U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO 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)
CanArgo Services (UK) Limited
150 Buckingham Palace Road, London, England SW1W 9TR
------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(44) 207 808 4700
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(REGISTRANT'S TELEPHONE NUMBER)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check whether the registrant (1) has 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 [ ]
The number of shares of registrant's common stock outstanding on April 30, 2002
was 97,070,580. An additional 147,866 shares of common stock are issuable at any
time without additional consideration upon exercise of CanArgo Oil & Gas Inc.
Exchangeable Shares.
CANARGO ENERGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Cash flows 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART 2. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index 22
(b) Reports on Form 8-K 25
Signatures 26
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FORWARD-LOOKING STATEMENTS
The United States Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. Such forward-looking
statements are based upon the current expectations of CanArgo and speak only as
of the date made. These forward-looking statements involve risks, uncertainties
and other factors. The factors discussed elsewhere in this Quarterly Report on
Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly
Report on Form 10-Q, 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. Few of the forward-looking statements in this Report
deal with matters that are within our unilateral control. 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 interests that do not coincide with ours and may
conflict with our interests. Unless the third parties and we are able to
compromise their various objectives in a mutually acceptable manner, agreements
and arrangements will not be consummated.
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2
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
Unaudited
-----------------------------------
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
Cash and cash equivalents $ 4,325,727 $ 5,891,292
Cash held in trust 1,762,433 --
Accounts receivable 2,911,280 2,646,110
Inventory 348,733 583,849
Prepayments 1,092,171 2,235,712
Other current assets 818,512 733,211
------------- -------------
Total current assets $ 11,258,856 $ 12,090,174
Capital assets, net (including unevaluated amounts of
$29,048,786 and $24,570,886, respectively) 61,348,333 57,684,710
Investments in and advances to oil and gas and other
ventures - net 1,119,146 1,085,922
------------- -------------
TOTAL ASSETS $ 73,726,335 $ 70,860,806
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,295,064 $ 1,618,308
Current portion of long term debt 502,067 392,408
Income taxes payable 100,146 90,456
Accrued liabilities 370,043 400,221
------------- -------------
Total current liabilities $ 3,267,320 $ 2,501,393
Long term debt 382,118 514,352
Provision for future site restoration 82,290 64,290
Minority shareholder advances 895,000 450,000
Minority interest in subsidiaries 1,612,766 1,531,191
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, par value $0.10 per share -- --
Common stock, par value $0.10 per share 9,721,845 9,200,845
Capital in excess of par value 145,136,735 144,057,517
Accumulated deficit (87,371,739) (87,458,782)
------------- -------------
Total stockholders' equity $ 67,486,841 $ 65,799,580
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,726,335 $ 70,860,806
============= =============
See accompanying notes to unaudited consolidated condensed financial statements.
3
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Unaudited
---------------------------------
MARCH 31, MARCH 31,
2002 2001
------------ ------------
Operating Revenues from Continuing Operations:
Oil and gas sales $ 1,637,929 $ 1,748,195
Refining and marketing 1,364,705 1,849,608
Other 1,243,505 --
------------ ------------
4,246,139 3,597,803
------------ ------------
Operating Expenses:
Field operating expenses 595,976 502,217
Purchases of crude oil and products 1,042,066 1,157,724
Refinery operating expenses -- 120,406
Direct project costs 629,439 249,580
Selling, general and administrative 829,876 927,889
Depreciation, depletion and amortization 798,539 1,185,788
------------ ------------
3,895,896 4,143,604
------------ ------------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS 350,243 (545,801)
------------ ------------
Other Income (Expense):
Interest, net (47,686) 391,156
Other (88,512) (104,279)
Equity income (loss) from investments (8,125) (37,000)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (144,323) 249,877
------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAX AND MINORITY
INTEREST 205,920 (295,924)
Income taxes (37,302) --
Minority interest in income of consolidated subsidiaries (81,575) (30,157)
------------ ------------
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) $ 87,043 $ (326,081)
============ ============
Weighted average number of common shares outstanding 94,787,113 75,950,681
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.00 $ (0.00)
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.00 $ (0.00)
------------ ------------
See accompanying notes to unaudited consolidated condensed financial statements.
4
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
-------------------------------
MARCH 31, MARCH 31,
2002 2001
------------ -----------
Operating activities:
Net income (loss) $ 87,043 $ (326,081)
Depreciation, depletion and amortization 798,539 1,185,788
Equity loss (income) from investments 8,125 37,000
Allowance for doubtful accounts -- 100,000
Minority interest in income of consolidated subsidiaries 81,575 30,157
Changes in assets and liabilities:
Accounts receivable (265,170) (845,390)
Inventory 235,116 263,317
Other current assets (85,301) (17,156)
Accounts payable 676,756 (306,925)
Income taxes payable 9,690 --
Accrued liabilities (30,178) (125,000)
------------ ------------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES 1,516,195 (4,290)
------------ ------------
Investing activities:
Capital expenditures (4,444,162) (3,766,248)
Investments in and advances to oil and gas and other
ventures (41,349) (112,632)
Change in non cash working capital items 1,143,541 (2,555,943)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,341,970) (6,434,823)
------------ ------------
Financing Activities:
Proceeds from sale of common stock 1,762,433 --
Share issue costs (162,215) --
Funds held in trust (1,762,433) --
Minority shareholder advances 445,000 --
Advances from minority interest -- 1,701,652
Advances from joint venture partner -- (3,950,792)
Decrease in long term debt (22,575) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 260,210 (2,249,140)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,565,565) (8,688,253)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,891,292 28,627,013
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,325,727 $ 19,938,760
============ ============
See accompanying notes to unaudited consolidated condensed financial statements.
5
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001 (UNAUDITED)
(1) Basis of Presentation
The interim consolidated condensed financial statements and notes
thereto of CanArgo Energy Corporation and its subsidiaries
(collectively, CanArgo) have been prepared by management without audit.
In the opinion of management, the consolidated condensed financial
statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair statement of the results for the
interim period. The accompanying consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in CanArgo's Annual
Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission. All amounts are in U.S. dollars.
Certain items in the consolidated condensed 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.
(2) Need for Significant Additional Capital, Possible Impairment of Assets
Development of the oil and gas properties and ventures in which CanArgo
has interests involves multi-year efforts and substantial cash
expenditures. Full development of these properties will require the
availability of substantial funds from external sources. CanArgo
believes that it will be able to generate funds from external sources
including quasi-governmental financing agencies, conventional lenders,
equity investors and other oil and gas companies that may desire to
participate in CanArgo's oil and gas projects, although no firm funding
commitments have been received.
Ultimate realization of the carrying value of CanArgo's oil and gas
properties will require production of oil and gas in sufficient
quantities and marketing such oil and gas at sufficient prices to
provide positive cash flow to CanArgo. This 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 the carrying value
of its oil and gas properties.
CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has
an interest. There can be no assurance, however, that CanArgo or the
entities that are developing the oil and gas properties and ventures
will be able to arrange the financing necessary to develop the projects
being undertaken or to support the corporate and other activities of
CanArgo or that such financing if available will be on terms that are
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 oil and gas
properties and ventures or other adjustments that would be necessary if
financing cannot be arranged for the development of such properties and
ventures or if they are unable to achieve profitable operations.
Failure to arrange such financing on reasonable terms or failure of
such properties and ventures to achieve profitability would have a
material adverse effect on the financial position, including
realization of assets, results of operations, cash flows and prospects
of the CanArgo.
6
(3) Foreign Operations
CanArgo's future operations and earnings will depend upon the results
of CanArgo's operations in the Republic of Georgia and the Ukraine.
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 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, 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.
(4) Inventory
Inventory at March 31, 2002 and December 31, 2001 consisted of the
following:
MARCH 31, December 31,
2002 2001
--------- ------------
Crude oil $226,443 $373,818
Refined products 122,290 210,031
-------- --------
$348,733 $583,849
======== ========
(5) Capital Assets, Net
Capital assets, net of accumulated depreciation and impairment, at
March 31, 2002 and December 31, 2001 include the following:
MARCH 31, 2002 December 31, 2001
---------------------------------- -----------------------------------
ACCUMULATED
DEPRECIATION NET NET
COST AND IMPAIRMENT CAPITAL ASSETS CAPITAL ASSETS
----------- -------------- -------------- --------------
OIL AND GAS PROPERTIES
Proved properties $31,900,462 $15,857,770 $16,042,692 $16,669,691
Unproved properties 29,048,786 29,048,786 24,570,886
----------- ----------- ----------- -----------
60,949,248 15,857,770 45,091,478 41,240,577
PROPERTY AND EQUIPMENT
Oil and gas related
equipment 13,676,774 3,391,868 10,284,906 10,621,771
Office furniture,
fixtures and
equipment and other 1,060,531 516,805 543,726 562,221
----------- ----------- ----------- -----------
14,737,305 3,908,673 10,828,632 11,183,992
REFINING AND MARKETING 9,598,853 4,170,630 5,428,223 5,260,141
----------- ----------- ----------- -----------
TOTAL $85,285,406 $23,937,073 $61,348,333 $57,684,710
=========== =========== =========== ===========
7
Oil and gas related equipment includes new or refurbished drilling rigs
and related equipment, all of which are in the Republic of Georgia for
use by CanArgo in the development of the Ninotsminda field.
(6) Investments 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 March 31, 2002 and December 31, 2001 is
set out below:
MARCH 31, December 31,
2002 2001
----------- ------------
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company $ 6,739,411 $ 6,698,062
Republic of Georgia - Ninotsminda
Through an effective 50% ownership of East Georgian Pipeline Co. 192,500 192,500
Other Investments 441,614 441,614
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES $ 7,373,525 $ 7,332,176
----------- -----------
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw (602,086) (593,961)
Republic of Georgia - East Georgian Pipeline Co. (192,500) (192,500)
----------- -----------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES $ (794,586) $ (786,461)
IMPAIRMENT - STYNAWSKE FIELD (5,459,793) (5,459,793)
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 1,119,146 $ 1,085,922
=========== ===========
Under the terms of the license Boryslaw Oil Company holds in the
Stynawske field, field operations were to be transferred to Boryslaw
Oil Company effective January 1, 1999. As a result of prolonged
negotiations which created significant uncertainty as to CanArgo's
ability to raise funds for the project or enter into a satisfactory
farm-out agreement on a timely basis, CanArgo recorded in the third
quarter of 1999 an impairment charge of $5,459,793 against its
investment in and advances to Boryslaw Oil Company. At present, certain
obligations must be met by June 2002 in order for Boryslaw Oil Company
to retain the field licence including the drilling of one new well.
CanArgo is currently seeking an extension to the licence to allow a
proper assessment of the workovers and development plans. If Boryslaw
Oil Company does not proceed with the Stynawske field development
programme or if an extension to the current licence cannot be obtained,
it may be in breach of obligations it has with regard to the field
license and an impairment charge against CanArgo's investment in and
advances to Boryslaw Oil Company may be required.
Other investments include CanArgo's 10% interest in a potential Caspian
Sea exploration project and two petrol station sites in Tbilisi,
Georgia in which CanArgo has a 50% non-controlling interest. CanArgo
accounts for its interest in the two petrol station sites using the
equity method and consolidates the remaining seventeen sites in which
it has controlling interest.
CanArgo's ventures are in the development stage. Accordingly,
realization of these investments is dependent upon successful
development of and ultimately cash flows from operations of the
ventures.
8
(7) Accrued Liabilities
Accrued liabilities at March 31, 2002 and December 31, 2001 include the
following:
MARCH 31, December 31,
2002 2001
--------- ------------
Professional fees $137,600 $150,000
Operating costs -- 90,000
Other 232,443 160,221
-------- --------
$370,043 $400,221
======== ========
(8) Long Term Debt
Bank loans at March 31, 2002 and December 31, 2001 include the
following:
MARCH 31, December 31,
2002 2001
---------- ------------
Outstanding bank loan $ 884,185 $ 906,760
Less current portion (502,067) (392,408)
--------- ---------
Long term debt $ 382,118 $ 514,352
========= =========
In November 2001, CanArgo Standard Oil Products Limited entered into a
$1 million credit facility agreement with a commercial lender in
Georgia to fund further expansion of its petrol station network. In
2001, the full amount of the facility was drawn of which $884,185 was
outstanding as at March 31, 2002. The loan bears interest at 18% per
annum and is secured by the assets of three petrol stations. The full
amount of the loan is to be repaid by December 2003. No parent company
guarantees have been provided by CanArgo with respect to this loan.
(9) Minority Shareholder Advances
In 2001 CanArgo received $450,000 and in 2002, $445,000 on issuance of
convertible loans from future shareholders of CanArgo's subsidiary,
CanArgo Norio Limited ("Norio"). The cash amount received represents
part of the future shareholders share of the cost of drilling an
exploration well under the Norio and North Kumisi production sharing
agreement. CanArgo anticipates increasing its interest to over 60% in
Norio through an increased level of funding of this well.
The convertible loans are non interest bearing and will convert into
ordinary share capital of Norio 30 days after the final cost of the
well is known. It is at this point when the final ownership interest in
Norio will be determined and consequently the $895,000 received to
March 31, 2002 and any subsequent advances from the future shareholders
towards the cost of the well will be reclassified as minority interest.
9
(10) Stockholders' Equity
COMMON STOCK
--------------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
------------- ------------- ------------- ------------- -------------
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 period (148,826) (14,883) (279,436) -- (294,319)
Issuance of common stock upon
exchange of CanArgo Oil &
Gas Inc. Exchangeable Shares 960 96 1,803 -- 1,899
Issuance of common stock pursuant
to February private placement 5,210,000 521,000 1,241,433 -- 1,762,433
Share issue costs (162,215) -- (162,215)
Net income (loss) -- -- -- 87,043 87,043
------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 2002 97,070,580 9,707,058 144,859,102 (87,371,739) 67,194,421
Shares issuable upon exchange of
CanArgo Oil & Gas Inc.
Exchangeable Shares without
receipt of further consideration 147,866 14,787 277,633 -- 292,420
------------- ------------- ------------- ------------- -------------
TOTAL, MARCH 31, 2002 97,218,446 $ 9,721,845 $ 145,136,735 $ (87,371,739) $ 67,486,841
============= ============= ============= ============= =============
On January 24, 2002 CanArgo announced that it has established May 24,
2002 as the redemption date for all of the Exchangeable Shares of
CanArgo Oil & Gas Inc.. Each Exchangeable Share will be purchased by
CanArgo for shares of CanArgo Common Stock on a share-for-share basis.
No cash consideration will be issued by CanArgo and the purchase will
not increase the total number of shares of Common Stock of CanArgo
issued and issuable.
10
(11) Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share for the three
month periods ended March 31, 2002 and 2001 are based on the weighted
average number of common shares outstanding during those periods. The
weighted average numbers of shares issued and issuable without receipt
of additional consideration for the three month periods ended March 31,
2002 and 2001 are 94,787,113 and 75,950,681 respectively. Options to
purchase CanArgo's common stock were outstanding at March 31, 2002 but
were not included in the computation of diluted net income (loss) per
common share because the effect of such inclusion would have been
anti-dilutive.
(12) Commitments and Contingencies
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional
obligations, absolute and contingent, with respect to acquiring and
developing oil and gas properties and ventures. At March 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.
(13) Segment Information
Operating revenues for the three month periods ended March 31, 2002 and
2001 by geographical area were as follows:
MARCH 31, March 31,
2002 2001
----------- -----------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe $ 1,637,929 $ 1,967,544
REFINING AND MARKETING
Eastern Europe 1,364,705 1,849,608
Other
Eastern Europe 1,243,505 --
INTERSEGMENT ELIMINATIONS -- (219,349)
----------- -----------
TOTAL $ 4,246,139 $ 3,597,803
=========== ===========
Operating income (loss) for the three month periods ended March 31,
2002 and 2001 by geographical area was as follows:
MARCH 31, March 31,
2002 2001
----------- -----------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe $ 1,589,651 $ 454,635
REFINING AND MARKETING
Eastern Europe 239,913 64,683
CORPORATE AND OTHER EXPENSES (1,479,321) (1,065,119)
----------- -----------
TOTAL OPERATING INCOME (LOSS) $ 350,243 $ (545,801)
=========== ===========
11
Net income (loss) before minority interest for the three month periods
ended March 31, 2002 and 2001 by geographic area was as follows:
MARCH 31, March 31,
2002 2001
----------- -----------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe $ 1,514,055 $ 453,585
REFINING AND MARKETING
Eastern Europe 125,895 59,962
CORPORATE AND OTHER EXPENSES (1,471,331) (809,471)
----------- -----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST $ 168,619 $ (295,924)
=========== ===========
Identifiable assets as of March 31, 2002 and December 31, 2001 by
business segment and geographical area were as follows:
MARCH 31, December 31,
2002 2001
----------- ------------
CORPORATE
Eastern Europe $ 3,691,814 $ 3,926,930
Western Europe 7,567,042 8,163,244
----------- -----------
TOTAL 11,258,856 12,090,174
----------- -----------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Eastern Europe 55,920,110 52,424,569
REFINING AND MARKETING
Eastern Europe 5,428,223 5,260,141
OTHER ENERGY PROJECTS
Eastern Europe 1,119,146 1,085,922
----------- -----------
IDENTIFIABLE ASSETS - TOTAL $73,726,335 $70,860,806
=========== ===========
12
ITEM 2. 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 STATEMENTS. SEE
"FORWARD-LOOKING STATEMENTS" BELOW AND ELSEWHERE IN THIS REPORT.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, CanArgo had working capital of $7,992,000 compared to
working capital of $9,589,000 as of December 31, 2001. The $1,597,000 decrease
in working capital from December 31, 2001 to March 31, 2002 is principally due
to a reduction in cash as a result of capital expenditures on the Ninotsminda
and Norio fields.
CanArgo's management believes that working capital at March 31, 2002 should be
sufficient to cover CanArgo's near term funding requirements with respect to its
activities in the Republic of Georgia. Existing cash and cash equivalents at
March 31, 2002, however, are not sufficient to adequately finance the
acquisition and subsequent development of the Bugruvativske field in Eastern
Ukraine. Both the Bugruvativske field and the Stynwaske field in Western Ukraine
are in the early stage of evaluation and development and are themselves
relatively new to CanArgo and additional financing will be required to fully
develop and exploit these fields. In addition, CanArgo is in the process of
establishing its own administrative and finance infrastructure in the Ukraine.
Establishment of this infrastructure may result in a diversion, temporary or
otherwise, of time and other resources from other operating activities.
Prior to the acquisition of Lateral Vector Resources Inc. ("LVR") CanArgo had
directed substantially all of its efforts and most of its available funds to the
development of the Ninotsminda oil field in the Republic of Georgia and some
ancillary activities closely related to the Ninotsminda field project. Immediate
development plans are for the completion of testing of well N100 and drilling of
well M11, two deep exploration wells in the Republic of Georgia. Drilling of a
third exploration well in the Norio block in the Republic of Georgia has also
commenced and quantification of the reserve and production potential of
discoveries in the Saramatian and Upper Eocene sequences continues.
According to publicly available information at the time of CanArgo's acquisition
of LVR, LVR negotiated and concluded with Ukrnafta, the Ukrainian State Oil
Company, a Joint Investment Production Activity (JIPA) agreement in 1998 to
develop the Bugruvativske field in Eastern Ukraine. To date, neither of the
parties has fulfilled their initial contribution requirements which may result
in Ukrnafta exercising any rights it might have to terminate and cancel the
Joint Investment Production Activity agreement. In addition, certain other
aspects of Lateral Vector's interest in the field under the Joint Investment
Production Agreement remain to be determined. We are presently in discussions
with Ukrnafta regarding these matters and there is no assurance that such
discussions will be successfully concluded.
At present, certain obligations must be met by June 2002 in order for Boryslaw
Oil Company to retain the field licence including the drilling of one new well.
CanArgo is currently seeking an extension to the licence to allow a proper
assessment of the workovers and development plans. If Boryslaw Oil Company does
not proceed with the Stynawske field development programme or if an extension
to the current licence cannot be obtained, it may be in breach of obligations it
has with regard to the field license. This could place Boryslaw Oil Company's
rights to the Stynawske field at risk and substantially reduce Boryslaw Oil
Company's ability to repay amounts advanced to it by CanArgo.
In Ukraine, 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 all of its existing projects and new opportunities, CanArgo will
require additional capital. While expected to be substantial, without further
exploration work and evaluation the exact amount of funds needed to fully
develop all of our oil and gas properties cannot at present, be quantified.
Potential sources of funds include additional equity, project financing, debt
financing and the participation of other oil and gas entities in CanArgo's
projects. Based on CanArgo's past history of raising capital and continuing
discussions including those with major stockholders, investment bankers and
other institutions, CanArgo believes that such required funds may be available.
However, there is no assurance that such funds will be available, and if
available, will be offered on attractive or acceptable terms.
Development of the oil and gas properties and ventures in which CanArgo has
interests involves multi-year efforts and substantial cash expenditures. Full
development of CanArgo's oil and gas properties and ventures will require the
availability of substantial additional financing from external sources. CanArgo
also may, where opportunities
13
exist, seek to transfer portions of its interests in oil and gas properties and
ventures to entities in exchange for such financing. CanArgo generally has the
principal responsibility for arranging financing for the oil and gas properties
and ventures in which it has an interest. There can be no assurance, however,
that CanArgo or the entities that are developing the oil and gas properties and
ventures will be able to arrange the financing necessary to develop the projects
being undertaken or to support the corporate and other activities of CanArgo.
There can also be no assurance that such financing as is available will be on
terms that are attractive or acceptable to or are deemed to be in the best
interest of CanArgo, such entities and their respective stockholders or
participants.
Ultimate realization of the carrying value of CanArgo's oil and gas properties
and ventures will require production of oil and gas in sufficient quantities and
marketing such oil and gas at sufficient prices to provide positive cash flow to
CanArgo. Establishment of successful oil and gas operations is dependent upon,
among other factors, the following:
o mobilization of equipment and personnel to implement effectively
drilling, completion and production activities;
o achieving significant production at costs that provide acceptable
margins;
o reasonable levels of taxation, or economic arrangements in lieu of
taxation in host countries; and
o the ability to market the oil and gas produced at or near world
prices.
CanArgo has plans to mobilize resources and achieve levels of production and
profits sufficient to recover the carrying value of its oil and gas properties
and ventures. However, if one or more of the above factors, or other factors,
are different than anticipated, these plans may not be realized, and CanArgo may
not recover the carrying value of its oil and gas properties and ventures.
CanArgo will be entitled to distributions from the various properties and
ventures in which it participates in accordance with the arrangements governing
the respective properties and ventures.
STATEMENT OF CASH FLOWS
Cash and cash equivalents decreased by $1,566,000 to $4,326,000 at March 31,
2002 from $5,891,000 at December 31, 2001. The decrease was primarily due to the
cost of the Cretaceous exploration programme currently underway in Georgia.
Cash held in trust increased to $1,762,000 at March 31, 2002 from nil at
December 31, 2001 following a private placement by CanArgo in February 2002.
Cash held in trust was released to CanArgo in April 2002.
Accounts receivable increased by $265,000 to $2,911,000 at March 31, 2002 from
$2,646,000 at December 31, 2001. The increase is primarily a result of accounts
receivable generated from oil, natural gas and refined product sales in 2002 and
rental income. Subsequent to March 31 2002, CanArgo received $1,000,000 from AES
included in accounts receivable at March 31,2002 and December 31, 2001 related
to termination in 2002 of AES's participation in a three well exploration
programme.
Inventory decreased by $235,000 to $349,000 at March 31, 2002 from $584,000 at
December 31, 2001 primarily as result of the sale of oil by Ninotsminda Oil
Company from storage. Approximately 25,000 barrels of oil were held in storage
by Ninotsminda Oil Company at March 31, 2002 for sale to the Georgian domestic,
region or international market.
Prepayments decreased by $1,144,000 to $1,092,000 at March 31, 2002 from
$2,236,000 at December 31, 2001 primarily as a result of receipt of materials
and services related to CanArgo's exploration activities. This decrease is
included in the statement of cash flows as an investing activity.
Capital assets, net increased to $61,348,000 at March 31, 2001 from $57,685,000
at December 31, 2001, primarily as a result of investment of $4,444,000 in
capital assets including oil and gas properties and equipment, principally
related to the Ninotsminda and Norio fields.
Investments in and advances to oil and gas and other ventures, net increased to
$1,119,000 at March 31, 2002 from $1,086,000 at December 31, 2001. The increase
reflects costs related to CanArgo's investment in Boryslaw Oil Company.
Accounts payable increased by $677,000 to $2,295,000 at March 31, 2002 from
$1,618,000 at December 31, 2001, primarily as a result of payments received in
advance for oil deliveries to be made in April and May 2002.
14
To fund construction of new petrol stations in Georgia, a short term bank loan
was drawn by CanArgo Standard Oil Products in Tbilisi, Georgia at an
effective interest rate of 18% per annum. Accrued liabilities decreased by
$30,000 to $370,000 at March 31, 2002 from $400,000 at December 31, 2001 as
identified in note 7 to the unaudited consolidated financial statements.
Long term debt decreased by $132,000 to $382,000 at March 31, 2002 from $514,000
at December 31, 2001. The decrease in long term debt is due to repayments in the
period of the credit facility and reclassification of long term debt as current.
Minority shareholder advances increased by $445,000 to $895,000 at March 31,
2002 from $450,000 at December 31, 2001 due to the receipt of convertible loans
from future shareholders of CanArgo's subsidiary, CanArgo Norio Limited
("Norio"). The cash amount received represents part of the future shareholders
share of the cost of drilling an exploration well under the Norio and North
Kumisi production sharing agreement ("PSA"). CanArgo anticipates increasing its
interest to over 60% in CanArgo Norio Limited through an increased level of
funding of this well.
The convertible loans are non interest bearing and will convert into ordinary
share capital of CanArgo Norio Limited 30 days after the final cost of the well
is known. It is at this point when the final ownership interest in CanArgo Norio
Limited will be determined and consequently the $895,000 received at March 31,
2002 and any subsequent advances from the future shareholders towards the cost
of the well will be reclassified as minority interest.
Minority interest in subsidiaries increased to $1,613,000 at March 31, 2002
compared to $1,531,000 at December 31, 2001 due to minority interest
shareholders share of income in the period. CanArgo consolidates its 50%
interest in CanArgo Standard Oil Products as it has the ability to control the
strategic operating and financial activities of the joint venture. The remaining
50% interest in CanArgo Standard Oil Products is held by Standard Oil Products
of Georgia and an individual who is one of the founders of Standard Oil
Products.
On February 12, 2002, CanArgo completed an offering of 5,210,000 common shares
at NOK 2.95 per share (approximately US$0.33 per share) to certain institutions
and qualified purchasers for gross proceeds of approximately $1,762,000 in
transactions intended to qualify for an exemption from registration under the
Securities Act of 1933 afforded by Regulation S promulgated thereunder. After
completion of the offering, CanArgo has 97,218,446 common and Exchangeable
shares issued and issuable.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL TERMS
CanArgo has contingent obligations and may incur additional obligations,
absolute or contingent, with respect to the acquisition and development of oil
and gas properties and ventures in which it has interests that require or may
require CanArgo to expend funds and to issue shares of its Common Stock. At
March 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.
Current drilling obligations with respect to CanArgo's oil and gas properties
include, under the second phase of the preliminary work programme for the Norio
and Nazvrevi/Block XIII production sharing contracts, the drilling of one well,
unless CanArgo decides to terminate the contracts. The second phase of the
preliminary work programme under the Norio and North Kumisi production sharing
agreement is currently underway with the commencement in January 2002 of the
first exploration well at an estimated cost of up to $4.2 million of which
CanArgo's estimated share of costs is $3.2 million. In addition, certain
obligations must be met by June 2002 in order for Boryslaw Oil Company to retain
the field licence including the drilling of one new well. CanArgo is currently
seeking an extension to the licence to allow a proper assessment of the
workovers and development plans. If no extension is obtained Boryslaw Oil
Company's rights to the Stynawske field could be at risk and substantially
reduce Boryslaw Oil Company's ability to repay amounts advanced to it by
CanArgo.
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.
15
RESULTS OF OPERATIONS
Three Month Period Ended March 31, 2002 Compared to Three Month Period Ended
March 31, 2001
CanArgo recorded operating revenue of $4,246,000 during the three month period
ended March 31, 2002 compared with $3,598,000 for the three month period ended
March 31, 2001. The increase is attributable to rental of CanArgo equipment in
Georgia, offsetting declines in oil and gas and refining and marketing revenues.
Ninotsminda Oil Company generated $1,638,000 of revenue in the three month
period ended March 31, 2002 compared with $1,748,000 for the three month period
ended March 31, 2001. Its net share of the 73,374 (815 barrels per day) of gross
oil production for sale from the Ninotsminda field in the period amounted to
47,693 barrels. In the period 52,064 barrels of oil were removed from storage
and sold resulting in higher oil sales volumes in the first quarter of 2002 than
those expected in the second quarter. For the three month period ended March 31,
2001 Ninotsminda Oil Company's net share of the 130,960 barrels (1,423 barrels
per day) of gross production was 79,760 barrels.
Ninotsminda Oil Company's entire share of production was sold into the Georgian
local and regional market. Because lower transportation costs are involved,
CanArgo believes that sales of Ninotsminda oil to customers in the 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 the first quarter of 2002 averaged $16.20 per barrel
as compared with an average of $20.22 per barrel in the first quarter of 2001.
Its net share of the 27,925 mcf of gas delivered was 18,151 mcf at an average
net sale price of $1.18 per mcf of gas. For the three month period ended March
31, 2001, Ninotsminda Oil Company's net share of the 446,700 mcf of gas
delivered was 290,330 mcf at an average net sales price of $1.16 per mcf of gas.
Gas deliveries declined significantly due to lower oil and gas production and
the shutdown by AES of its thermal power generating station following an
accident at the facility.
Refining and marketing revenues for the three month period ended March 31, 2002
relate to activities of Georgian American Oil Refinery and CanArgo Standard Oil
Products respectively. Currently only nafta, diesel and mazut can currently be
produced by the refinery and of these products, an excise tax on naptha sales
remains in place. As a result of these taxes and the local market for naptha in
the Republic of Georgia, CanArgo deemed production of naptha as commercially
uneconomic and suspended refining activity in the fourth quarter of 2001. In
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. CanArgo continues to monitor demand for
product produced by the refinery and is seeking changes to the legislation in
support of indigenous refining activities.
Operating income for the three month period ended March 31, 2002 was $350,000
compared with an operating loss of $546,000 for the corresponding period in
2001. The increase in operating profit is attributable primarily to
marketing activity and profit generated from rental of CanArgo equipment. No new
equipment rental contracts have been signed and accordingly this revenue is
anticipated to drop sharply in the second quarter of 2002.
Field operating expenses increased to $596,000 for the three month period ended
March 31, 2002 as compared to $502,000 for the three month period ended March
31, 2001. The increase is primarily a result of increased activity at the
Ninotsminda field.
Purchases of crude oil and products of $1,042,000 for the three month period
ended March 31, 2002 relate to operating activities CanArgo Standard Oil
Products.
Refinery operating expenses were nil for the three month period ended March 31,
2002 as compared to $120,000 for the three month period ended March 31, 2001
resulting from refining activity being suspended.
Direct project costs increased to $629,000 for the three month period ended
March 31, 2002, from $250,000 for the three month period ended March 31, 2001,
reflecting increased activity at the Ninotsminda field and additional costs
associated with the rental by others of CanArgo equipment.
16
General and administrative costs decreased to $830,000 for the three month
period ended March 31, 2002, from $928,000 for the three month period ended
March 31, 2001. The decrease is primarily attributable decreased general and
administrative costs related to refining activities.
The decrease in depreciation, depletion and amortization expense to $799,000 for
the three month period ended March 31, 2002, from $1,186,000 for the three month
period ended March 31, 2001 is attributable principally to lower production from
the Ninotsminda oil field.
CanArgo recorded net other loss of $144,000 for the three months ended March 31,
2002, as compared to other income of $250,000 during the three months ended
March 31, 2001 as a result of lower cash balances in 2002 and interest expense
on its credit facility in Georgia.
Equity loss from investments decreased to $8,000 for the three month period
ended March 31, 2002 from a loss of $37,000 for the three month period ended
March 31, 2001 as a result of equity income from production and sales of crude
oil by Boryslaw Oil Company.
The net profit of $87,000 or $0.00 per share for the three month period ended
March 31, 2002 compares to a net loss of $326,000, or $0.00 per share for the
three month period ended March 31, 2001. The weighted average number of common
shares outstanding was substantially higher during the three month period ended
March 31, 2002 than during the three month period ended March 31, 2001, due in
large part to private placements in July 2001 and February 2002.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria, which must be met, for intangible assets
acquired in a purchase method business combination to be recognized and reported
apart from goodwill. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values.
CanArgo has adopted the provisions of Statement 141 and Statement 142 effective
January 1, 2002. Furthermore, any goodwill and any intangible asset determined
to have an indefinite useful life that are acquired in a purchase business
combination will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature.
In August 2001, FASB issued Statement No. 143 Accounting for Asset Retirement
Obligations. Statement 143 requires companies to record the fair value of a
liability for an asset retirement obligation in the period in which the
liability is incurred concurrent with an increase in the long-lived assets
carrying value. The increase and subsequent adjustments in the related
long-lived assets carrying value is amortised over its useful life. Upon
settlement of the liability a gain or loss is recorded for the difference
between the settled liability and the recorded amount. This standard will be
effective for CanArgo on January 1, 2003. We are in the process of assessing the
impact that the adoption of this standard will have on our financial position
and results of operations.
In August 2001, FASB issued Statement No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary
Unusual and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business (as previously defined in that Opinion). Among other
provisions, the new rules change the criteria for classifying an asset as
held-for-sale. The standard also broadens the scope of businesses to be disposed
of that qualify for reporting as discontinued operations, and changes the timing
of recognizing losses on such operations. Statement 144 is
17
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 2 and elsewhere in this
Form 10-Q 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.
Operating entities in various foreign jurisdictions must be registered by
governmental agencies, and production licenses for development of oil and gas
fields in various foreign jurisdictions must be granted by governmental
agencies. These governmental agencies generally have broad discretion in
determining whether to take or approve various actions and matters. In addition,
the policies and practices of governmental agencies may be affected or altered
by political, economic and other events occurring either within their own
countries or in a broader international context.
CanArgo does not have a majority of the equity in the entity that is the
licensed developer of some projects, such as the Bugruvativske and Stynawske
field projects, that CanArgo may pursue in Eastern Europe, even though we may be
the designated operator of the oil or gas field. In these circumstances, the
concurrence of co-venturers may be required for various actions. Other parties
influencing the timing of events may have priorities that differ from ours, even
if they generally share our objectives. As a result of all of the foregoing,
among other matters, any forward-looking statements regarding the occurrence and
timing of future events may well anticipate results that will not be realized.
Demands by or expectations of governments, co-venturers, customers and others
may affect CanArgo's strategy regarding the various projects. Failure to meet
such demands or expectations could adversely affect CanArgo's participation in
such projects or our ability to obtain or maintain necessary licenses and other
approvals.
CanArgo's ability to finance all of its present oil and gas projects and other
ventures according to present plans is dependent upon obtaining additional
funding. An inability to obtain financing could require CanArgo to scale back or
abandon part of all of CanArgo's project development, capital expenditure,
production and other plans. The availability of equity or debt financing to
CanArgo or to the entities that are developing projects in which CanArgo has
interests is affected by many factors, including:
o world economic conditions;
o international relations;
o the stability and policies of various governments;
o fluctuations in the price of oil and gas, the outlook for the oil and
gas industry and competition for funds; and
o an evaluation of CanArgo and specific projects in which CanArgo has an
interest.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of us and our projects and comparisons with alternative investment
opportunities.
The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to CanArgo's properties are subject to change as additional
information becomes available.
Most of CanArgo's interests in oil and gas properties and ventures are located
in Eastern European countries. Operations in those countries are subject to
certain additional risks including the following:
18
o enforceability of contracts;
o currency convertibility and transferability;
o unexpected changes in tax rates;
o sudden or unexpected changes in demand for crude oil and or natural
gas; o availability of trained personnel; and
o availability of equipment and services and other factors that could
significantly change the economics of production.
Production estimates are subject to revision as prices and costs change.
Production, even if present, may not be recoverable in the amount and at the
rate anticipated and may not be recoverable in commercial quantities or on an
economically feasible basis. World and local prices for oil and gas can
fluctuate significantly, and a reduction in the revenue realizable from the sale
of production can affect the economic feasibility of an oil and gas project.
World and local political, economic and other conditions could affect CanArgo's
ability to proceed with or to effectively operate projects in various foreign
countries.
Demands by or expectations of governments, co-venturers, customers and others
may affect CanArgo's strategy regarding the various projects. Failure to meet
such demands or expectations could adversely affect CanArgo's participation in
such projects or its ability to obtain or maintain necessary licenses and other
approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CanArgo's principal exposure to market risk is due to changes in oil and gas
prices and currency fluctuations. As indicated elsewhere in this Report, as a
producer of oil and gas CanArgo is exposed to changes in oil and gas prices as
well as changes in supply and demand which could affect its revenues. CanArgo
does not engage in any commodity hedging activities. Due to the ready market for
its production in the Republic of Georgia, CanArgo does not believe that any
current exposures from this risk will materially affect CanArgo's financial
position at this time, but there can be no assurance that changes in such market
will not affect CanArgo adversely in the future.
Also as indicated elsewhere in this Report, because all of CanArgo's operations
are being conducted in Eastern Europe, CanArgo is potentially exposed to the
market risk of fluctuations in the relative values of the currencies in areas in
which it operates. At present CanArgo does not engage in any currency hedging
operations since, to the extent it receives payments for its production,
refining and marketing activities in local currencies, it is utilizing such
currencies to pay for its local operations. In addition, it currently has
contracts to sell its production from the Ninotsminda field in the Republic of
Georgia which provide for payment in dollars.
While CanArgo Standard Oil Products marketing revenue is denominated in Lari,
the local Georgian currency, and is used to pay Lari denominated operating
costs, its long term debt is denominated in dollars. As a result, changes in the
exchange rate could have a material adverse effect on its ability to pay off
non-Lari denominated indebtedness such as its existing credit facility. The
sensitivity to changes in exchange rates for CanArgo Standard Oil Products was
determined using current market pricing models. We estimate that a 10%
appreciation or devaluation in the foreign exchange rate of the Lari against the
dollar in 2002 would not have had a significant impact on operations.
CanArgo had no material interest in investments subject to market risk during
the period covered by this report.
19
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) 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$0.33 per share) to certain
institutions and qualified purchasers for gross proceeds of
approximately $1,762,000 in transactions intended to qualify
for an exemption from registration under the Securities Act
of 1933 afforded by Regulation S promulgated thereunder. 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 offering will be used for working capital and future
capital expenditures in Georgia following termination of the
AES Participation Agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*) Documents filed herewith
are identified by a cross (+).
1(1) Escrow Agreement with Signature Stock Transfer, Inc.
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on September 9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities
Limited, David Williamson Associates Limited, and Orkla
Finans (Fondsmegling) ASA (Incorporated herein by reference
from Form S-1 Registration Statement, File No. 333-72295
filed on September 9, 1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on September 9, 1999).
1(4) Selling Agent Agreement with National Securities Corporation
(Incorporated herein by reference from Post-Effective
Amendment No. 1 to Form S-1 Registration Statement, File No.
333-72295 filed on July 29, 1999).
1(5) Escrow Agreement with Continental Stock Transfer & Trust
Company (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
2(1) Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
August 10, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International
Limited dated November 3, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor (Incorporated
herein by reference from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All
the Issued Share Capital of Gastron International Limited
dated May 29, 1996 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from September 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services
Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated
dated May 16, 1995 (Incorporated herein by reference from
December 31, 1997 Form 10-K/A).
2(5) Amended and Restated Combination Agreement between Fountain
Oil Incorporated and CanArgo Energy Inc. dated as of
February 2, 1998 (Incorporated herein by reference from Form
S-3 Registration Statement, File No. 333-48287 filed on
September 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated
herein by reference as Annex G from Form S-3 Registration
Statement, File No. 333-48287 filed on September 9,
20
1998).
2(7) Offer Circular relating to a proposed purchase all of the
outstanding common shares of Lateral Vector Resources, Inc.
dated March 20, 2001 (Incorporated herein by reference from
Form 14D-1F dated March 21, 2001).
2(8) Notice of Extension and Variation amending Registrant's
offer to purchase all of the outstanding common shares of
Lateral Vector Resources, Inc. dated April 9, 2001
(Incorporated herein by reference from Amendment No. 1 to
Form 14D-1F dated April 11, 2001).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15, 1998
Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
4(1) Registration Rights Agreement between Registrant and JKX
Nederland B.V. dated September 28, 2000, relating to
purchase of 21.2% interest in Ninotsminda Oil Company
(Incorporated herein by reference from July 20, 2000 Form
8-K).
*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
21
(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) (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 Bugruvativsk Field (Incorporated herein by
reference from June 30, 2001 Form 10-Q).
21 List of Subsidiaries (Incorporated herein by reference from
June 30, 2001 Form 10-Q)
22
(b) Reports on Form 8-K:
The following current reports on form 8-K were filed during the
quarter ended March 31, 2002.
On January 24, 2002 CanArgo announced that it has established May 24,
2002 as the redemption date for all of the Exchangeable Shares of
CanArgo Oil & Gas Inc. ("CAOG"). The Exchangeable Shares were issued in
July 1998 in connection with the acquisition by CanArgo of all of the
shares of CAOG. As a result, CAOG became a subsidiary of CanArgo, and
each previously outstanding share of CAOG common stock was converted
into the right to receive 0.8 shares (the "Exchangeable Shares") of
CAOG. Each Exchangeable Share is exchangeable at the option of the
holder into one share of common stock of CanArgo.
On February 8th 2002, CanArgo announced that its wholly owned
subsidiary, Ninotsminda Oil Company (`NOC') has, by mutual agreement,
agreed to the termination of the Participation Agreement, which it
signed with AES Mktvari LLC in July 2000. The termination, which comes
about as a result of AES's intention to focus on its core activities,
is expected to become effective in the very near future once legal
documentation has been concluded.
On February 12, 2002, CanArgo announced that it closed an offering
of approximately 5.2 million shares of its common stock for
gross proceeds of approximately $1.7 million in a transaction intended
to qualify for an exemption from registration under the Securities Act
of 1933 afforded by Regulation S promulgated thereunder. Such proceeds
will be used for working capital purposes and future capital
expenditures in Georgia.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
Date: May 14, 2002 By: /s/Anthony J. Potter
-------------------------------
Anthony J. Potter
Chief Financial Officer