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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
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
-----------------
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 Identification No.)
incorporation or organization)
C/O 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
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(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 February 28, 2003.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
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The aggregate market value of the common equity held by non-affiliates of the
registrant, as of February 28, 2003, was $4,186,317.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
The United States Private Securities Litigation Reform Act of 1995 provides a
"safe harbour" for certain forward looking statements. Such forward looking
statements are based upon the current expectations of CanArgo Energy Corporation
("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.
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
1
Ninotsminda, Manavi and West Rustavi Production Sharing Contract, the Nazvrevi
and Block XIII Production Sharing Contract and the Norio (Block XI(c)) 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 2001 the refinery ceased operations, as it was no longer
economic to refine product under the existing Georgian fiscal regime. Management
continues to discuss possible fiscal changes with the Georgian government that
may make this a viable business going forward. 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 17
and 18 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 both in which CanArgo owns a 100%
interest through its subsidiaries Ninotsminda Oil Company Limited and CanArgo
(Nazvrevi) Limited respectively, and the Norio (Block XI(c)) and North Kumisi
Production Sharing Agreement which CanArgo entered into through its subsidiary
CanArgo Norio Limited in which CanArgo holds a 64.2% interest. 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. In 2001 the
refinery ceased operations, as it was no longer economic to refine product under
the existing Georgian fiscal regime. Management continues to discuss possible
fiscal changes with the Georgian government that may make this a viable business
going forward. In September 2002, CanArgo approved a plan to sell CanArgo
Standard Oil Products, its investment in the chain of petrol stations, 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. CanArgo
continues to direct most of its efforts and resources to the development of the
exploration programme and the Ninotsminda field.
[MAP SHOWING EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES]
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 eighteen wells in the Ninotsminda field, of which
fourteen are currently classified as producing.
CanArgo believes the Ninotsminda 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 a 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.
[MAP SHOWNING HYDROCARBON PRODUCING REGIONS]
3
BUSINESS STRUCTURE
CanArgo and its active subsidiaries are as follows:
[FLOWCHART SHOWING CANARGO AND ITS ACTIVE SUBSIDIARIES]
CanArgo's activities at the Ninotsminda oil field are conducted through
Ninotsminda Oil Company, which is currently a 100% subsidiary. 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. 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.
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%.
4
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 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 86 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.
5
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 203 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".
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. Gas deliveries to AES for 2002 declined significantly due to
lower oil and gas production and the temporary shutdown by AES of its thermal
power generating station following an accident at the facility. Although AES has
now re-opened, CanArgo had not sold any further gas to AES since their demand
for gas was too great for CanArgo to meet from production.
A gas exploration programme to explore and determine the future development
potential of gas prospects in the Sub Middle Eocene on CanArgo's Ninotsminda
field in Georgia was initiated under a binding Participation Agreement with AES
Gardabani dated July 19, 2000. 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 to be implemented by CanArgo's existing
operations unit in Georgia.
Ninotsminda Oil Company commenced the first and second wells of this three-well
exploration programme in 2001. In January 2002, the first of these wells, N100,
reached target depth and underwent testing to determine if hydrocarbons were
present in the well and if present, the possible extent of the hydrocarbons. In
January 2002, the initial planned testing programme on the N100 exploration oil
discovery was completed and the production rates were deemed to be
non-commercial at the initial stage. Drilling of the second well in the
exploration programme, M11, began in June 2001 (see "Other fields and prospects
under Ninotsminda Production Sharing Contract" below).
Prior to completion of the exploration programme as defined in the Participation
Agreement ("the Agreement"), AES indicated in January 2002 that it wished to
withdraw from the Agreement in order to focus on its core business. In 2002 the
agreement with AES was terminated without AES earning any rights to any of the
Ninotsminda field reservoirs. Under a separate Letter Agreement, if gas from the
Sub Middle Eocene is discovered and produced, AES will 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 also has 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 be supplied to the
Gardabani thermal power plant.
6
As a result of AES Gardabani withdrawing from the Participation Agreement with
respect to the Cretaceous gas exploration programme and unexpected mechanical
difficulties drilling exploration wells M11 at the Ninotsminda field and MK72 at
the Norio field, and delays in testing well N100, capital expenditures exceeded
initial estimates and production volumes available for sale are less than
anticipated. These events resulted in lower than expected cash resources from
which CanArgo could 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 was implemented with both direct project and general and administrative
costs being reduced. These reductions together with the receipt of the final $3
million payment from the agreed sale of CanArgo's interest in its retail
operation CanArgo Standard Oil Products, the planned 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. 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.
In January 2003, in an attempt to increase production at the Ninotsminda field
and further improve working capital, drilling of a new horizontal well, NH4,
commenced targeting an existing producing reservoir. 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 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.
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.
In January 2003, in an attempt to increase production at the Ninotsminda field,
drilling of a new horizontal well N4H, commenced, targeting an existing
producing reservoir.
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 a
number of currently identified prospects including 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 at rates of 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
and commerciality.
Drilling of the M11 well on the Manavi Cretaceous gas prospect, began in June
2001. CanArgo has temporarily suspended further drilling of well M11 below its
current casing point at 4,182 metres in order to
7
fully review available technical data, and secure funding to complete the well.
Farm-in partners are currently being sought to provide additional capital for
completing this well.
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 900
barrels of oil equivalent (BOE) per day, comprising approximately 755 barrels of
oil per day and 145 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
------------ -------------------
2002 292,289
2001 413,724
2000 478,999
Productive Wells and Acreage
The following table summarizes as of December 31, 2002 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 14 2,500 14 2,500
On December 31, 2002, 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, 2003
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
OIL RESERVES GROSS VOLUMES(1)
----------------- -----------------
(MILLION BARRELS) (MILLION BARRELS)
----------------- -----------------
Proved Developed 4.0 2.8
Proved Undeveloped 0.1 0.1
------------------ ------------------
TOTAL PROVEN 4.1 2.9
================== ==================
8
GAS RESERVES - PSC ENTITLEMENT
GAS RESERVES GROSS VOLUMES(1)
------------------ ------------------
(BILLION CUBIC (BILLION CUBIC
FEET) FEET)
------------------ ------------------
Proved Developed 8.0 2.4
Proved Undeveloped -- --
------------------ ------------------
TOTAL PROVEN 8.0 2.4
================== ==================
(1) PSC Entitlement Volumes attributed to CanArgo are calculated using the
"economic interest method" applied to the terms of the production sharing
contract. PSC Entitlement Volumes are those produced volumes which, through
the production sharing contract, accrue to the benefit of Ninotsminda Oil
Company after deduction of Georgian Oil's share which includes all Georgian
taxes, levies and duties. As a result of CanArgo's interest in Ninotsminda
Oil Company, these volumes accrue to the benefit of CanArgo for the
recovery of capital, repayment of operating costs and share of profit.
Proved reserves are those reserves estimated as recoverable under current
technology and existing economic conditions from that portion of a reservoir
which can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data, including
the reserves to be obtained by enhanced recovery processes demonstrated to be
economically and technically successful in the subject reservoir. Proved
reserves 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
expenditure 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, 2003 were $17.80 per barrel and $1.29 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 either in a pipeline or by truck to Georgian Oil's
central processing facility at Sartichala for further treatment. The gas is
transported to Sartichala in a separate pipeline where some is used for fuel and
the rest is piped 34 kilometres to Rustavi where it is delivered to the Rustavi
industrial complex for sale to a number of customers.
9
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 or by road
tanker to Vaziani rail loading terminal primarily for export sales. At the
railheads, 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
point at Sartichala.
Ninotsminda Oil Company sells its oil directly to local and international
buyers. In 2002, Ninotsminda Oil Company sold its oil production to eight
customers. Of these customers, four customers represented sales greater than 10%
of oil revenue:
CUSTOMER PERCENT OF OIL REVENUE
---------------------------------------- ---------------------------
Caspian Trading 28.4%
Sveti 26.4%
Crownhill 20.1%
Trafigura 19.9%
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 production to three customers.
CUSTOMER PERCENT OF OIL REVENUE
---------------------------------------- ---------------------------
Georgian American Oil Refinery(1) 54.4%
MS 31.4%
Caspian Trading 14.2%
------------
(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 2002 were at an average
discount of $5.09 to Brent.
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
10
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 five year intervals commencing in
2003 at least 25 percent of the area then covered by the production sharing
contract, but not any portions being actively developed.
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 at a cost of approximately $1.5
million, and met the minimum obligatory work commitment under the contract. The
Department for Protection of Mineral Resources and Mining has confirmed that
CanArgo has met the requirements of the work programme defined in the production
sharing agreements. 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 XI(c)) and North Kumisi Blocks
In December 2000, CanArgo entered into a third PSC with the State of Georgia
represented by Georgian Oil and the State Agency for Regulation of Oil and Gas
Resources in Georgia. This agreement covers the Norio and North Kumisi blocks of
East Georgia, a 1,542 square kilometre exploration area adjacent to the
Ninotsminda, West Rustavi and Samgori fields. There are two existing oil fields
on the Norio block, Norio and Satskhenisi which are relatively shallow fields
and which have produced oil from the Miocene and Sarmatian sequences. The
commercial terms of the production sharing agreement are similar to those of the
Nazvrevi/Block XIII production sharing contract with the exception that after
all cumulative capital costs have been recovered by CanArgo, remaining
production after deduction of operating costs is allocated on a 60/40 basis
between Georgian Oil and CanArgo respectively. 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 64.2% 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.
11
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
64.2% 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 XI(G) (Tbilisi) and Block XI(H) (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 XI(G)
(Tbilisi) and Block XI(H) (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 18 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 potential design capacity of approximately
4,000 barrels per day. Operating as a straight-run distillation unit it can
potentially produce 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
12
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 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 and diesel sales remain 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 products allowed 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 used in CanArgo's Georgian operations, and from time to time have also been
leased out to other operators on a service basis. In January 2002, CanArgo
established a well services subsidiary, which will bid in local tenders for
drilling contracts. In 2002, a plan to sell the 3 megawatt duel fuel power plant
has been agreed and this asset is classified in "Assets held for sale" for all
periods presented.
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 Stynawske 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
13
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 $360,000 was repaid by December 31, 2002
and has been fully paid in 2003. 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.
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, 2003 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.
CANARGO SHARE
OIL RESERVES OIL RESERVES - -----------------
GROSS (45%)
----------------- -----------------
(MILLION BARRELS) (MILLION BARRELS)
----------------- -----------------
Proved Developed 0.7 0.3
Proved Undeveloped -- --
----------------- -----------------
TOTAL PROVEN 0.7 0.3
================= =================
GAS RESERVES - CANARGO SHARE
GROSS (45%)
GAS RESERVES ----------------- ----------------
(BILLION CUBIC (BILLION CUBIC
FEET) FEET)
----------------- -----------------
Proved Developed 4.9 2.2
Proved Undeveloped -- --
----------------- ----------------
TOTAL PROVEN 4.9 2.2
================= ================
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,
2003 was $15.64 per barrel and $0.64 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, 2002, 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.
14
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 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.
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, and future plans
include interpretation of this data and possible drilling.
Potential Syrian Exploration Project
In January 2003, CanArgo won exclusive rights to negotiate a Production Sharing
Contract (PSC) for Block XIX in southern Syria. The block comprises 6,000 km2 of
under-explored acreage in the Sirhan Basin in the south of the country,
bordering Jordan. There are two oil and gas plays in the block, one Paleozoic
and one Mesozoic; these plays have been successfully exploited in both western
Iraq and more recently in neighbouring north-eastern Jordan.
15
DISCONTINUED OPERATIONS
CanArgo Standard Oil Products
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 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. Discontinued
Operation activity is incorporated herein by reference from note 17 to the
consolidated financial statements.
As at 31 December, 2002, CanArgo Standard Oil Products had a total of 23
licences/sites in its portfolio with 19 sites in operation.
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
CanArgo's ability to remain a going concern
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 was implemented with both direct project and general and
administrative costs being reduced. These reductions and the receipt of the
final $3 million payment from the agreed sale of CanArgo's interest in its
retail operation CanArgo Standard Oil Products (CSOP) (explained below), the
planned 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. 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.
The financial statements have been prepared on a going concern basis, which
assumes the additional funding and/or proceeds from the sale of non-core assets
is received. If this additional finance is not received, in particular the
receipt of the final $3 million payment from the sale of CSOP, or receipt of an
equivalent amount, adjustments may have to be made to reduce the balance sheet
values of assets to their recoverable amounts, to provide for further
liabilities that might arise and to reclassify fixed assets and long term
liabilities as current assets and liabilities.
16
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 of which $1 million has
been received to date as a non-refundable deposit. Legal ownership will transfer
upon receipt of the final payment of $3 million due in August 2003.
Whilst the directors presently cannot be certain as to the outcome of the
matters mentioned above, they believe that it is appropriate for the financial
statements to be prepared on a going concern basis.
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 internal and/or external sources. CanArgo believes that it will be
able to generate funds from 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.
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
Under the terms of the farm-in for the development of the Bugruvativske field in
Ukraine the local Ukrainian oil and gas company, Gals-K Limited, 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. Agreement has also
been reached with Ukrnafta, on revisions to the commercial terms of the Joint
Investment Production Activity (JIPA) agreement. 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.
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
17
advances to Boryslaw Oil Company has also been agreed of which $360,000 was
repaid at December 31, 2002 and has been fully paid in 2003. 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.
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.
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 2002, we recorded an
impairment charge of $1.6 million, and in 2001, we recorded an impairment charge
of $7.3 million following application of the full cost ceiling limitation to
capitalized oil and gas property costs. The impairments are 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 in 2002.
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 its 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.
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
need to raise additional funds from outside sources in order to pay for project
development costs beyond those currently budgeted through 2003. 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
18
operations, or such funds may only be available on commercially unattractive
terms. The carrying value of the Ninotsminda and Bugruvativske fields may not be
realized unless additional capital expenditures are incurred to develop the
fields. 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; and
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; and
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.
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
19
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.
In early 2002, the Georgian government 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; and
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, although power
supplies have been more regular since that time.
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.
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 although CanArgo has negotiated economic stabilization clauses in
its production sharing agreements in Georgia.
Conflicting Interests with our Partners
20
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 Stynawkse
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; and
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 $31.98 per barrel at December 31,
2002. CanArgo may also not benefit from continued increases in oil prices as
have occurred in the first quarter of 2003 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:
21
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; and
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, 2003. 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 our 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; and
o environmental matters.
We expect the trend towards more burdensome regulation of our business to result
in increased costs and operational delays. This trend is particularly applicable
in developing economies, such as those in Eastern Europe where we have our
principal operations. In these countries, the evolution towards a more developed
economy is often accompanied by a move towards the more burdensome regulations
that typically exist in more developed economies.
Competition
The oil and gas industry including the refining and marketing of crude oil
products is highly competitive. Our competitors include integrated oil and gas
companies, independent oil and gas companies, drilling and income programmes,
and individuals. Many of our competitors are large, well-established,
well-financed companies. Because of our small size and lack of financial
resources, we may not be able to compete effectively with these companies.
Operations are Dependent on 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
22
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 the date of termination of the
agreement. The agreement can be terminated by giving six months notice from
either side. We do not carry key employee insurance on any of our employees.
Employees
As of December 31, 2002, CanArgo had 248 full time employees. Of its full time
employees, the entity acting as operator of the Ninotsminda oil field for
Ninotsminda Oil Company has 86 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 145 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, 2002 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 ACREAGE SQUARE
OF WELLS ACREAGE KILOMETRES OF WELLS KILOMETRES
--------- ----------- ------------ --------- ---------- ------------
Ninotsminda field 14 2,500 10 14 2,500 10
On December 31, 2002, 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, 2002. The information regarding net acreage
represents the interest of CanArgo based on its 100% interest in Ninotsminda Oil
Company and the subsidiary holding the Nazvrevi/Block XIII contract and its
current 50% interest in the subsidiary holding the Norio/North Kumisi contract.
23
GROSS NET
---------------------------- ----------------------------
PSC SQUARE SQUARE
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 XI(c)) 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; Guernsey, Channel Islands;
Calgary, Alberta; Tbilisi, Republic of Georgia and Kiev, Ukraine. The leases
have remaining terms varying from three months to seven years and six months and
annual rental charges ranging from $16,000 to $213,000.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 2002 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, 2002.
24
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 the 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 0.15 0.04 29,404 0.08 0.04 712,500
At February 28, 2003, the closing price of our common stock on the OTC Bulletin
Board and Oslo Stock Exchange was $0.040 and $0.043 respectively.
On February 28, 2003 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
25
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 February 12, 2002, CanArgo completed an offering of 5,210,000 shares of
common stock at Norwegian Kroner 2.95 per share (approximately US$0.34 per
share) to a financial institution 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. ABG Sundal Collier ASA acted as placement agent for this
transaction. The placement agent received a commission of 5.75% of the gross
proceeds of the placement. Proceeds from the placement of approximately US$1.5
million were used for working capital purposes. In January 2003, a registration
statement on Form S-1 registering resale of the common shares issued in the
private placement under the Securities Act was declared effective by the United
States Securities and Exchange Commission.
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.
On January 24, 2002, CanArgo announced a redemption of all the outstanding
Exchangeable Shares issued by our subsidiary CanArgo Oil & Gas, Inc., which
redemption was completed on May 31, 2002 in exchange for the issuance of an
aggregate of 148,826 shares of Common Stock, in accordance with the terms of
such Exchangeable Shares.
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 YEAR ENDED
for per common share amounts DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
FINANCIAL PERFORMANCE
Total revenue from
continuing operations 5,576 7,171 7,010 2,783 821
Operating income (loss) from
continuing operations (4,971) (16,107) (2,401) (8,119) (6,357)
26
----------------------------------------------------------------
Reported in $000's except YEAR ENDED
for per common share amounts DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Other income (expense) and
Minority Interest in income
(loss) of consolidated
subsidiaries (528) 2,545 258 (354) 247
Net income (loss) from
continuing operations (5,499) (13,562) (2,143) (8,473) (6,110)
Net income (loss) from
discontinued operations, net
of taxes and minority
interest(1) 171 344 (8) -- --
Net income (loss) (5,328) (13,218) (2,151) (8,473) (6,110)
Net loss per common share -
basic and diluted from
continuing operations (0.06) (0.16) (0.04) (0.32) (0.39)
Net loss per common share -
basic and diluted from
discontinued operations (0.00) (0.00) (0.00) -- --
Net loss per common share -
basic and diluted (0.06) (0.16) (0.04) (0.32) (0.39)
Cash generated by (used in)
operations 8 (11,829) 7,881 (1,210) (14,718)
Working capital 5,585 14,590 23,315 2,729 1,366
Total assets 70,736 70,312 82,849 43,948 46,618
Minority shareholder advances -- 450 -- -- --
Stockholders' equity 62,105 65,800 72,426 37,863 40,031
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 held for sale" and "Liabilities 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.
27
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.
On February 12, 2002, CanArgo completed a private placement of 5,210,000 common
shares at NOK 2.95 per share (approximately US$0.34 per share) an institution
and another qualified purchaser for gross proceeds of approximately $1,762,000.
As of December 31, 2002, CanArgo had working capital of $5,585,000, compared to
working capital of $14,590,000 as of December 31, 2001. The $9,005,000 decrease
in working capital from December 31, 2001 to December 31, 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 AES Gardabani withdrawing from the Participation Agreement with
respect to the Cretaceous gas exploration programme and unexpected mechanical
difficulties drilling exploration wells M11 at the Ninotsminda field and MK72 at
the Norio field, and delays in testing well N100, capital expenditures exceeded
initial estimates and production volumes available for sale are less than
anticipated. These events resulted in lower than expected cash resources from
which CanArgo could 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 was implemented with both direct project and general and administrative
costs being reduced. These reductions together with the receipt of the final $3
million payment from the agreed sale of CanArgo's interest in its retail
operation CanArgo Standard Oil Products, the planned 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. 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.
In January 2003, in an attempt to increase production at the Ninotsminda field
and further improve working capital, drilling of a new horizontal well, NH4,
commenced targeting an existing producing reservoir. 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 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 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.
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 a local Ukrainian oil and gas company on the
28
terms of a farm-in to the JIPA. The terms of the farm-in 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 31 December 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 31 December 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.
Initial costs in respect of CanArgo's investment in the Bugruvativske field,
through its direct investment in LVR, are included in "capital assets - unproved
properties". These costs will continue to be disclosed as unproved properties
until CanArgo participates in the JIPA by investing an amount up to the cash
contribution made by its JIPA partner, IPEC. Any contribution must be made prior
to 31 December 2003 in order for CanArgo to participate in the existing JIPA.
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 the final $3 million payment due in August 2003.
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 $360,000 was repaid at December 31, 2002 and has been fully paid in 2003.
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.
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, 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
29
unable to sell some or all of its non-core assets, further cost reductions
and additional funding 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 raising of additional finance;
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 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 $4,293,000 from $5,891,000 at December 31,
2001 to $1,598,000 at December 31, 2002. The decrease was primarily due to the
cost of the Manavi and Norio exploration programmes in Georgia.
Operating Activities
Net cash generated from operations in 2002 was $1,619,000 compared to cash used
in operations in 2002 of $11,829,000 in 2001. Cash used in operating activities
decreased primarily due to the use in 2001 of cash received from the joint
venture partner, AES Gardabani, with respect to its participation in a three
well exploration; changes in accounts receivable in 2002 and 2001 related to
rental income due from the lease of one of CanArgo's drilling rigs to a third
party, and amounts due from AES Gardabani relating to the termination of their
participation in the three well exploration programme in Georgia; changes in
accounts payable in 2001 due to payments of liabilities at December 31, 2000
relating to the 2000 Norio seismic progamme; and an increase in deferred revenue
in 2002 from a prepayment on the sale of crude oil, and proceeds from the sale
of CanArgo's 50% holding in CanArgo Standard Oil Products.
30
Accounts receivable decreased from $2,007,000 at December 31, 2001 to $306,000
at December 31, 2002. The decrease is primarily a result of the receipt of
$1,000,000 from AES relating to the termination of AES's participation in a
three well exploration programme, and an increase in allowance for a doubtful
debt of $275,000, generated from gas sales to the Rustavi Plant in Georgia in
2000 and the receipt of payment for services from a third party relating to the
use of one of CanArgo's drilling rigs.
Inventory decreased from $406,000 at December 31, 2001 to $186,000 at December
31, 2002 primarily as result of the sale of oil by Ninotsminda Oil Company from
storage. Approximately 33,000 barrels of oil were held in storage by Ninotsminda
Oil Company at December 31, 2002 for sale to the Georgian domestic, regional or
international market.
Prepayments decreased from $2,236,000 at December 31, 2001 to $212,000 at
December 31, 2002 as a result of receipt of materials and services related to
CanArgo's exploration activities transferred to capital assets in the period.
This decrease is included in the statement of cash flows as an investing
activity.
Assets held for sale, consisting of assets of discontinued operations and a 3
megawatt duel fuel power generator, increased by $1,741,000 to $8,096,000 at
December 31, 2002 from $6,355,000 at December 31, 2001 primarily due to activity
at CanArgo Standard Oil Products relating to the addition of new petrol stations
in Georgia.
Other currents assets increased from $162,000 at December 31, 2001 to $176,000
at December 31, 2002 as a result of a deposit to secure the rental of CanArgo's
representative office in Ukraine.
Accounts payable increased to $872,000 at December 31, 2002 from $ 828,000 at
December 31, 2001 primarily due to an absolute increase in corporate payables.
Deferred revenue of $1,500,000 at December 31, 2002 relates to a 12 month crude
oil sales agreement for Ninotsminda Oil Company to sell its monthly share of oil
produced under the Ninotsminda production sharing contract. As security over
payment the buyer provided $1 million to be repaid by Ninotsminda Oil Company at
the end of the twelve month period through the delivery of crude oil equal to
the value of the security; and $500,000 advanced proceeds received for the sales
of CanArgo Standard Oil Products.
Accrued liabilities decreased to $204,000 at December 31, 2002 from $400,000 at
December 31, 2001 primarily due to a reduction in accrued professional fees
mainly in respect of share capital issues, and liabilities relating to the
winding up of East Georgian Pipeline Company.
Liabilities held for sale, in respect of discontinued operations, increased by
$1,175,000 to $2,352,000 at December 31, 2002 from $1,177,000 at December 31,
2001 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.
Investing Activities
Net cash used in investing activities decreased to $8,692,000 in the year ended
December 31, 2002 from $17,189,000 in the year ended December 31, 2001. The
decrease in cash used in investing activities was primarily due to capital
expenditures related to the Ninotsminda field and the 2001 acquisition of LVR.
Capital assets, net increased from $52,535,000 at December 31, 2001 to
$59,703,000 at December 31, 2002, primarily as a result of investment of
$10,996,000 in capital assets including oil and gas properties and equipment,
principally related to the Ninotsminda and Norio production sharing contracts.
During 2002, CanArgo wrote down its oil and gas properties in the Ninotsminda
field by an aggregate $1,600,000 on application of the full cost ceiling test as
a result of lower reserve quantities following production declines in 2002 and
reduced development plans. If oil prices or production levels further decline,
CanArgo may experience additional impairment of this property.
31
Investments in and advances to oil and gas and other ventures, net deceased from
$719,000 at December 31, 2001 to $459,000 at December 31, 2002. The decrease
reflects repayments by Boryslaw Oil Company of CanArgo's advances in 2002
partially offset by an increase in equity income related to CanArgo's investment
in Boryslaw Oil Company.
Financing Activities
Cash from financing activities decreased to $3,175,000 for the year ended
December 31, 2002 from $8,974,000 for the year ended December 31, 2001 due
primarily to proceeds from the sale of common stock issued and received in 2001.
On February 12, 2002, CanArgo completed an offering of 5,210,000 common shares
at NOK 2.95 per share (approximately US$0.34 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 64.2% 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.
Minority interest in continuing and discontinued subsidiaries increased by
$1,988,000 to $3,519,000 at December 31, 2002 from $1,531,000 at December 31,
2001 due to the reclassification of $1,207,000 from minority shareholder
advances resulting from finalisation of CanArgo's equity interest from 50% to
64.2% in Norio and its existing Norio and North Kumisi production sharing
agreement, an increase of $444,000 resulting from CanArgo's adjusted interest in
its final share of the carrying net asset value of Norio, and minority interest
shareholder's share of income in the period.
Discontinued Operations
Assets held for sale include the results of discontinued operations and the
generator. This increased by $1,741,000 to $8,096,000 at December 31, 2002 from
$6,355,000 at December 31, 2001 primarily due to activity at CanArgo Standard
Oil Products relating to the addition of new petrol stations in Georgia.
Liabilities held for sale, resulting from discontinued operations, increased by
$1,175,000 to $2,352,000 at December 31, 2002 from $1,177,000 at December 31,
2001 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.
32
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 XI(c)) and North Kumisi Production
Sharing Agreement was concluded after enactment of the Petroleum Law, and under
the terms and conditions of this legislation.
To confirm 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 existing
production sharing contracts 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.
In 2002 the Participation Agreement for the three well exploration programme on
the Ninotsminda field with AES was terminated without AES earning any rights to
any of the Ninotsminda field reservoirs. The Company therefore has not present
obligations in respect of AES. However, under a separate Letter of Agreement, if
gas from the Sub Middle Eocene is discovered and produced, AES will be entitled
to recover at the rate of 15% of future gas sales from the Sub Middle Eocene,
net of operating costs, of approximately $7.5 million, representing their prior
funding under the Participation Agreement.
In January 2003, CanArgo won exclusive rights to negotiate a Production Sharing
Contract (PSC) for Block XIX in southern Syria. CanArgo has the contingent
obligation to issue an aggregate of 333,000 stock options at a proposed
exercise price of $0.17 per share, subject to the successful award of the PSC
for Block XIX in southern Syria.
CanArgo has contingent obligations and may incur additional obligations,
absolute or contingent, with respect to the acquisition and development of oil
and gas properties and ventures in which it has interests that require or may
require CanArgo to expend funds and to issue shares of its Common Stock.
At December 31, 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 performance standards.
As CanArgo develops current projects and undertakes other projects, it could
incur significant additional obligations.
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 a cost of up to $4.4 million of which CanArgo's share of
costs was $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
33
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 $360,000 was repaid by December 31, 2002 and has been
fully paid in 2003. 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.
The following tables sets forth information concerning the amounts of payments
due under specified contractual obligations for periods of less than one year,
one to three years, three to five years and more than five years as at December
31, 2002 and December 31, 2001.
CONTRACTUAL OBLIGATIONS
DUE IN LESS DUE IN 1 TO 3 DUE IN 3 TO 5 DUE IN MORE
THAN 1 YEAR YEARS YEARS THAN 5 YEARS
----------- ------------- ------------- ------------
Operating lease obligations $250,000 690,000 440,000 440,000
Other long-term liabilities(1) -- -- -- 122,290
----------- ------------- ------------- ------------
$250,000 690,000 440,000 562,290
=========== ============= ============= ============
(1) Other long-term liabilities represent costs provided for future site
restoration.
(2) CanArgo has no contractual obligations in respect of long-term debt,
capital leases or purchase obligations.
RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
CanArgo recorded operating revenue of $5,576,000 during the year ended December
31, 2002 compared with $7,171,000 for the year ended December 31, 2001. The
decrease is primarily attributable to there being no refining revenue in 2002
following suspension of activity in 2001, offset by other revenue, representing
provision of drilling services in Georgia.
Ninotsminda Oil Company generated $4,163,000 of oil and gas revenue in the year
ended December 31, 2002 compared with $3,967,000 for the year ended December 31,
2001 due principally to a a lower average net sales price achieved in 2002. Its
net share of the 292,289 barrels (801 barrels per day) of gross oil production
for sale from the Ninotsminda field in the period amounted to 189,988 barrels.
In 2002, 44,483 barrels of oil were removed from storage and sold. For the year
ended December 31, 2001, Ninotsminda Oil Company's net share of the 413,724
barrels (1,133 barrels per day) of gross oil production was 247,179 barrels. The
decline in production is due to limited workover investment resulting in a
natural reservoir rate of decline.
34
Ninotsminda Oil Company's entire share of production was sold locally in Georgia
under both national and international contracts. Net sale prices for Ninotsminda
oil sold during 2002 averaged $17.09 per barrel as compared with an average of
$19.43 per barrel in 2001. Its net share of the 212,499 thousand cubic feet
(mcf) of gas delivered was 138,124 mcf at an average net sale price of $1.25 per
mcf of gas. For the year ended December 31, 2001, Ninotsminda Oil Company's net
share of the 1,110,390 mcf of gas delivered was 721,754 mcf at an average net
sales price of $1.14 per mcf of gas. Gas deliveries for the year ended December
31, 2002 declined significantly due to lower oil and gas production and the
temporary shutdown by AES of its thermal power generating station following an
accident at the facility. Although AES has now re-opened, CanArgo has not sold
any further gas to AES since their demand for gas was too great for CanArgo to
meet from production.
CanArgo had no refining revenue for the year ended December 31, 2002 compared to
revenue from refining of $2,596,000 for the year ended, December 31, 2001.
Refining revenues for 2001 related solely to the refinery owned by Georgian
American Oil Refinery. Currently only naptha, diesel and mazut can be produced
and of these products, an excise tax on both naptha and diesel 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
2002 CanArgo 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. The refinery is now in a care and maintenance condition.
CanArgo had other revenue of $1,413,000 for the year ended December 31, 2002
compared to other revenue of $608,000 for the year ended December 31, 2002. In
2002, other revenue consisted of $1,324,000 for the provision of drilling
services and $89,000 of rental income from leasing its refinery. In 2001, other
revenue was all in respect of the provision of drilling services. 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. No new drilling service
contracts have been signed, although the company has established a well services
subsidiary, which will bid in local tenders for drilling contracts.
The operating loss from continuing operations for the year ended December 31,
2002 amounted to $4,971,000 compared with an operating loss of $16,107,000 for
2001. The decrease in operating loss is attributable primarily to reduced
impairment of oil and gas properties and other assets in 2002, refining
activity, profit generated from a drilling services contract, a reduced
depreciation, and reduced depletion and amortization in the period.
Field operating expenses decreased to $1,538,000 ($4.69 per BOE) for the year
ended December 31, 2002 as compared to $1,568,000 ($2.62 per BOE) for 2001. The
decrease is primarily a result of decreased activity at the Ninotsminda field
offset partially by costs relating to sales of oil from storage in the year.
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.
CanArgo recorded no Purchases of crude oil and products and Refinery operating
expenses for the year ended December 31, 2002 compared to Purchases of crude oil
and products of $1,451,000 and Refinery operating expenses of $791,000
respectively for the year ended, December 31, 2001. Purchases of crude oil and
products and Refinery operating expenses for the year ended December 31, 2001
related solely to refining activity which was suspended in the fourth quarter of
2001.
Direct project costs increased to $1,429,000 for the year ended December 31,
2002, from $1,300,000 for the year ended December 31, 2001, reflecting
additional costs associated with the provision of drilling services in Georgia.
35
Selling, general and administrative costs decreased to $3,652,000 for the year
ended December 31, 2002, from $3,742,000 for the year ended December 31, 2001.
The decrease is primarily as a result of the impact of a corporate cost
reduction programme initiated in the last quarter of 2002 offset partially by
increased costs resulting from business development activity.
The decrease in depreciation, depletion and amortization expense to $2,317,000
for the year ended December 31, 2002 from $3,250,000 for the year ended December
31, 2001 is attributable principally to lower production, due to limited
workover investment resulting in a natural reservoir rate of decline.
During 2002, CanArgo wrote down its oil and gas properties in the Ninotsminda
field by an aggregate $1,600,000 on application of the full cost ceiling test as
a result of lower reserve quantities following production declines in 2002. The
write-down was a non-cash write-down. In 2001, CanArgo wrote down its oil and
gas properties in the Ninotsminda field by an aggregate $7,300,000 on
application of the full cost ceiling test as a result of a decline in Brent oil
prices at December 31, 2001, lower reserve quantities following production
declines in 2001 and reduced development plans. If oil prices or production
levels decline further, CanArgo may experience additional impairment of this
property.
In 2001, 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. In 2001, CanArgo further wrote down
other oil and gas related equipment by $500,000 following a decision to dispose
of a power generating unit. In 2002, a plan was agreed to sell this equipment
and it is included in assets held for sale as at December 31, 2002.
CanArgo recorded net other expenses of $536,000 for the year ended December 31,
2002, as compared to net other income of $407,000 during the year ended December
31, 2001. This is primarily due to CanArgo's adjusted interest in its share of
the carrying net asset value of its subsidiary CanArgo Norio Limited (Norio)
giving rise to a non-operating loss of $444,000, in accordance with the
application of SAB 51, following agreement with the minority shareholders on the
finalization of respective equity interest in Norio. Additional movements are
explained by lower cash balances in 2002, an allowance for doubtful accounts of
$275,000 from previous gas sales, and a bad debt write-off of $93,000 relating
to the provision of drilling services in Georgia.
Equity income from investments increased to $86,000 for the year ended December
31, 2002 from an equity loss of $160,000 for the year ended December 31, 2001 as
a result of increased equity income from production and sales of crude oil by
Boryslaw Oil Company and 2001 expenses relating to operation by East Georgian
Pipeline Company of the gas pipeline from Ninotsminda to the Gardabani power
station.
The net loss from continuing operations of $5,499,000 or $0.06 per share for the
year ended December 31, 2002 compares to a net loss from continuing operations
of $13,562,000 or $0.16 per share for the year ended December 31, 2001. The
weighted average number of common shares outstanding was substantially higher
during the year ended December 31, 2002 than during the year ended December 31,
2001, due in large part to private placements in July 2001, February and May
2002.
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.
36
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. Due to
excise 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 ($2.62 per BOE) for the year
ended December 31, 2001 as compared to $1,287,000 ($1.66 per BOE) for 2000. The
increase is primarily a result of increased activity at the Ninotsminda field.
Operating costs per BOE increased as day to day field operations in Georgia
include a proportionately higher fixed to variable cost component combined with
lower production rates.
Purchases of crude oil and products and refinery operating expenses of
$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.
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.
37
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.
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.
RESULTS OF DISCONTINUED OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
The net income from discontinued operations, net of taxes and minority interest
for the year ended December 31, 2002 amounted to $171,000 compared with net
income of $344,000 for the corresponding period in 2001. The decrease in net
income from discontinued operations, net of taxes and minority interest relates
entirely to the activities of CanArgo standard Oil Products, and is due to more
competitive operating margins for the year ended December 31, 2002 compared with
the corresponding period in 2001 and interest on 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.
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. CanArgo Standard Oil Products was purchased in
2000 and operations were developed in 2001.
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, Mr Levan Pkhakadze, who is
38
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 an
individual shareholder, own the 50% interest in CanArgo Standard Oil Products
not held by CanArgo. Total product purchases from the related company in 2002
were $5,263,000.
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 2002 were $125,729.
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.
CRITICAL 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 - 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. 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. Unproved properties are
not deemed to be impaired until the right to drill on those properties is lost
and planned development has ceased.
Oil And Gas Properties - CanArgo and the 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.
39
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, 2002 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.
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 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.
We have applied the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB
Statement No. 123," for the years ended December 31, 2002, 2001, and 2000. SFAS
No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation"
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by SFAS No. 148, we
continue to account for stock options under APB Opinion No. 25.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to
40
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our financial
statements. To date we have not entered into or modified any such guarantees.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 7 and elsewhere in this
Annual Report on Form 10-K are subject to various risks, uncertainties and other
factors that could cause actual results to differ materially from the results
anticipated in such forward looking statements. Included among the important
risks, uncertainties and other factors are those hereinafter discussed.
Few of 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.
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.
41
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 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.
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.
42
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) 45 Chairman of the Board, Managing Director and
Chief Executive Officer
Russell Hammond(2)(3) 61 Director
Nils N. Trulsvik(2)(3) 54 Director
Murray Chancellor 50 Chief Operating Officer
Vincent McDonnell(4) 44 Chief Commercial Officer and Chief Financial Officer
Liz Landles(5) 42 Corporate Secretary
------------
(1) On November 11 2002, Roger Brittain resigned as non-executive Chairman of
the Board and on November 21 2002, the Board appointed Dr. 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.
(5) On August 1, 2002, Liz Landles was appointed Corporate Secretary.
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, being reappointed
Chairman on November 27, 2002. 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
43
consultant group of companies of which he was a founder, including Managing
Director from 1987 to 1993 and Special Advisor from 1993 to August 1994.
MURRAY CHANCELLOR, a resident of the UK, was elected Chief Operating Officer of
the Company on September 11, 2000. Mr. Chancellor joined the company from Aminex
PLC, a UK oil and gas exploration company, where he was most recently involved
as General Director of Russian Operations from April 1998 until September 2000.
From 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 appointed Chief Financial Officer
on September 23, 2002. Prior thereto, he served CanArgo as Chief Commercial
Officer of the Company since April 1, 2001 and Commercial Manager from December
2000. Prior to joining the Company, he was an independent oil and gas consultant
from May 1999 until October 2000. From 1994 until April 1999, Mr. McDonnell
served as Commercial Manager of JKX Oil & Gas plc. Prior to 1994, 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.
LIZ LANDLES, a resident of Guernsey, was appointed Corporate Secretary on August
1, 2002. Prior thereto, she served as Assistant Corporate Secretary of the
Company since December 4, 2000. Mrs Landles also acts as the Company's
Administration Manager and is responsible for organising the Company's
administrative activities. Mrs Landles has worked for the Company since October
1997, principally in an administrative role and more recently as a Director of
some of the Company's subsidiaries.
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.
44
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, 2002, 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($) (#) ($)(6)
------------------- ----- --------- -------- ------------- -------------
David Robson(1) 12/02 217,500 29,000 -- 19,575
12/01 217,500 15,075 585,000 19,575
12/00 197,420 37,500 1,295,000 9,941
Murray Chancellor(2) 12/02 174,000 -- -- 15,660
12/01 174,000 -- 200,000 15,660
12/00 50,750 -- 250,000 4,568
Vincent McDonnell(3) 12/02 153,583 -- 100,000 13,822
12/01 137,750 -- 100,000 12,398
Anthony J. Potter(4) 12/02 188,500 -- -- 70,863
12/01 210,000 -- 100,000 1,333
12/00 120,116 -- 117,000 1,333
Liz Landles(5) 12/02 85,500 -- -- 7,695
12/01 70,875 -- 72,000 --
12/00 29,100 -- 90,000 --
(1) Dr. 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) Mrs. Landles has served as Company Secretary since August 1, 2002.
(6) Primarily CanArgo's contributions to or accruals with respect to individual
retirement and pension plans, except for Mr Potter's other compensation in
2002 relating to severance.
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 2002
The following table sets forth information concerning options granted to the
Named Officers who were employed during the year ended December 31, 2002.
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT VALUE(2)
NAME GRANTED 2002 PRICE DATE PER SHARE TOTAL
--------------------- ---------- ------------ -------- ---------- --------- ------
Vincent McDonnell(1) 100,000 77% $0.14 18/09/2006 $0.0921 $9,210
45
------------
(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 1/3
on 19/09/2003, 1/3 on 19/09/2004 and 1/3 on 19/09/2005.
(2) These values were derived using the Black-Scholes option pricing model
applying the following assumptions:
RISK-FREE
INTEREST
EXERCISE PRICE DIVIDEND YIELD VOLATILITY RATE EXPECTED TERM
---------------- -------------- ---------- --------- -------------
$0.140 0% 80.47% 2.91% 3.37 years
Pursuant to the terms of CanArgo's various stock option plans, the Compensation
Committee may, subject to each plan's limits, modify the terms of outstanding
options, including the exercise price and vesting schedule thereof. These values
are not intended to forecast future appreciation of CanArgo's stock price. The
actual value, if any, that an executive officer may realize from his options
(assuming that they are exercised) will depend solely on the increase in the
market price of the shares acquired through option exercises over the exercise
price, measured when the shares are sold.
OPTION VALUES AT DECEMBER 31, 2002
The following table sets forth information concerning option exercises and the
number and hypothetical value of stock options held by the Named Officers at
December 31, 2002.
NUMBER OF SHARES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED
NUMBER OF HELD AT FISCAL YEAR IN-THE-MONEY OPTIONS AT FISCAL
SHARES VALUE END(1) YEAR END($)
ACQUIRED ON REALIZED ------------------------------ -------------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ------------ ---------- ----------- -------------- ----------- -------------
David Robson -- -- 2,488,334 178,333 -- --
Murray Chancellor -- -- 233,334 216,666 -- --
Vincent McDonnell -- -- 100,000 200,000 -- --
Anthony Potter -- -- 150,333 66,667 -- --
Liz Landles -- -- 112,667 59,333 -- --
---------------
(1) The exercise of stock options is not dependent on performance criteria and
may be exercised in full when vested.
COMPENSATION OF DIRECTORS
In 2002 CanArgo paid directors' fees on a quarterly basis at a rate of $37,500
per year plus Pound Sterling 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, up until his resignation on November 12, 2002, was
paid 35,000 Pound Sterling per year payable on a quarterly basis. On November
27, 2002 CanArgo announced that Dr David Robson had been appointed to the
position of Chairman of the Board of CanArgo Energy Corporation in addition to
his current duties as Chief Executive Officer.
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, 2002:
46
OPTIONS AND
DIRECTORS FEES AND CONSULTING WARRANTS
NAME OTHER COMPENSATION PAYMENTS GRANTED
---------------- ------------------ ---------- -----------
$ $
Roger Brittain 49,189 -- --
Russell Hammond 42,250 -- --
Nils N. Trulsvik 42,250 -- --
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, CanArgo's Compensation Committee consisted of Messrs. Trulsvik and
Hammond and to November 12, 2002 Messr. Brittain, 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 2002.
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; and
o Encourage long-term commitment to CanArgo.
The Compensation Committee held four meetings during fiscal 2002.
Stock Based Compensation Plan
o At December 31, 2002, 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, 2002, 3,887,834 options were
outstanding.
o CAOG Plan. Adopted by CanArgo following the acquisition by CanArgo of
CanArgo Oil & Gas Inc. in 1998, this plan allowed for 988,000 shares of
CanArgo's Common Stock to be issued to employees, consultants and advisors.
As of December 31, 2002, 626,667 options were outstanding.
47
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, 2002, 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.
Annual Incentives: An annual cash incentive has been developed and approved for
the Chief Executive Officer.
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 2002, the Compensation Committee approved new stock options to one officer
and one employee, and in 2001, approved a series of new stock options to a broad
range of employees. The stock option awards were granted under the various plans
available in the company.
Compliance with Section 162(m) of the Internal Revenue Code
Under Section 162(m) of the Internal Revenue Code, CanArgo Energy Corporation
may not deduct annual compensation in excess of $1 million paid to certain
employees, generally its Chief Executive Officer and its four other most highly
compensated executive officers, unless that compensation qualifies as
performance-based compensation. While the Compensation Committee intends to
structure performance-related awards in a way that will preserve the maximum
deductibility of compensation awards, the Compensation Committee may from time
to time approve awards which would vest upon the passage of time or other
compensation which would not result in qualification of those awards as
performance-based compensation. It is not anticipated that compensation realized
by
48
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 2002,
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 Sterling 150,000 (approx $217,500) for Dr. Robson,
effective July 1, 2000.
o Short-Term Incentives: In 2002, incentive compensation for Dr. Robson was
based solely upon increase in cash flow per quarter. Based on 2002 cash
flow performance each quarter, Dr. Robson qualified for a quarterly bonus
in 2002 of $29,000. The bonus is capped at one times salary for a given
quarter.
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 2003 with respect to Dr. Robson's 2003 compensation will
be reflected in the proxy statement for the 2004 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.
RUSSELL HAMMOND
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.
49
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Year End CanArgo Stock Price Peer Group Index N A S D A Q Composite Index
-------- ------------------- ---------------- ---------------------------
1997 100 100 100
1998 33 69 140
1999 82 82 260
2000 94 80 158
2001 31 75 110
2002 5 118 75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 2002 with respect
to aggregate beneficial ownership of outstanding shares of Common Stock and
shares of Common Stock that would be issued upon exchange of Exchangeable Shares
either outstanding or issuable for no additional consideration, by each person
known by CanArgo to be the beneficial owner of more than 5% of the aggregate of
such shares, by each Director and Named Officer of CanArgo and by all Directors
and executive officers of CanArgo as a group.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
--------------------------------------- -------------------- ---------------
Roger Brittain 166,667(1) *
David Robson 2,746,094(2) 2.8%
Nils N. Trulsvik 419,700(3) *
Russell Hammond 346,250(4) *
Murray Chancellor 233,334(5) *
Vincent McDonnell 100,000(6) *
Anthony Potter 150,333(7) *
Liz Landles 112,667(8) *
All Directors and executive officers as
a group (8 persons) 4,275,045(9) 4.4%
-----------
o Less than 1%.
(1) Includes 166,667 shares underlying presently exercisable options.
(2) Includes 2,488,344 shares underlying presently exercisable options.
(3) Includes 346,250 shares underlying presently exercisable options.
(4) Includes 346,250 shares underlying presently exercisable options.
(5) Includes 233,334 shares underlying presently exercisable options.
(6) Includes 100,000 shares underlying presently exercisable options.
(7) Includes 150,333 shares underlying presently exercisable options.
(8) Includes 112,667 shares underlying presently exercisable options
(9) Includes 3,943,845 shares underlying presently exercisable options
held by directors and executive officers as a group.
50
The table below sets forth information concerning equity compensation plans
adopted by CanArgo as at December 31 2002.
PLAN CATEGORY NUMBER OF
SECURITIES TO BE NUMBER OF SECURITIES
ISSUED UPON THAT REMAIN AVAILABLE
EXERCISE OF WEIGHTED AVERAGE FOR FUTURE ISSUANCE UNDER
OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
----------------- ------------------- -------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders 4,514,501 $0.69 2,468,835
Equity compensation plans not approved by
security holders 2,200,000 $1.40 --
----------------- ------------------- ------------------------
6,734,501 $0.93 2,468,835
The material features of each equity compensation plan adopted by CanArgo as at
December 31, 2002 are described in note 20 of the financial statements.
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 2002 were $5,263,000. 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 2002 were $125,729.
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.
51
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.
ITEM 14. CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this
report, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures as defined in Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934, as amended, are effective, as
of the evaluation date, in timely alerting them to material information relating
to our Company required to be included in our reports filed or submitted under
the Exchange Act. Since the date of the evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect such controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 FINANCIAL STATEMENTS
The following financial statements and related notes of the Company contained on
pages F-1 through F-36 of the Company's Annual Report to the Stockholders for
the year ended December 31, 2002 are incorporated herein by reference:
Report of Independent Auditors
Consolidated Statements of Operations - Years ended December 31, 2002, December
31 2001, and December 31, 2000.
Consolidated Balance Sheets - December 31, 2002 and December 31, 2000.
Consolidated Statements of Cash Flows - December 31, 2002, December 31 2001, and
December 31, 2000.
Consolidated Statements of Stockholders' Equity - Years ended December 31, 2002,
December 31 2001, and December 31, 2000.
Notes to Consolidated Financial Statements
(a) 2 FINANCIAL STATEMENTS SCHEDULES
None
All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3 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).
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
53
by reference from Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 333-72295 filed on July 29,
1999).
1(6) Engagement Agreement with Sundal Collier & Co ASA dated August
13, 2001. (Incorporated herein by reference from Post-Effective
Amendment No. 2 to Form S-1 Registration Statement, File No.
333-85116 filed on September 10, 2002).
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).
3(1) Registrant's Certificate of Incorporation and amendments thereto
(Incorporated herein by reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX
Nederland B.V. dated September 28, 2000, relating to purchase of
21.2% interest in Ninotsminda Oil Company (Incorporated herein by
reference from July 20, 2000 Form 8-K).
*10(1) Form of Option Agreement for options granted to certain persons,
including Directors (Incorporated herein by reference from August
31, 1994 Form 10-KSB, filed by Electromagnetic Oil Recovery,
Inc., the Company's predecessor).
*10(2) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form
S-1 Registration Statement, File No. 333-72295 filed on July 29,
1999).
*10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
54
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 June 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).
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).
55
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).
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 June 30, 2001 Form 10-Q).
10(24) Crude Oil Sales Agreement dated August 13, 2002 (Incorporated
herein by reference from June 30, 2002 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, 2002 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, 2002
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, 2002 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, 2002 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, 2002 Form
10-Q)
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, 2002 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, 2002 Form
10-Q)
21 List of Subsidiaries (Incorporated herein by reference from June
30, 2001 Form 10-Q)
25(1) Power of attorney of certain signatories (Incorporated herein by
reference from December
56
17, 2002 Form S1/A)
+23 Consent of PricewaterhouseCoopers LLP
+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 the quarter
ended December 31, 2002.
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 XI(G) (Tbilisi) and Block XI(H) (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 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.
57
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: March 24, 2003
--------------------------------------------------------
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/David Robson Date: March 24, 2003
--------------------------------------------------------
David Robson, Chairman of the Board and Chief Executive
Officer and Director
Principal Executive Officer
By: /s/Russell Hammond Date: March 24, 2003
--------------------------------------------------------
Russell Hammond, Director
By: /s/Nils N. Trulsvik Date: March 24, 2003
--------------------------------------------------------
Nils N. Trulsvik, Director
By: /s/Vincent McDonnell Date: March 24, 2003
--------------------------------------------------------
Vincent McDonnell, Chief Financial Officer
Principal Accounting Officer
58
REPORT ON MANAGEMENT'S RESPONSIBILITIES
To the Stockholders of CanArgo Energy Corporation:
CanArgo's management is responsible for the integrity and objectivity of the
financial information contained in this Annual Report. The financial statements
included in this report have been prepared in accordance with generally accepted
accounting principles in the United States and, where necessary, reflect the
informed judgements and estimates of management.
Management maintains and is responsible for systems of internal accounting
control designed to provide reasonable assurance that all transactions are
properly recorded in the Company's books and records, that procedures and
policies are adhered to, and that assets are safeguarded from unauthorized use.
The financial statements have been audited by the independent accounting firm of
PricewaterhouseCoopers LLP, as indicated in their report. Management has made
available to PricewaterhouseCoopers LLP all the Company's financial records and
related data and minutes of directors' and audit committee meetings.
CanArgo's audit committee, consisting solely of directors who are not employees
of CanArgo, is responsible for: reviewing the Company's financial reporting;
reviewing accounting and internal control practices; recommending to the Board
of Directors and shareholders the selection of independent accountants; and
monitoring compliance with applicable laws and company policies. The independent
accountants have full and free access to the audit committee and meet with it,
with and without the presence of management, to discuss all appropriate matters.
On the recommendation of the audit committee, the consolidated financial
statements have been approved by the Board of Directors.
/s/Dr. David Robson /s/Vincent McDonnell
Chief Executive Officer Chief Financial Officer
March 24, 2003
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of CanArgo Energy Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of CanArgo
Energy Corporation and its subsidiaries at 31 December 2002 and 2001, and the
results of their operations and their cash flows for the each of the three years
in the period ended December 31, 2002 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 of America, 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 our opinion.
The accompanying financial statements have been prepared assuming the Group will
continue as a going concern. As discussed in Note 1, Basis of Presentation, to
the consolidated financial statements, the Group is reliant on raising
additional significant financing from external sources in order to recover the
carrying value of its undeveloped and unproved properties and without additional
financing there is substantial doubt about the Group's long term ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1, Basis of Presentation. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
March 24, 2003
London, England
F-2
CANARGO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 1,598,304 $ 5,891,038
Accounts receivable 306,336 2,007,112
Inventory 185,924 405,918
Prepayments 211,623 2,235,712
Assets held for sale 8,095,947 6,355,036
Other current assets 175,951 162,373
------------ ------------
Total current assets $ 10,574,085 $ 17,057,189
Capital assets, net (including unevaluated amounts of $36,843,425 and
$24,570,886, respectively) 59,702,525 52,535,420
Investments in and advances to oil and gas and other
ventures - net 459,308 719,308
------------ ------------
TOTAL ASSETS $ 70,735,918 $ 70,311,917
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 871,996 $ 828,461
Deferred revenue 1,500,000 -
Income taxes payable 61,000 61,000
Accrued liabilities 204,045 400,221
Liabilities held for sale 2,351,965 1,177,174
------------ ------------
Total current liabilities $ 4,989,006 $ 2,466,856
Provision for future site restoration 122,290 64,290
Minority shareholder advances - 450,000
Minority interest in subsidiaries 3,519,342 1,531,191
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, par value $0.10 per share 9,735,620 9,200,845
Capital in excess of par value 145,151,475 144,057,517
Foreign currency translation adjustment 4,668 -
Accumulated deficit (92,786,483) (87,458,782)
------------ ------------
Total stockholders' equity $ 62,105,280 $ 65,799,580
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,735,918 $ 70,311,917
============ ============
F-3
CANARGO ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31,
2002 2001 2000
----------- ----------- -----------
Operating Revenues from Continuing Operations:
Oil and gas sales $ 4,163,201 $ 3,967,078 $ 6,108,779
Refining - 2,595,763 535,865
Other 1,412,741 608,032 364,900
----------- ----------- -----------
5,575,942 7,170,873 7,009,544
----------- ----------- -----------
Operating Expenses:
Field operating expenses 1,537,917 1,568,011 1,287,035
Purchases of crude oil and products - 1,451,083 20,520
Refinery operating expenses - 791,139 439,037
Direct project costs 1,428,638 1,300,423 737,731
Selling, general and administrative 3,652,262 3,741,826 3,050,383
Depreciation, depletion and amortization 2,316,921 3,249,962 3,875,988
Impairment of oil and gas properties 1,600,000 7,300,000 -
Impairment of other assets - 3,859,795 -
Loss on disposition of assets 10,725 16,130 -
----------- ----------- -----------
10,546,463 23,278,369 9,410,694
----------- ----------- -----------
OPERATING LOSS FROM CONTINUING OPERATIONS (4,970,521) (16,107,496) (2,401,150)
----------- ----------- -----------
Other Income (Expense):
Interest, net 32,413 642,216 549,749
Other (654,850) (74,796) (78,774)
Equity income (loss) from investments 86,059 (160,000) (240,070)
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (536,378) 407,420 230,905
----------- ----------- -----------
NET LOSS BEFORE MINORITY INTEREST (5,506,899) (15,700,076) (2,170,245)
Minority interest in income (loss) of consolidated subsidiaries 7,986 2,138,163 26,939
----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS $(5,498,913) $(13,561,912) $(2,143,306)
=========== ============ ===========
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
TAXES AND MINORITY INTEREST 171,212 343,566 (8,298)
---------- ---------- ----------
NET LOSS (5,327,701) (13,218,346) (2,151,604)
========== =========== ==========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation 4,668 - -
----------- ----------- -----------
COMPREHENSIVE LOSS $(5,323,033) $(13,218,346) $(2,151,604)
=========== ============ ===========
Weighted average number of
common shares outstanding 96,643,744 83,869,579 54,950,630
----------- ----------- -----------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- from continuing operations $ (0.06) $ (0.16) $ (0.04)
- from discontinued operations $ 0.00 0.00 $ (0.00)
----------- ----------- -----------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.06) $ (0.16) $ (0.04)
----------- ------------ -----------
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, 2002, 2001 AND 2000
(EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Operating activities:
Net income (loss) from continued operations (5,498,913) (13,561,912) (2,143,306)
Depreciation, depletion and amortization 2,316,921 3,249,962 3,875,988
Impairment of oil and gas properties 1,600,000 7,300,000 -
Impairment of other assets - 3,859,795 -
Issuance of common stock for services - - 112,700
Equity income from investments (86,059) 160,000 240,070
Loss (gain) on disposition of assets 10,725 16,130 -
Allowance for doubtful accounts 275,000 200,000 100,000
Minority interest in income (loss) of consolidated subsidiaries (7,986) (2,138,163) (26,939)
Changes in assets and liabilities:
Accounts receivable 1,425,776 (1,623,866) 300,405
Inventory 219,994 262,419 46,828
Prepayments 29,713 (130,300) (628,853)
Other current assets (13,578) 38,690 (144,222)
Accounts payable 43,535 (3,352,399) 197,889
Deferred revenue 1,500,000 - -
Income taxes payable - 61,000 -
Accrued liabilities (196,176) (281,318) 62,225
Advances from joint venture partner - (5,888,573) 5,888,573
------------ ------------ ------------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES 1,618,952 (11,828,535) 7,881,358
------------ ------------ ------------
Investing activities:
Capital expenditures (10,995,518) (11,116,538) (11,857,279)
Proceeds from disposition of assets - 19,383 13,408
Acquisitions, net of cash acquired (50,000) (4,044,973) -
Proceeds from disposition of investment 13,435 125,000 -
Investments in and advances to oil and gas and other
ventures 346,059 (831,403) (236,074)
Change in non cash working capital items 1,994,376 (1,340,359) (150,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (8,691,648) (17,188,890) (12,229,945)
------------ ------------ ------------
Financing Activities:
Proceeds from sale of common stock 1,790,948 7,235,337 33,283,873
Share issue costs (162,215) (643,075) (2,848,505)
Minority shareholder advances - 450,000 -
Advances from minority interest 1,546,137 1,931,874 500,000
Cash acquired - - 207,470
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,174,870 8,974,136 31,142,838
NET CASH FLOWS FROM ASSETS AND LIABILITIES HELD FOR SALE (394,908) (3,762,327) (744,999)
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,292,734) (23,805,616) 26,049,251
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,891,038 29,696,654 3,647,403
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,598,304 $ 5,891,038 $ 29,696,654
============ ============ ============
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 AN 1999
(EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK
--------------------------
NUMBER OF
SHARES ADDITIONAL FOREIGN TOTAL
ISSUED AND PAID-IN CURRENCY ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL TRANSLATION DEFICIT EQUITY
----------- ---------- ------------ ----------- ------------ -------------
---------- ---------- ------------ ------ ------------ ------------
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
pursuant to July private
placement 16,057,765 1,605,776 5,629,561 -- 7,235,337
Issuance of common stock
upon exchange of
CanArgo Oil & Gas Inc.
Exchangeable Shares 274,965 27,497 516,276 543,772
Shares 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) 65,505,260
---------- ---------- ------------ ------ ------------ ------------
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
========== ========== ============ ====== ============ ============
Less shares issuable at
beginning of year (148,826) # (14,883) # (79,436) - (294,319)
Issuance of common stock
upon exchange of
CanArgo Oil & Gas Inc.
Exchangeable Shares 148,826 14,883 279,436 294,319
Shares issued pursuant to
private placement February
2002 5,210,000 521,000 1,241,433 1,762,433
Shares issued pursuant to
private placement May 2002 137,760 13,775 14,740 28,515
Share issue costs (162,215) (162,215)
Current year adjustment 4,668 4,668
Net loss (5,327,701) (5,327,701)
---------- ---------- ------------ ------ ------------ ------------
TOTAL, DECEMBER 31, 2002 97,356,206 $9,735,620 $145,151,475 $4,668 $(92,786,483) $ 62,105,280
========== ========== ============ ====== ============ ============
The accompanying notes are an integral part of the consolidated
financial statements
F-6
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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.
GOING CONCERN ASSUMPTION - 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 was implemented with both direct project
and general and administrative costs being reduced. These reductions and
the receipt of the final $3 million payment from the agreed sale of
CanArgo's interest in its retail operation CanArgo Standard Oil Products
(CSOP) (explained below), the planned 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. 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.
The financial statements have been prepared on a going concern basis, which
assumes the additional funding and/or proceeds from the sale of non-core
assets is received. If this additional finance is not received, in
particular the receipt of the final $3 million payment from the sale of
CSOP, or receipt of an equivalent amount, adjustments may have to be made
to reduce the balance sheet values of assets to their recoverable amounts,
to provide for further liabilities that might arise and to reclassify fixed
assets and long term liabilities as current assets and liabilities.
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 of
which $1 million has been received to date as a non-refundable deposit.
Legal ownership will transfer upon receipt of the final payment of $3
million due in August 2003.
Whilst the directors presently cannot be certain as to the outcome of the
matters mentioned above, they believe that it is appropriate for the
financial statements to be prepared on a going concern basis.
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 internal and/or external sources. CanArgo believes
that it will be able to generate funds from 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.
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 held
for sale" and "Liabilities of 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.
During 2002, the Company adopted the self-sustaining method of accounting
for CanArgo Standard Oil Products. The adoption of the self-sustaining
method was necessitated by the fact that CanArgo Standard Oil Products was
no longer financially and operationally dependant upon its parent company.
Under the
F-7
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
self-sustaining method of foreign currency translation, assets and
liabilities are translated into US dollars at period end exchange rates and
income and expenses are translated into US dollars at average rates in
effect during the period. Exchange gains and losses on translation are
reflected as a separate component of shareholders' equity.
The consolidated financial statements do not give effect to any additional
impairment of its investments in oil and gas properties and ventures or
other adjustments which would be necessary should the Company be unable to
obtain sufficient funds from external sources or continue as a going
concern.
CONSOLIDATION - The consolidated financial statements include the accounts
of CanArgo Energy Corporation and its majority owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
Investments in less than majority owned corporations and corporate like
entities in which the Company exercises significant influence are accounted
for using the equity method. Entities in which the Company does not have
significant influence are accounted for using the cost method.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes
term-deposits with original maturity terms not exceeding 90 days.
FAIR VALUE OF FINANCIAL INSTRUMENTS - CanArgo considers all liquid
investments with an original maturity of three months or less to be cash
equivalents. The carrying amount of cash and other current assets and
liabilities approximates fair value because of the short term maturity of
these items. CanArgo does not hold or issue financial instruments for
trading purposes.
RECLASSIFICATION - Certain items in the consolidated financial statements
have been reclassified to conform to the current year presentation. There
was no effect on net loss as a result of these reclassifications.
INVENTORIES - Inventories of crude oil, refined products and supplies are
valued at the lower of average cost and net realizable value.
CAPITAL ASSETS - Capital assets are recorded at cost less accumulated
provisions for depreciation, depletion and amortization unless the carrying
amount is viewed as not recoverable in which case the carrying value of the
assets is reduced to the estimated recoverable amount. See "Impairment of
Long-Lived Assets" below. Expenditures for major renewals and betterments,
which extend the original estimated economic useful lives of applicable
assets, are capitalized. Expenditures for normal repairs and maintenance
are charged to expense as incurred. The cost and related accumulated
depreciation of assets sold or retired are removed from the accounts and
any gain or loss thereon is reflected in operations. Unproved properties
are not deemed to be impaired until the right to drill on those properties
is lost and planned development has ceased.
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
F-8
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002 are being charged to the
Statement of Operations on a unit of production basis and reflected within
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.
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
F-9
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002, 2001 and 2000 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 - In August 2001, the FASB issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed
of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 144 on January 1, 2002. There was no impact on the
Company's financial position or results of operations upon adoption of
SFAS No. 144.
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.
F-10
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the income statement had compensation cost
for stock options been determined consistent with SFAS No. 123 for the
years ended December 31, 2002, 2001 and 2000:
Income statement had compensation cost
for stock options been determined DECEMBER 31, DECEMBER 31, DECEMBER 31,
consistent with SFAS No. 123 2002 2001 2000
------------ ------------ ------------
Net Loss as reported $(5,327,701) (13,218,346) (2,151,604)
Net Loss per common share - Basic and
Diluted as reported (0.06) (0.16) (0.04)
Stock-based compensation cost, net of
related tax effects, included in the
determination of net income reported -- -- --
Stock-based compensation cost, net of
related tax effects, that would have
been included in the determination of 925,339 1,334,339 925,446
net income reported if the fair value
based method had been applied to all
awards
Net Loss as if the fair value based
method had been applied to all awards (6,253,040) (3,077,050) (14,552,685)
Net Loss per common share - Basic and
Diluted as if the fair value based (0.06) (0.17) (0.04)
method had been applied to all awards
RECENTLY ISSUED PRONOUNCEMENTS - 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.
F-11
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have applied the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of
FASB Statement No. 123," for the years ended December 31, 2002, 2001, and
2000. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. As permitted by SFAS No. 148, we continue to account for
stock options under APB Opinion No. 25.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002 and are not expected to have a
material effect on our financial statements. To date we have not entered
into or modified any such guarantees.
2. 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. In 2002, the refining and marketing
business segment in continuing operations was redefined as only refining of
crude oil following the approval of a plan to sell CanArgo Standard Oil
Products to finance Georgian and Ukrainian development projects. The assets
and liabilities of CanArgo Standard Oil Products have been classified as
"Assets held for sale" and "Liabilities 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.
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.
3. BUSINESS COMBINATION AND BUSINESS DISPOSAL
In July 2002, CanArgo acquired the remaining 15% interest it did not own in
IPEC for cash consideration of $50,000. Total cash consideration was
allocated to capital assets and on completion of the acquisition, IPEC
became a wholly owned subsidiary of CanArgo. There were no material assets
or liabilities within IPEC at the acquisition date requiring fair valuing.
Prior to acquisition, the historical cost of the 85% interest that CanArgo
owned in IPEC was $33,369.
In July 2002, CanArgo signed a covenant with a local Ukrainian oil and gas
company, on their participation in the Joint Investment Production Activity
agreement (JIPA) for the development of the Bugruvativske field in Ukraine.
IPEC was to provide the vehicle by which they would become party, through
their
F-12
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiary or nominee, to the JIPA and in September 2002, CanArgo disposed
of its entire interest (100%) in IPEC for $13,435 to their nominees.
4. ACCOUNTS RECEIVABLE
Accounts receivable as at December 31, 2002 and 2001 consisted of the
following:
DECEMBER 31, December 31,
2000 2001
----------- ------------
Accounts Receivable before allowance for doubtful debts 958,257 2,384,033
Allowance for doubtful debts (651,921) (376,921)
-------- ----------
$306,336 $2,007,112
======== ==========
5. INVENTORY
Inventory at December 31, 2002 and 2001 consisted of the following:
DECEMBER 31, December 31,
2002 2001
------------ -----------
Crude oil $158,896 $373,818
Refined products 27,028 32,100
-------- --------
$185,924 $405,918
======== ========
F-13
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CAPITAL ASSETS
Capital assets, net of accumulated depreciation and impairment, at December
31, 2002 include the following:
ACCUMULATED
DEPRECIATION NET
COST AND IMPAIRMENT CAPITAL ASSETS
----------- -------------- --------------
OIL AND GAS PROPERTIES
Proved properties $32,443,742 $(18,422,771) $14,020,971
Unproved properties 36,843,425 - 36,843,425
----------- ------------ -----------
69,287,167 (18,422,771) 50,864,396
PROPERTY AND EQUIPMENT
Oil and gas related equipment 11,991,991 (3,788,028) 8,203,963
Office furniture, fixtures and
equipment and other 1,187,526 (653,360) 534,166
----------- ------------ -----------
13,179,517 (4,441,388) 8,738,129
REFINING 4,154,216 (4,054,216) 100,000
----------- ------------ -----------
$86,620,900 $(26,918,375) $59,702,525
=========== ============ ===========
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 4,165,067 (4,054,216) 100,851
----------- ------------ -----------
$75,603,505 $(23,068,085) $52,535,420
=========== ============ ===========
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
F-14
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2002 of oil and gas properties of $1,600,000 and a
write-down in 2001 of oil and gas properties of $7,300,000. In 2001,
refining assets were written-down to their estimated net realizable value
by $3,359,795.
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.
Unproved property additions relate to CanArgo's exploration activity in the
period. Oil and gas related equipment includes new or refurbished drilling
rigs and related equipment, all of which are in the Republic of Georgia.
In 2002, CanArgo acquired the remaining 15% interest it did not own in
IPEC, whose sole operations were the ownership of a 0.1% working interest
in the Bugruvativske field for cash consideration of $50,000. Total cash
consideration was allocated to capital assets and on completion of the
acquisition IPEC became a wholly owned subsidiary of CanArgo. Subsequent to
the purchase, in July 2002, CanArgo disposed of its entire interest (100%)
in IPEC to the nominees of a local Ukrainian oil and gas company for
$13,435 and recorded $35,742 in unproved properties related to CanArgo's
investment in the Bugruvativske field.
Initial costs in respect of CanArgo's investment in the Bugruvativske
field, through its direct investment in LVR, are included in "capital
assets - unproved properties". These costs will continue to be disclosed as
unproved properties until CanArgo participates in the JIPA by investing an
amount up to the cash contribution made by its JIPA partner, IPEC. Any
contribution must be made prior to 31 December 2003 in order for CanArgo to
participate in the existing JIPA.
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-15
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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, 2002 and 2001 is set out below:
DECEMBER 31, December 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 2002 2001
------------ ------------
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company $6,524,121 $6,698,062
Republic of Georgia - Ninotsminda
Through an effective 50% ownership of East Georgian Pipeline Co. - 192,500
Other Investments 75,000 75,000
---------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES $6,599,121 $6,965,562
========== ==========
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw (680,020) (593,961)
Republic of Georgia - East Georgian Pipeline Co. - (192,500)
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES $ (680,020) $ (786,461)
IMPAIRMENT - STYNAWSKE FIELD, BORYSLAW (5,459,793) (5,459,793)
---------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 459,308 $ 719,308
========== ==========
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 entire investment in and advances to Boryslaw Oil
Company.
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 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 $360,000 was repaid at December 31, 2002.
Boryslaw Oil Company has 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.
F-16
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CanArgo's venture in Boryslaw Oil Company is in the development stage and
accordingly, realization of this investment is dependent upon successful
development of and ultimately cash flows from operations of the venture.
Other investments represent CanArgo's 10% interest in a Caspian Sea
exploration project.
8. ACCOUNTS PAYABLE
Accounts payable as at December 31, 2002 and 2001 consisted of the
following:
DECEMBER 31, December 31,
2002 2001
------------ ------------
Trade creditors 871,996 828,461
-------- --------
$871,996 $828,461
======== ========
9. DEFERRED REVENUE AND ACCRUED LIABILITIES
Deferred revenue at December 31, 2002 and 2001 include the following:
December 31, December 31,
2002 2001
------------ ------------
Prepaid sales $1,000,000 $ --
Advanced proceeds from the sale of subsidiary 500,000 --
---------- ------------
$1,500,000 $ --
========== ============
See note 17 for details of the sale of the subsidiary classified as
discontinued operation.
Accrued liabilities at December 31, 2002 and 2001 include the following:
DECEMBER 31, December 31,
2002 2001
------------ ------------
Professional fees 105,000 150,000
Operating costs - 90,000
Other 99,045 160,221
-------- --------
$204,045 $400,221
======== ========
As at December 31, 2001 $90,000 represented liabilities relating to the
winding up of East Georgian Pipeline Company.
10. MINORITY SHAREHOLDER ADVANCES
In 2001 CanArgo received $731,000 and in 2002, $476,000 on issuance of
convertible loans from new minority shareholders of CanArgo's subsidiary,
CanArgo Norio Limited (Norio). The cash amount received represented the new
minority shareholders 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 64.2% in Norio and its existing Norio and
North Kumisi production sharing agreement. On finalisation of respective
equity interest, the convertible loans, previously classified as minority
shareholder advances, have been reclassified to minority interest.
11. MINORITY INTEREST
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 64.2% in Norio and its existing Norio and North
Kumisi production sharing agreement. As a result of the finalisation of
respective equity interest, CanArgo's interest was adjusted to reflect its
share of $6,031,070, the carrying net asset value of Norio, and in
accordance with the application of SAB 51, this gave rise to a
non-operating loss of $443,564, classified as other expenses. The nominal
value of the final shares issued in Norio were $1,250 per share which gives
a nominal value
F-17
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for Norio of $11,328,928 of which CanArgo share is $7,269,023 and the
minority shareholders share is $4,059,876.
CanArgo Norio Limited (Norio) is consolidated in the accounts of CanArgo.
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.
12. COMMITMENTS AND CONTINGENCIES
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
Current drilling obligations with respect to CanArgo's oil and gas
properties include, under the second phase of the preliminary work
programme for the Norio and Nazvrevi/Block XIII production sharing
contracts, the drilling of one well, unless CanArgo decides to terminate
the contracts.
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, 2002, 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.
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 2002 the Participation Agreement for the three well exploration
programme on the Ninotsminda field with AES was terminated without AES
earning any rights to any of the Ninotsminda field reservoirs. The Company
therefore has no present obligations in respect of AES. However, under a
separate Letter of Agreement, if gas from the Sub Middle Eocene is
discovered and produced, AES will be entitled to recover at the rate of 15%
of future gas sales from the Sub Middle Eocene, net of operating costs,
approximately $7.5 million, representing their prior funding under the
Participation Agreement.
In January 2003, CanArgo won exclusive rights to negotiate a Production
Sharing Contract (PSC) for Block XIX in southern Syria. CanArgo has the
contingent obligation to issue an aggregate of 333,000 stock options at a
proposed exercise price of $0.17 per share, subject to the successful award
of the PSC for Block XIX in southern Syria.
LEASE COMMITMENTS - CanArgo leases office space under non-cancellable
operating lease agreements. Rental expense for the years ended December 31,
2002, 2001 and 2000 was $327,254, $353,594 and $178,745 respectively.
Future minimum rental payments over the next five years for the Company's
lease obligations as of December 31, 2002, are as follows:
2003 $250,000
2004 $250,000
2005 $220,000
2006 $220,000
2007 $220,000
Thereafter $660,000*
* This represents aggregate payments for 3 years.
No parent company guarantees have been provided by CanArgo with respect to
its contingent obligations and commitments.
13. 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
F-18
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
14. 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 had established May 24, 2002
as the redemption date for all of the Exchangeable Shares of CAOG since the
number of outstanding Exchangeable Shares had fallen below the minimum
853,071 share threshold. Each Exchangeable Share was purchased by CanArgo
for shares of CanArgo Common Stock on a share-for-share basis resulting in
the issuance of an aggregate of 148,826 shares of Common Stock. No cash
consideration was issued by CanArgo and the purchase did not increase the
total number of shares of Common Stock of CanArgo deemed issued and
issuable.
As of December 31, 2002, 97,356,206 shares of Common Stock 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, 2002, 2001 and 2000, 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, 2002
o In February 2002, CanArgo issued 5,210,000 shares at $0.34 per share
upon completion of a private placement.
o In May 2002, CanArgo issued 137,760 shares at $0.21 to David Robson,
CanArgo's Chief Executive Officer, for gross proceeds of approximately
$29,000 upon completion of a private placement.
o In May, 2002 CanArgo redeemed all of the Exchangeable Shares of CAOG
since the number of outstanding Exchangeable Shares had fallen below
the minimum 853,071 share threshold. Each Exchangeable Share was
purchased by CanArgo for shares of CanArgo Common Stock on a
share-for-share basis resulting in the issuance of an aggregate of
148,826 shares of Common Stock. No cash consideration was issued by
CanArgo and the purchase did not increase the total number of shares
of Common Stock of CanArgo deemed issued and issuable.
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.
F-19
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
o In 2000, CanArgo issued 105,968 shares upon exchange by holders of
Exchangeable Shares.
o In February and March 2000, CanArgo issued 140,000 shares at $0.805
per share in connection with services performed by third parties.
o In April 2000, CanArgo issued 3,695,000 shares at $0.862 per share for
gross proceeds of $3,184,166 upon completion of a private placement.
o In June 2000, CanArgo issued 4,054,054 shares at $1.11 per share for
gross proceeds of $4,500,000 to acquire the minority interest
shareholders interest in Ninotsminda Oil Company.
o In 2000, CanArgo issued 1,504,664 shares at $0.387 per share pursuant
to exercised stock options.
o In June 2000, CanArgo issued 15,550,916 shares at $0.98 per share upon
completion of a private placement.
o In August 2000, CanArgo issued 12,000,000 shares at $1.18 per share
upon completion of a private placement.
o In November 2000, CanArgo issued 1,543,125 shares at $1.08 per share
to acquire controlling interest in a refinery.
15. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the years ended December
31, 2002, 2001 and 2000 were based on the weighted average number of common
shares outstanding during those periods. The weighted average number of
shares used was 96,643,744, 83,869,579 and 54,950,630 respectively. Options
to purchase CanArgo's Common Stock were outstanding during the years ended
December 31, 2002, 2001 and 2000 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.
F-20
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Income tax benefit at statutory rate $(1,811,418) $(4,494,238) $(731,545)
Benefit of losses not recognized 1,811,418 4,494,238 731,545
Other, net -- -- --
----------- ----------- ---------
Provision for income taxes $ -- $ -- $ --
=========== =========== =========
Effective tax rate 0% 0% 0%
=========== =========== =========
The components of deferred tax assets as of December 31, 2002 and 2001 were
as follows:
DECEMBER 31, DECEMBER 31,
------------- ------------
2002 2001
------------- ------------
Net operating loss carryforwards $ 9,512,000 $ 11,256,000
Foreign net operating loss carryforwards 5,142,000 4,844,000
Net timing differences on impairments and accelerated
capital allowances 8,981,000 8,981,000
------------ ------------
23,635,000 25,081,000
Valuation allowance (23,635,000) (25,081,000)
------------ ------------
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, 2002, total U.S. net operating loss
carryforwards were approximately $27,977,000. Of that amount, approximately
$1,551,000 was incurred subsequent to the ownership change in 2000,
$26,426,000 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 2003 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 $15,123,000 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.
F-21
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
17. 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 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 held for
sale" and "Liabilities 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.
The results of discontinued operations at December 31, 2002, December 31,
2001 and December 31, 2000 consisted of the following:
DECEMBER 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Operating Revenues 7,390,138 7,607,489 126,014
Income (Loss) Before Income taxes and
Minority Interest 366,556 733,335 (16,596)
Income Taxes 24,132 46,203 --
Minority Interest in Income (171,212) (343,566) 8,298
----------- ---------- --------
Net Income (Loss) from Discontinued
Operation $ 171,212 $ 343,566 $ (8,298)
========== ========== ========
Gross consolidated assets and liabilities of subsidiary held for sale that
are included in "assets and liabilities held for sale" at December 31, 2001
and December 31, 2000 consisted of the following:
DECEMBER 31, December 31,
2002 2001
---------- ------------
Assets held for sale:
Cash and cash equivalents 37,948 254
Accounts receivable 243,529 90,108
Inventory 224,733 177,931
Other current assets 155,079 35,384
Capital assets, net 6,326,478 5,149,291
Investment in other ventures, net 548,910 366,614
---------- ----------
$7,536,677 $5,819,582
========== ==========
Liabilities held for sale:
Accounts payable 143,296 240,958
Current portion of long term debt 1,268,422 392,408
Income taxes payable 48,880 29,456
Long term debt 891,367 514,352
---------- ----------
$2,351,965 $1,177,174
========== ==========
F-22
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other investments include three petrol station sites in Tbilisi, Georgia in
which CanArgo has a 50% non-controlling interest. CanArgo accounts for its
interest in the three petrol station sites using the equity method and
consolidates the remaining sites in which it has controlling interest. In
2002, CanArgo purchased the remaining 50% of Petro-Invest, a petrol station
site in which CanArgo previously held a 50% non-controlling interest. This
site is now consolidated in the results of CanArgo Standard Oil Products,
above.
Cash consideration received at December 31, 2002 in respect of this
transaction was $500,000 and has been recorded in deferred revenue (see
Note 9). The second tranche of $500,000 was received in February 2003. The
sale will be reflected on receipt of the final $3 million in August 2003,
in accordance with the Sale and Purchase Agreement.
In 2002, the three petrol station sites that CanArgo has a 50%
non-controlling interest entered into credit facility agreements of
$550,000 with a commercial lender in Georgia. As at September, 2002
$350,000 of these facilities were drawn and as at December 31, 2002,
$299,377 under the facilities were outstanding. The loans bear interest at
18% per annum and are secured by the assets of the petrol stations. The
full amount of the loans are to be repaid by June 2005. No company
guarantees have been provided by CanArgo with respect to these loans.
In November 2001, CanArgo Standard Oil Products Limited entered into a
$1,000,000 credit facility agreement, in May 2002 a further $240,000 credit
facility agreement, and in September 2002 a further $1,900,000 credit
facility agreement with commercial lenders in Georgia and Greece to fund
further expansion of its petrol station network. In 2001, the full amount
of the first facility was drawn, in 2002 $180,000 of the second facility
was drawn, in September 2002 the full amount of the third facility was
drawn. As at December 31, 2002, $2,084,709 of the total facility was
outstanding. The loans bear interest between 13% and 18% per annum and are
secured by the assets of petrol stations. The full amount of the first loan
is to be repaid by December 2003, the second loan by November 2004, the
third loan by July 2005. No parent company guarantees have been provided by
CanArgo with respect to these loans.
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.
18. SEGMENT AND GEOGRAPHICAL DATA
During the year ended December 31, 2002 CanArgo's continuing operations
operated through two business segments, oil and gas exploration and
refining of crude oil.
F-23
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating revenues from continuing operations for the years ended December
31, 2002, 2001 and 2000 by business segment and geographical area were as
follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
OPERATING REVENUES FROM ------------ ------------ ------------
CONTINUING OPERATIONS: 2002 2001 2000
------------ ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $4,179,208 $4,873,623 $6,108,779
REFINING
Eastern Europe -- 2,595,763 535,865
OTHER
Eastern Europe 1,412,741 608,032 364,900
INTERSEGMENT ELIMINATIONS (16,007) (906,545) --
---------- ---------- ----------
TOTAL $5,575,942 $7,170,873 $7,009,544
========== ========== ==========
In 2002, the Company sold its oil and gas production in Eastern Europe to
twenty two (2001 - five, 2000 - five) customers. In 2002 sales to four
third party customers represented 27%, 25%, 19% and 19% of oil and gas
revenue respectively. In 2001 sales to three 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.
Operating profit (loss) from continuing operations for the years ended
December 31, 2002, 2001 and 2000 by business segment and geographical area
were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
OPERATING PROFIT (LOSS) FROM ------------ ------------ ------------
CONTINUING OPERATIONS: 2002 2001 2000
------------ ------------ ------------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe $ 581,934 $ (6,630,886) $ 871,896
REFINING
Eastern Europe (68,247) (4,683,563) (298,255)
CORPORATE AND OTHER EXPENSES (5,484,208) (4,793,047) (2,974,791)
----------- ------------ -----------
TOTAL $(4,970,521) $(16,107,496) $(2,401,150)
=========== ============ ===========
As a result of application of the ceiling test limitation, CanArgo recorded
a write-down in 2002 of oil and gas properties of $1,600,000 and a
write-down in 2001 of oil and gas properties of $7,300,000. In 2001,
refining assets and generating equipment were written-down to their
estimated net realizable value by $3,359,795 and $500,000 respectively. The
write-down of oil and gas properties and generating equipment was recorded
in operating profit (loss) for oil and gas, exploration and production. The
write-down of refining assets was recorded in profit (loss) for refining.
F-24
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable assets as of December 31, 2002 and 2001 by business segment
and geographical area were as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
CORPORATE
Eastern Europe $ 203,291 $ 3,926,930
Western Europe (principally cash) 2,274,847 6,775,224
----------- -----------
TOTAL CORPORATE 2,478,138 10,702,154
----------- -----------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe 59,602,525 52,424,569
REFINING
Eastern Europe 100,000 110,850
ASSETS HELD FOR SALE
Eastern Europe 7,536,677 5,819,582
Western Europe 559,270 535,454
----------- -----------
TOTAL ASSETS HELD FOR SALE 8,095,947 6,355,036
----------- -----------
OTHER ENERGY PROJECTS
Eastern Europe 459,308 719,308
----------- -----------
TOTAL IDENTIFIABLE ASSETS $70,735,918 $70,311,917
=========== ===========
19. SUPPLEMENTAL CASH FLOW INFORMATION AND NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the years
ended December 31, 2002, 2001 and 2000:
Supplemental schedule of non-cash DECEMBER 31, DECEMBER 31, DECEMBER 31,
activities: 2002 2001 2000
------------ ------------ ------------
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 compensation earned and third
party services provided -- -- 112,700
Issuance of Common Stock in connection
with compensation earned 29,000 -- --
------- --- ----------
$29,000 $-- $6,279,276
======= === ==========
F-25
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. 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, 3,887,384 options
were outstanding at December 31, 2002.
Pursuant to the terms of the Combination Agreement ("CAOG"), 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, 626,667 options were outstanding at December 31, 2002.
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, 2002, 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-26
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 WEIGHTED
SHARES AVAILABLE UNDER OUTSTANDING AVERAGE EXERCISE
FOR ISSUE OPTIONS PRICE
---------------- ----------------- ----------------
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
Expired 436,250 (436,250) 0.89
CAOG Plan Authorization:
Granted at market (485,000) 485,000 1.10
Exercised -- (63,333) 0.46
Expired 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 -- --
Expired 123,335 (123,335) 1.44
CAOG Plan Authorization:
Granted at market (185,000) 185,000 1.02
Exercised -- --
Expired -- --
---------- ---------- ----
BALANCE, DECEMBER 31, 2001 2,111,335 7,092,001 0.92
Options (1995 Plan):
Increase in shares available for issue
Granted at market (130,000) 130,000 0.14
Exercised -- --
Expired 307,500 (307,500) 0.25
CAOG Plan Authorization:
Granted at market -- --
Exercised -- --
Expired 180,000 (180,000) 1.11
---------- ---------- ----
BALANCE, DECEMBER 31, 2002 2,468,835 6,734,501 0.93
F-27
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 WEIGHTED
UNDER EXERCISABLE AVERAGE EXERCISE
OPTIONS PRICE
----------------- ----------------
December 31, 2000 725,329 $0.99
December 31, 2001 3,452,831 $0.91
December 31, 2002 5,114,834 $0.93
The weighted average fair value of options granted during the year was
$0.14, $0.71 and $1.26 for the years ended December 31, 2002, 2001 and 2000
respectively.
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------- ---------------------------------
NUMBER NUMBER
OF SHARES WEIGHTED WEIGHTED OF SHARES WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
Range of Exercise Prices 2002 TERM PRICE 2002 PRICE
------------------------ -------------- --------- -------- -------------- --------
$0.14 to $0.69 3,197,501 3.02 0.54 2,272,834 0.51
$0.70 to $0.99 175,000 2.96 0.88 120,000 0.88
$1.00 to $1.85 3,362,000 1.98 1.30 2,722,000 1.28
--------- ---- ---- --------- ----
$0.14 to $1.85 6,734,501 2.50 0.93 5,114,834 0.93
========= ==== ==== ========= ====
As discussed in Note1, 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 $6,253,000 and $0.06 respectively for the year ended December
31, 2002, $14,553,000 and $0.17 for the year ended December 31, 2001, and
$3,077,000 and $0.04 respectively for the year ended December 31, 2000.
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, 2002, 2001
and 2000: dividend yield of 0.00%, risk-free interest rate of 2.91% for the
year ended December 31, 2002, dividend yield of 0.00%, risk-free interest
rate of 4.61% for the year ended December 31, 2001, and dividend yield of
0.00%; risk-free interest rate of 5.98% for the year ended December 31,
2000, the average expected lives of options of 5.0 years, 3.37 years and
3.51 years respectively; and volatility of 80.47% for the year ended
December 31, 2002, 75.15% for the year ended December 31, 2001, and 75.07%
for the year ended December 31, 2000.
See note 22 for changes made to stock options disclosed above since
December 31, 2002.
21. 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, Mr Levan Pkhakadze, who is
F-28
CANARGO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2002 were $5,263,000. 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 2002 were $125,729.
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.
22. SUBSEQUENT EVENTS
As a result of ongoing cost reduction plans, CanArgo's principal executive
offices based in London will close at the end of March, 2003 and will be
relocated to Guernsey in the Channel Islands. CanArgo intends to sublet the
remaining space that it is vacating and does not expect to make a material
loss on subletting.
CanArgo Energy Corporation has resolved to issue 1,589,166 new options and
amend the terms and conditions attaching to 5,117,501 of existing options.
The exercise price for all these options is US $0.10 (approximately NOK
0.71) approximately 2.5 times the current share price. All these options
vest immediately and expire on March 4, 2008. With regard to individual
officers and directors, details of existing and new options are as follows:
Amended Terms New Options Total
------------- ----------- ---------
David Robson 2,666,667 333,333 3,000,000
Vincent McDonnell 300,000 300,000 600,000
Russ Hammond 346,250 153,750 500,000
Nils Trulsvik 346,250 153,750 500,000
Liz Landles 172,000 28,000 200,000
F-29
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2002
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ----------- ----------- ----------- -----------
Operating Revenue from
Continuing Operations $2,881,434 $ 980,163 $ 696,406 $ 1,017,939 $ 5,575,942
Operating Income (Loss) from
Continuing Operations 135,062 (1,719,662) (462,237) (2,923,684) (4,970,521)
Net Loss from Continuing
Operations (18,976) (1,321,902) (1,264,453) (2,893,582) (5,498,913)
Net Income (Loss) from
Discontinued Operations, net
of Taxes and Minority Interest 106,019 30,763 36,608 (2,178) 171,212
Net Income (Loss) 87,043 (1,291,139) (1,227,845) (2,895,760) (5,327,701)
Comprehensive Income (Loss) 87,043 (1,342,396) (1,078,650) (2,989,030) (5,323,033)
Net Loss per Common Share -
basic and diluted from
Continuing Operations 0.00 (0.01) (0.01) (0.03) (0.06)
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 (0.01) (0.01) (0.03) (0.06)
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 Loss (326,081) (1,203,440) (487,364) (11,201,461) (13,218,346)
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)
F-30
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs with existing
equipment under existing economic and operating conditions.
Proved developed reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and under existing
economic and operating conditions.
No major discovery or other favorable or adverse event subsequent to December
31, 2002 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,
2002, as estimated by the independent petroleum engineering firm, Ashton Jenkins
Mann:
NET PROVED RESERVES - OIL REPUBLIC OF
(In Thousands of Barrels) GEORGIA
-----------
DECEMBER 31, 1999 7,718
Purchase of properties 1,610
Revisions of previous estimates --
Extension, discoveries, other additions 583
Production (246)
Disposition of properties --
------
DECEMBER 31, 2000 9,665
Purchase of properties --
Revisions of previous estimates (5,689)
Extension, discoveries, other additions --
Production (247)
Disposition of properties --
------
DECEMBER 31, 2001 3,729
Purchase of properties --
Revisions of previous estimates (630)
Extension, discoveries, other additions --
Production (198)
Disposition of properties --
------
DECEMBER 31, 2002 2,901
NET PROVED DEVELOPED OIL RESERVES
------
December 31, 2002 2,811
======
F-31
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
NET PROVED RESERVES - GAS REPUBLIC OF
(In Million Cubic Feet) GEORGIA
-----------
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
Purchase of properties --
Revisions of previous estimates (2,265)
Extension, discoveries, other additions --
Production (346)
Disposition of properties --
------
DECEMBER 31, 2002 2,414
NET PROVED DEVELOPED GAS RESERVES
------
December 31, 2002 2,385
======
Net proved oil reserves in the Republic of Georgia as at December 31, 2002
and 2001 were as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
------------------------------ ------------------------------
PSC
PSC ENTITLEMENT
OIL RESERVES ENTITLEMENT OIL RESERVES VOLUMES
- GROSS VOLUMES - GROSS -----------
(MSTB) (MSTB)(1) (MSTB) (MSTB) (1)
------------ ----------- ------------ -----------
Proved Developed Producing 4,016 2,811 3,985 2,928
Proved Undeveloped 134 90 1,076 801
----- ----- ----- -----
TOTAL PROVEN 4,150 2,901 5,061 3,729
===== ===== ===== =====
Net proved gas reserves in the Republic of Georgia as at December 31, 2002
and 2001 were as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
------------------------------ ------------------------------
PSC
PSC ENTITLEMENT
GAS RESERVES ENTITLEMENT GAS RESERVES VOLUMES
- GROSS VOLUMES - GROSS -----------
(MMCF) (MMCF)(1) (MMCF) (MMCF)(1)
------------ ----------- ------------ -----------
Proved Developed Producing 7,952 2,385 12,878 3,963
Proved Undeveloped 96 29 3,873 1,162
----- ----- ------ -----
TOTAL PROVEN 8,048 2,414 16,751 5,025
===== ===== ====== =====
F-32
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
------------
(1) PSC Entitlement Volumes attributed to CanArgo are calculated 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.
Results of operations for oil and gas producing activities for the years
ended December 31, 2002, 2001 and 2000 are as follows:
REPUBLIC OF
YEAR ENDED DECEMBER 31, 2002 GEORGIA
-----------
Revenues $4,179,208
Operating expenses 1,537,917
Depreciation, depletion and amortization 3,353,266
----------
Operating Income/(Loss) (711,975)
Income tax provision --
----------
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES $ (711,975)
==========
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
==========
F-33
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
Costs incurred for oil and gas property acquisition, exploration and development
activities for the years ended December 31, 2002, 2001 and 2000 are as follows:
EASTERN
EUROPE
-----------
DECEMBER 31, 2002
Property Acquisition
Unproved* $ --
Proved --
Exploration 12,167,238
Development 543,280
-----------
Total costs incurred $12,710,518
===========
DECEMBER 31, 2001
Property Acquisition $ 5,186,002
Unproved* --
Proved 5,851,306
Exploration 2,054,989
Development
-----------
Total costs incurred $13,092,297
===========
DECEMBER 31, 2000
Property Acquisition
Unproved* $ 1,365,783
Proved --
Exploration --
Development 9,261,624
-----------
Total costs incurred $10,627,407
===========
* These amounts represent costs incurred by CanArgo and excluded from the
amortization base until proved reserves are established or impairment is
determined.
F-34
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The following information has been developed utilizing procedures prescribed by
SFAS No. 69 Disclosure about Oil and Gas Producing Activities ("SFAS 69") and
based on crude oil reserve and production volumes estimated by the Company's
engineering staff. It may be useful for certain comparative purposes, but should
not be solely relied upon in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should the
Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
CanArgo believes that the following factors should be taken into account in
reviewing the following information: (1) future costs and selling prices will
probably differ from those required to be used in these calculations; (2) actual
rates of production achieved in future years may vary significantly from the
rate of production assumed in the calculations; (3) selection of a 10% discount
rate is arbitrary and may not be reasonable as a measure of the relative risk
inherent in realizing future net oil and gas revenues; and (4) future net
revenues may be subject to different rates of income taxation.
Under the Standardized Measure, future cash inflows were estimated by applying
period-end oil prices adjusted for fixed and determinable escalations to the
estimated future production of period-end proven reserves. Future cash inflows
were reduced by estimated future development, abandonment and production costs
based on period-end costs in order to arrive at net cash flow before tax. Future
income tax expenses has been computed by applying period-end statutory tax rates
to aggregate future pre-tax net cash flows, reduced by the tax basis of the
properties involved and tax carryforwards. Use of a 10% discount rate is
required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as proven reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to proved
oil and gas reserves is as follows:
REPUBLIC OF
DECEMBER 31, 2002 (IN THOUSANDS) GEORGIA
-----------
Future cash inflows $54,761
Less related future:
Production costs 17,959
Development and abandonment costs 7,500
-------
Future net cash flows before income taxes 29,302
Future income taxes(1) (600)
-------
Future net cash flows 28,702
10% annual discount for estimating timing of cash flows 14,595
-------
Standardized measure of discounted future net cash flows $14,107
=======
F-35
CANARGO ENERGY CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
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
=======
-------------
(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 2002 2001 2000
------------- ------------ ------------
Beginning of year $16,695 $ 62,966 $40,168
Purchase (sale) of reserves in place -- -- 11,316
Revisions of previous estimates (6,978) (36,196) (409)
Development costs incurred during the period 543 2,055 9,262
Additions to proved reserves resulting from
extensions, discoveries and improved recovery -- -- --
Accretion of discount -- -- --
Sales of oil and gas, net of production costs (2,625) (2,327) (4,822)
Net change in sales prices, net of production
costs 4,990 (12,865) 4,393
Changes in production rates (timing) and other 1,482 3,062 3,058
------- -------- -------
Net increase (decrease) (2,588) (46,271) 22,798
------- -------- -------
End of year $14,107 $ 16,695 $62,966
======= ======== =======
F-36
EXHIBIT INDEX
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).
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).
1(6) Engagement Agreement with Sundal Collier & Co ASA dated August
13, 2001. (Incorporated herein by reference from Post-Effective
Amendment No. 2 to Form S-1 Registration Statement, File No.
333-85116 filed on September 10, 2002).
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).
3(1) Registrant's Certificate of Incorporation and amendments thereto
(Incorporated herein by reference from July 15, 1998 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX
Nederland B.V. dated September 28, 2000, relating to purchase of
21.2% interest in Ninotsminda Oil Company (Incorporated herein by
reference from July 20, 2000 Form 8-K).
*10(1) Form of Option Agreement for options granted to certain persons,
including Directors (Incorporated herein by reference from August
31, 1994 Form 10-KSB, filed by Electromagnetic Oil Recovery,
Inc., the Company's predecessor).
*10(2) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated
herein by reference from Post-Effective Amendment No. 1 to Form
S-1 Registration Statement, File No. 333-72295 filed on July 29,
1999).
*10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998 Form
10-Q).
10(4) 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 June 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).
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).
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 June 30, 2001 Form 10-Q).
10(24) Crude Oil Sales Agreement dated August 13, 2002 (Incorporated
herein by reference from June 30, 2002 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, 2002 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, 2002
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, 2002 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, 2002 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, 2002 Form
10-Q)
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, 2002 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, 2002 Form
10-Q)
21 List of Subsidiaries (Incorporated herein by reference from June
30, 2001 Form 10-Q)
25(1) Power of attorney of certain signatories (Incorporated herein by
reference from December 17, 2002 Form S1/A)
+23 Consent of PricewaterhouseCoopers LLP
+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.