkla Finans
(Fondsmegling) ASA (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on September 9,
1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on September 9, 1999).
49
1(4) Selling Agent Agreement with National Securities Corporation
(Incorporated herein by reference from Post-Effective Amendment No.
1 to Form S-1 Registration Statement, File No. 333-72295 filed on
July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust Company
(Incorporated herein by reference from Post-Effective Amendment No.
1 to Form S-1 Registration Statement, File No. 333-72295 filed on
July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated August 10, 1995 by
and among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated November
3, 1995 by and among Ribalta Holdings, Inc. as Vendor and Fountain
Oil Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated May 29,
1996 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from September 30, 1997 Form
10-Q).
2(4) Memorandum of Agreement between Fielden Management Services Pty,
Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated dated May 16,
1995 (Incorporated herein by reference from December 31, 1997 Form
10-K/A).
2(5) Amended and Restated Combination Agreement between Fountain Oil
Incorporated and CanArgo Energy Inc. dated as of February 2, 1998
(Incorporated herein by reference from Form S-3 Registration
Statement, File No. 333-48287 filed on September 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated herein by
reference as Annex G from Form S-3 Registration Statement, File No.
333-48287 filed on September 9, 1998).
2(7) Offer Circular relating to a proposed purchase all of the
outstanding common shares of Lateral Vector Resources, Inc. dated
March 20, 2001 (Incorporated herein by reference from Form 14D-1F
dated March 21, 2001).
2(8) Notice of Extension and Variation amending Registrant's offer to
purchase all of the outstanding common shares of Lateral Vector
Resources, Inc. dated April 9, 2001 (Incorporated herein by
reference from Amendment No. 1 to Form 14D-1F dated April 11, 2001).
3(1) Registrant's Certificate of Incorporation and amendments thereto
(Incorporated herein by reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration Statement,
File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX Nederland
B.V. dated September 28, 2000, relating to purchase of 21.2%
interest in Ninotsminda Oil Company (Incorporated herein by
reference from July 20, 2000 Form 8-K).
50
*10(1) Form of Option Agreement for options granted to certain persons,
including Directors (Incorporated herein by reference from August
31, 1994 Form 10-KSB, filed by Electromagnetic Oil Recovery, Inc.,
the Company's predecessor).
*10(2) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 333-72295 filed on July 29, 1999).
*10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
10(4) Agreement between Georgian American Oil Refinery Company and CanArgo
Petroleum Products Ltd. dated September 26, 1998 (Incorporated
herein by reference from Form S-1 Registration Statement, File No.
333-72295 filed on February 12, 1999).
10(5) Terrenex Acquisition Corporation Option regarding CanArgo (Nazvrevi)
Limited (Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on February 12, 1999).
10(6) Production Sharing Contract between (1) Georgia and (2) Georgian Oil
and JKX Navtobi Ltd. dated February 12, 1996 (Incorporated herein by
reference from Form S-1 Registration Statement, File No. 333-72295
filed on September 7, 1999).
10(7) Agreement on Financial Advisory Services between CanArgo Energy
Corporation, Orkla Finans (Fondsmegling) A.S and Sundal Collier &
Co. ASA dated December 8, 1999 (Incorporated herein by reference
from December 28, 1999 Form 8-K).
10(8) Form of Subscription Agreement (Incorporated herein by reference
from December 28, 1999 Form 8-K).
10(9) Agreement between CanArgo Energy Corporation and JKX Nederland BV
dated January 19, 2000 (Incorporated herein by reference from
December 31, 1999 Form 10-K).
10(10) Agreement between Ninotsminda Oil Company and AES Gardabani dated
March 10, 2000 (Incorporated herein by reference from December 31,
1999 Form 10-K).
10(11) Term Sheet dated September 27, 2000 relating to sale of 15,660,916
shares of Registrant's common stock (Incorporated herein by
reference from July 20, 2000 Form 8-K).
10(12) Form of Subscription Agreement relating to sale of 15,660,916 shares
of the Registrant's common stock (Incorporated herein by reference
from July 20, 2000 Form 8-K).
10(13) Subscription Agreement between Registrant and JKX Nederland B.V.
dated September 15, 2000 relating to purchase of 21.2% interest in
Ninotsminda Oil Company (Incorporated herein by reference from July
20, 2000 Form 8-K).
*10(14) Employment Agreement between CanArgo Energy Corporation and Dr.
David Robson dated September 29, 2000 (Incorporated herein by
reference from September 30, 2000 Form 10-Q).
10(15) Tenancy Agreement between CanArgo Energy Corporation and Grosvenor
West End Properties dated September 8, 2000 (Incorporated herein by
reference from September 30, 2000 Form 10-Q).
51
10(16) Agreement between CanArgo Energy Corporation and Roger Brittain
dated August 18, 2000 (Incorporated herein by reference from
December 31, 2000 Form 10-K).
*10(17) Employment Agreements between CanArgo Energy Corporation and Murray
Chancellor dated September 22, 2000 (Incorporated herein by
reference from December 31, 2000 Form 10-K).
*10(18) Employment Agreements between CanArgo Energy Corporation and Anthony
Potter dated October 1, 2000 (Incorporated herein by reference from
December 31, 2000 Form 10-K).
10(19) Production Sharing Contract between (1) Georgia and (2) Georgian Oil
and CanArgo Norio Limited dated December 12, 2000 (Incorporated
herein by reference from December 31, 2000 Form 10-K) (Incorporated
herein by reference from December 31, 2000 Form 10-K).
10(20) Agreement between CanArgo Energy Corporation and Georgian British
Oil Services Company dated November 10, 2000 relating to the
purchase of 9.35% interest in Georgian American Oil Refinery
(Incorporated herein by reference from December 31, 2000 Form 10-K).
10(21) Share Exchange Agreement between CanArgo Energy Corporation and
Argonaut Oil and Gas Limited dated November 10, 2000, related to the
purchase of 28.7% interest in Georgian American Oil Refinery
(Incorporated herein by reference from December 31, 2000 Form 10-K).
*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).
10(23) Agreement Number 1 dated March 20, 1998 on Joint Investment
Production Activity for further development and further exploration
of Bugruvativske Field (Incorporated herein by reference from
September 30, 2001 Form 10-Q).
10(24) Crude Oil Sales Agreement dated August 13, 2002 (Incorporated herein
by reference from June 30, 2000 Form 10-Q).
10(25) Covenant on terms and conditions of participation in investment
activity under the Joint Investment Production Activity agreement
dated of March 20, 1998, dated July 23, 2002. (Incorporated herein
by reference from September 30, 2001 Form 10-Q).
10(26) Stock sale purchase contract of IPEC between Lateral Vector
Resources and Northern Industrial Development dated July 25, 2002.
(Incorporated herein by reference from September 30, 2001 Form
10-Q).
10(27) Amendments of and Additions to Joint Investment Production Activity
agreement of March 20, 1998, dated August 8, 2002. (Incorporated
herein by reference from September 30, 2001 Form 10-Q).
10(28) Amendment of Clause 9.3.1 of Amendments of and Additions to the
Joint Investment Production Activity agreement of March 20, 1998,
dated September 17, 2002. (Incorporated herein by reference from
September 30, 2001 Form 10-Q).
10(29) Stock sale purchase contract of IPEC between Lateral Vector
Resources Inc. and Lystopad dated September 24, 2002. (Incorporated
herein by reference from September 30, 2001 Form 10-Q).
52
+10(30) Stock sale purchase contract of IPEC between Lateral Vector
Resources Inc. and Lyutyi dated September 24, 2002. (Incorporated
herein by reference from September 30, 2001 Form 10-Q).
10(31) Sale agreement of CanArgo Petroleum Products Limited between CanArgo
Limited and Westrade Alliance LLC dated October 14, 2002.
(Incorporated herein by reference from September 30, 2001 Form
10-Q).
21 List of Subsidiaries (Incorporated herein by reference from
September 30, 2001 Form 10-Q).
+23 Consent of PricewaterhouseCoopers.
+99(1) Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
+99(2) Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K:
The following current reports on form 8-K were filed during 2002.
On January 24, 2002 CanArgo announced that it has established May 24, 2002
as the redemption date for all of the Exchangeable Shares of CanArgo Oil &
Gas Inc. ("CAOG"). The Exchangeable Shares were issued in July 1998 in
connection with the acquisition by CanArgo of all of the shares of CAOG. As
a result, 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. Each Exchangeable
Share is exchangeable at the option of the holder into one share of common
stock of CanArgo.
On February 8th 2002, CanArgo announced that its wholly owned subsidiary,
Ninotsminda Oil Company ('NOC') has, by mutual agreement, agreed to the
termination of the Participation Agreement, which it signed with AES
Mktvari LLC in July 2000. The termination, which comes about as a result of
AES's intention to focus on its core activities, is expected to become
effective in the very near future once legal documentation has been
concluded.
On February 12, 2002, CanArgo announced that it closed an offering of
approximately 5.2 million shares of its common stock for gross proceeds of
approximately $1.7 million in a transaction intended to qualify for an
exemption from registration under the Securities Act of 1933 afforded by
Regulation S promulgated thereunder. Such proceeds will be used for working
capital purposes and future capital expenditures in Georgia.
On May 29, 2002 CanArgo made a corporate presentation at its Annual General
Meeting in Oslo, Norway. On September 17, 2002, CanArgo Energy Corporation
announced that it agreed terms with Ukrnafta, the Ukrainian State Oil
Company, on revisions to the existing Joint Investment Production Activity
Agreement for the development of the Bugruvativske Field in Ukraine and
reached agreement with a local Ukrainian oil and gas company, on the terms
of a farm-in to the JIPA.
53
On September 23, 2002 CanArgo announced the appointment of Vincent
McDonnell as Chief Financial Officer.
On October 17 2002, CanArgo announced that it agreed binding terms for the
sale of its interest in its Georgian gasoline station business, CanArgo
Standard Oil Products, for a cash consideration of US$ 4 million.
On November 12 2002 CanArgo announced that its subsidiary, CanArgo Norio
Limited, has won the tender for the oil and gas exploration and production
rights to Block XIG (Tbilisi) and Block XIH (Rustavi) in Eastern Georgia
("the Blocks"). CanArgo also announced that it has reached agreement with
the other shareholders in CanArgo Norio on increasing CanArgo's interest in
CanArgo Norio.
On November 12 2002 CanArgo announced the resignation of Roger Brittain,
non-executive Chairman of the Board.
On November 27 2002 CanArgo announced that Dr David Robson has been
appointed to the position of Chairman of the Board of CanArgo Energy
Corporation in addition to his current duties as Chief Executive Officer.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CANARGO ENERGY CORPORATION
(Registrant)
By: /s/ Vincent McDonnell Date: December 17, 2002
-----------------------------------------
Chief Financial Officer
55
CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED
I, David Robson, Chairman of the Board and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of
CanArgo Energy Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
December 17, 2002 /S/ DAVID ROBSON
-----------------------------
DAVID ROBSON
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
56
CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED
I, Vincent McDonnell, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of
CanArgo Energy Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
December 17, 2002 /S/ VINCENT McDONNELL
-----------------------------
VINCENT McDONNELL
CHIEF FINANCIAL OFFICER
57
INDEX TO FINANCIAL STATEMENTS
CANARGO ENERGY CORPORATION:
Consolidated Balance Sheets 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 -
Unaudited F-26
Supplemental Financial Information: Supplemental Oil and Gas
Disclosures - Unaudited
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
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
PricewaterhouseCoopers
Chartered Accountants
London, England
March 18, 2002, except for Note 14, Discontinued Operations, which is as of 30
October 2002.
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 $ 5,891,038 29,696,654
Accounts receivable 2,007,112 316,730
Inventory 405,918 668,337
Prepayments 2,235,712 685,991
Other current assets 697,827 201,063
------------- ------------
Total current assets $ 11,237,607 31,568,775
Capital assets, net (including unevaluated amounts of
$24,570,886 and $13,897,096, respectively) 52,535,420 49,849,117
Investments in and advances to oil and gas and other
ventures - net 719,308 696,374
Assets of subsidiary held for sale 5,819,582 735,138
------------- ------------
TOTAL ASSETS $ 70,311,917 82,849,404
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 828,461 2,684,384
Advances from joint venture partner - 5,888,573
Income taxes payable 61,000 -
Accrued liabilities 400,221 409,144
------------- ------------
Total current liabilities $ 1,289,682 8,982,101
Provision for future site restoration 64,290 40,990
Liabilities of subsidiary held for sale 1,177,174 6,734
Minority shareholder advances 450,000 -
Minority interest in subsidiaries 1,531,191 1,393,915
Commitments and contingencies (Note 9)
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 $ 70,311,917 $ 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 2,595,763 535,865 -
Other 608,032 364,900 289,321
------------ ----------- -----------
7,170,873 7,009,544 2,782,933
------------ ----------- -----------
Operating Expenses:
Field operating expenses 1,568,011 1,287,035 1,062,610
Purchases of crude oil and products 1,451,083 20,520 -
Refinery operating expenses 791,139 439,037 -
Direct project costs 1,300,423 737,731 766,424
Selling, general and administrative 3,741,826 3,050,383 2,192,728
Depreciation, depletion and amortization 3,249,962 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
------------ ----------- -----------
23,278,369 9,410,694 10,902,283
------------ ----------- -----------
OPERATING LOSS FROM CONTINUING OPERATIONS (16,107,496) (2,401,150) (8,119,350)
------------ ----------- -----------
Other Income (Expense):
Interest, net 642,216 549,749 (199,604)
Other (74,796) (78,774) (74,172)
Equity income (loss) from investments (160,000) (240,070) (261,234)
------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 407,420 230,905 (535,010)
------------ ----------- -----------
NET LOSS BEFORE MINORITY INTEREST (15,700,076) (2,170,245) (8,654,360)
Minority interest in loss of consolidated subsidiaries 2,138,163 26,939 181,500
------------ ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (13,561,912) $(2,143,306) $(8,472,860)
============ =========== ===========
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES
AND MINORITY INTEREST 343,566 $ (8,298) $ -
------------ ----------- -----------
NET 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 AND DILUTED
- from continuing operations (0.16) $ (0.04) $ (0.32)
- from discontinued operations 0.00 $ (0.00) $ -
------------ ----------- ------------
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 from continuing operations (13,561,912) $ (2,143,306) $(8,472,860)
Depreciation, depletion and amortization 3,249,962 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 (2,138,163) (26,939) (181,500)
Changes in assets and liabilities:
Accounts receivable (1,623,866) 300,405 (121,429)
Inventory 262,419 46,828 (18,095)
Prepayments (130,300) (628,853) 277,539
Other current assets (496,764) (144,222) 271,442
Accounts payable (3,352,399) 197,889 322,536
Income taxes payable 61,000 - -
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 (12,363,989) 7,881,358 (1,209,872)
------------ ------------ -----------
Investing activities:
Capital expenditures (11,116,538) (11,857,279) (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 (831,403) (236,074) (649,603)
Change in non working capital items (1,340,359) (150,000) 150,000
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (17,188,890) (12,229,945) (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 -
Cash acquired - 207,470 -
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,974,136 31,142,838 5,564,439
------------ ------------ -----------
NET CASHFLOWS FROM SUBSIDIARY HELD FOR SALE (3,226,873) (744,999) -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23,805,616) 26,049,251 1,516,358
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,696,654 3,647,403 2,131,045
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 5,891,038 $ 29,696,654 $ 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 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
---------- ---------- ------------ ------------ ------------
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.
CanArgo has incurred recurring operating losses, and its current
operations are not generating positive cash flows. The ability of
CanArgo to continue as a going concern and to pursue its principal
activities of acquiring interests in and developing oil and gas fields
is dependent upon CanArgo reducing costs, generating funds from
internal sources including the sale of certain non-core assets,
external sources and, ultimately, achieving sufficient positive cash
flows from operating activities.
In order to preserve available cash resources while still maintaining
essential field operations and development activities in Georgia, a
significant cost reduction plan is being implemented. External sources
of funding are also being pursued. Should such funding not be
forthcoming and CanArgo be unable to sell some or all of its non-core
assets, further cost reductions will be required in order for CanArgo
to remain a going concern.
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 these properties will require the
availability of substantial funds from external sources. CanArgo
believes that it will be able to generate funds from external sources
including quasi-governmental financing agencies, conventional lenders,
equity investors and other oil and gas companies that may desire to
participate in CanArgo's oil and gas projects, although no firm funding
commitments have been received.
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil
Products to finance Georgian and Ukrainian development projects and in
October 2002, CanArgo agreed to sell its 50% holding for $4 million
with legal ownership being transferred upon receipt of final payment
due in August 2003. The agreed consideration to be exchanged does not
result in an impairment of the carrying value of assets held for sale.
The assets and liabilities of CanArgo Standard Oil Products have been
classified as "Assets of subsidiary held for sale" and "Liabilities of
subsidiary held for sale" for all periods presented. The results of
operations of CanArgo Standard Oil Products have been classified as
discontinued for all periods presented. The minority interest related
to CanArgo Standard Oil Products has not been reclassified for any of
the periods presented, however net income from discontinued operations
is disclosed net of taxes and minority interest.
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.
F-8
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. All other costs directly
attributable to a project are expensed as incurred as direct project
costs when such costs are considered recurring in nature.
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.
F-9
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 - The refinery and additions thereto are depreciated over the
estimated useful lives of the assets ranging from fifteen to twenty
years.
Discontinued Operations - CanArgo Standard Oil Products petrol stations
and additions thereto were depreciated over the estimated useful lives
of the assets ranging from ten to fifteen years until operations were
reclassified as discontinued.
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 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-
F-10
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has adopted the provisions of Statement 141 and Statement 142
effective January 1, 2002. No adjustments were required as a result of
adoption.
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 July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). This standard
will require companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The standard replaces the
existing guidance provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The statement is effective for fiscal years beginning
after December 31, 2002. CanArgo does not expect the adoption of this
standard to have a material effect on its 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.
F-11
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 32,100 481,652
-------- --------
$405,918 $668,337
======== ========
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 4,165,067 (4,054,216) 100,851
----------- ------------ -----------
$75,603,505 $(23,068,085) $52,535,420
=========== ============ ===========
F-12
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 4,081,983 (190,467) 3,891,516
----------- ----------- -----------
$59,025,621 $(9,176,504) $49,849,117
=========== =========== ===========
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. 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.
F-13
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 192,500 90,500
Pipeline Co.
Uentech International Corporation
Through an effective 45% voting interest - 304,943
Other Investments 75,000 75,001
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES $ 6,965,562 $ 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 $ 719,308 $ 696,374
=========== ===========
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.
F-14
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other investments include CanArgo's 10% interest in a potential Caspian
Sea exploration project.
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. 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.
9. COMMITMENTS AND CONTINGENCIES
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional
obligations, absolute and contingent, with respect to acquiring and
developing oil and gas properties and ventures. At 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
F-15
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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.
11. 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.
F-16
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
12. 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.
13. 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
Other, net - - -
----------- --------- -----------
Provision for income taxes $ - $ - $ -
=========== ========= ===========
Effective tax rate 0% 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
capital allowances 8,981,000 8,388,000
------------ ------------
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.
14. DISCONTINUED OPERATIONS
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil
Products to finance Georgian and Ukrainian development projects and in
October 2002, CanArgo agreed to sell its 50% holding to Westrade
Alliance LLC, an unaffiliated company, for $4 million in an arms-length
transaction, with legal ownership being transferred upon receipt of
final payment due in August 2003. The agreed consideration to be
exchanged does not result in an impairment of the carrying value of
assets held for sale. The assets and liabilities of CanArgo Standard
Oil Products have been classified as "Assets of subsidiary held for
sale" and "Liabilities of subsidiary held for sale" for all periods
presented. The results of operations of CanArgo Standard Oil
F-18
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Products have been classified as discontinued for all periods
presented. The minority interest related to CanArgo Standard Oil
Products has not been reclassified for any of the periods presented,
however net income from discontinued operations is disclosed net of
taxes and minority interest.
The results of discontinued operations at December 30, 2001, December
30, 2000 and December 30, 1999 consisted of the following:
DECEMBER 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Operating Revenues 7,607,489 126,014 -
Income (Loss) Before Income taxes and
Minority Interest 733,335 (16,596) -
Income Taxes 46,203 - -
Minority Interest in Income (343,566) 8,298 -
---------- -------- ---
Net Income (Loss) from Discontinued
Operation $ 343,566 $ (8,298) $ -
========== ======== ===
Gross consolidated assets and liabilities of subsidiary held for sale
at December 30, 2001 and December 30, 2000 consisted of the following:
DECEMBER 31, December 31,
2001 2000
------------ ------------
Assets held for sale:
Cash and cash equivalents 254 613
Accounts receivable 90,108 78,726
Inventory 177,931 27,572
Other current assets 35,384 -
Capital assets, net 5,149,291 628,227
Investment in other ventures, net 366,614 -
---------- -------
$5,819,582 $735,138
========== ========
Liabilities held for sale:
Accounts payable 240,958 6,734
Current portion of long term debt 392,408 -
Income taxes payable 29,456 -
Long term debt 514,352 -
---------- -------
$1,177,174 $ 6,734
========== ========
Other investments include 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.
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, 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.
The remaining 50% interest in CanArgo Standard Oil Products is held by
Standard Oil Products of Georgia and an individual, Mr. Levan
Pkhakazde, who is one of the founders of Standard Oil Products and the
General Director of CanArgo Standard Oil Products.
F-19
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 from continuing operations for the years ended
December 31, 2001, 2000 and 1999 by business segment and geographical
area were as follows:
OPERATING REVENUES FROM CONTINUING DECEMBER 31, DECEMBER 31, DECEMBER 31,
OPERATIONS: 2001 2000 1999
------------ ------------ ------------
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
Eastern Europe 2,595,763 535,865 -
INTERSEGMENT ELIMINATIONS (906,545) - -
---------- ---------- ----------
TOTAL $6,562,841 $6,644,644 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 2000 sales to three customers represented 43%,
25% and 14% of oil and gas revenue respectively. In 1999 sales to three
customers represented 38%, 34% and 11% of oil and gas revenue
respectively.
Operating profit (loss) from continuing operations for the years ended
December 31, 2001, 2000 and 1999 by business segment and geographical
area were as follows:
OPERATING PROFIT (LOSS) FROM DECEMBER 31, DECEMBER 31, DECEMBER 31,
CONTINUING OPERATIONS: 2001 2000 1999
------------ ------------ ------------
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
Eastern Europe (4,683,563) (298,255) -
CORPORATE AND OTHER EXPENSES (4,793,047) (2,974,791) (1,957,020)
------------ ----------- -----------
TOTAL $(16,107,496) $(2,401,150) $(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
F-20
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $ 668,337
Western Europe (principally cash) 7,310,678 30,900,438
----------- -----------
TOTAL CORPORATE 11,237,608 31,568,775
----------- -----------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe 52,424,569 45,957,601
REFINING AND MARKETING
Eastern Europe 110,850 3,891,516
DISCONTINUED OPERATIONS
Eastern Europe 5,819,582 735,138
OTHER ENERGY PROJECTS
Eastern Europe 719,308 606,010
Canada - 90,364
----------- -----------
TOTAL OTHER ENERGY PROJECTS 70,311,917 696,374
----------- -----------
TOTAL IDENTIFIABLE ASSETS $70,311,917 $82,849,404
=========== ===========
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:
Supplemental schedule of non-cash DECEMBER 31, DECEMBER 31, DECEMBER 31,
activities: 2001 2000 1999
------------ ------------ ------------
Issuance of Common Stock in connection
with acquisition of minority interest
shareholders interest in subsidiary $ - $4,500,000 $ -
Issuance of Common Stock in connection
with acquisition of controlling
interest in refinery - 1,666,576 -
Issuance of Common Stock in connection
with investments in oil and gas ventures
- - 440,740
Issuance of Common Stock in connection
with compensation earned and third
party services provided - 112,700 298,872
----------- ---------- --------
$ - $6,279,276 $739,612
=========== ========== ========
F-21
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-22
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of stock options granted under the 1994 Plan,
the 1995 Plan, CAOG Plan and special stock options and warrants is as
follows:
SHARES ISSUABLE
SHARES AVAILABLE UNDER OUTSTANDING WEIGHTED AVERAGE
FOR ISSUE OPTIONS EXERCISE 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
Exercised - -
Canceled - -
----------- ---------- ----
BALANCE, DECEMBER 31, 2001 2,111,335 7,092,001 0.92
=========== ========== ====
F-23
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares issuable upon exercise of vested options and the corresponding
weighted average exercise price are as follows:
SHARES ISSUABLE
UNDER EXERCISABLE WEIGHTED AVERAGE
OPTIONS EXERCISE 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 WEIGHTED NUMBER
OF SHARES AVERAGE WEIGHTED OF SHARES WEIGHTED
Range of Exercise Prices OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, 2001 TERM EXERCISE PRICE DECEMBER 31, 2001 EXERCISE 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.
18. RELATED PARTY TRANSACTIONS
Of the 50% of CanArgo Standard Oil Products not held by CanArgo, 41.65%
is held by Standard Oil Products, an unrelated third party entity, and
8.35% is held by an individual who is one of the founders of Standard
Oil Products and is an officer and director of CanArgo Standard Oil
Products. In September 2002, CanArgo approved a plan to sell CanArgo
Standard Oil Products to finance Georgian and Ukrainian development
projects and in October 2002, CanArgo agreed to sell its 50% holding
for $4 million with
F-24
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
legal ownership being transferred upon receipt of final payment due in
August 2003. The majority of refined product purchased by CanArgo
Standard Oil Products for resale at its petrol stations is purchased
from a company controlled by Standard Oil Products. 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-25
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2001
-------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ------------ --------------
Operating Revenue from
Continuing Operations $2,154,378 $ 1,551,524 $2,095,429 $ 1,369,542 $ 7,170,873
Operating Loss from
Continuing Operations (619,150) (1,294,077) (877,314) (13,316,955) (16,107,496)
Net Loss from Continuing
Operations (364,852) (1,214,048) (566,994) (11,416,018) (13,561,912)
Net Income from Discontinued
Operations, net of Taxes and
Minority Interest 38,771 10,608 79,630 214,557 343,566
Net and Comprehensive Loss (326,081) (1,203,440) (487,364) (11,201,461) (13,218,346)
Net Loss per Common Share -
basic and diluted from
Continuing Operations 0.00 (0.02) (0.01) (0.12) (0.16)
Net Loss per Common Share -
basic and diluted from
Discontinued Operations 0.00 0.00 0.00 0.00 0.00
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 from
Continuing Operations $2,080,976 $1,515,095 $1,163,277 $ 2,250,196 $ 7,009,544
Operating Profit (Loss) from
Continuing Operations 122,707 (187,392) (788,199) (1,548,266) (2,401,150)
Net Profit (Loss) from
Continuing Operations 100,462 (279,952) (712,729) (1,251,087) (2,143,306)
Net Income from Discontinued
Operations, net of Taxes and
Minority Interest - - - (8,298) (8,298)
Net and Comprehensive Loss 100,462 (279,952) (712,729) (1,259,385) (2,151,604)
Net Loss per Common Share -
basic and diluted from
Continuing Operations 0.00 (0.01) (0.01) (0.01) (0.04)
Net Loss per Common Share -
basic and diluted from
Discontinued Operations - - - 0.00 0.00
Net Profit (Loss) per Common
Share - basic and diluted 0.00 (0.01) (0.01) (0.02) (0.04)
F-26
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (5,689) - (5,689)
Extension, discoveries, other additions - - -
Production (247) - (247)
Disposition of properties - - -
------ ---- ------
DECEMBER 31, 2001 3,729 - 3,729
====== ==== ======
NET PROVED DEVELOPED OIL RESERVES
December 31, 2001 2,928 - 2,928
====== ==== ======
F-27
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ENTITLEMENT PSC ENTITLEMENT
OIL RESERVES VOLUMES OIL RESERVES VOLUMES
- GROSS (MSTB) (MSTB) (1) - GROSS (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 ENTITLEMENT PSC ENTITLEMENT
GAS RESERVES VOLUMES GAS RESERVES VOLUMES
- GROSS (MMCF) (MMCF) (1) - GROSS (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-28
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-29
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $ 1,991,779 $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-30
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-31
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-32