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 SEPTEMBER 30, 2001
[ ] 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
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(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 November 1,
2001 was 91,659,940. An additional 348,506 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 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index 22
(b) Reports on form 8-K 25
Signatures 26
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.
2
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
Unaudited
-------------
SEPTEMBER 30, December 31,
2001 2000
------------- -------------
ASSETS
Cash and cash equivalents $ 10,579,754 $ 28,627,013
Accounts receivable 2,862,129 786,570
Advances to operator 1,432,282 1,146,584
Inventory 1,386,545 695,909
Other current assets 571,713 334,402
------------- -------------
Total current assets $ 16,832,423 $ 31,590,478
Capital assets 66,626,167 50,477,344
Investments in and advances to oil and gas and other
ventures - net 801,793 696,374
------------- -------------
TOTAL ASSETS $ 84,260,383 $ 82,764,196
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,593,366 $ 2,691,118
Advances from joint venture partner -- 5,888,573
China projects payables 700,940 --
Bank loan $ 460,220 --
Accrued liabilities 172,393 323,936
------------- -------------
Total current liabilities $ 3,926,919 $ 8,903,627
Provision for future site restoration 61,290 40,990
Minority interest in subsidiaries 3,271,133 1,393,915
Stockholders' equity:
Preferred stock, par value $0.10 per share -- --
Common stock, par value $0.10 per share 9,200,845 7,595,069
Capital in excess of par value 144,057,517 139,071,031
Accumulated deficit (76,257,321) (74,240,436)
------------- -------------
Total stockholders' equity $ 77,001,041 $ 72,425,664
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,260,383 $ 82,764,196
============= =============
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 Three Months Ended Unaudited Nine Months Ended
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Operating Revenues:
Oil and gas sales $ 1,201,779 $ 1,163,277 $ 3,819,685 $ 4,394,448
Refining and marketing 2,880,643 -- 6,824,176 --
Other -- -- -- 364,900
------------ ------------ ------------ ------------
4,082,422 1,163,277 10,643,861 4,759,348
------------ ------------ ------------ ------------
Operating Expenses:
Field operating expenses 452,560 231,558 1,566,037 863,686
Purchases of crude oil and products 1,621,447 -- 4,250,931 --
Refinery operating expenses 649,908 -- 846,933 --
Direct project costs 365,625 178,200 936,830 561,729
General and administrative 1,035,037 780,718 3,082,623 1,546,737
Depreciation, depletion and amortization 656,520 761,000 2,758,832 2,640,080
------------ ------------ ------------ ------------
4,781,097 1,951,476 13,442,186 5,612,232
------------ ------------ ------------ ------------
OPERATING LOSS (698,675) (788,199) (2,798,325) (852,884)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest, net 143,617 268,450 646,830 369,913
Other (11,008) (37,980) 5,662 (37,706)
Equity income (loss) from investments 45,431 (155,000) 74,292 (237,154)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 178,040 75,470 726,784 95,053
------------ ------------ ------------ ------------
NET LOSS BEFORE MINORITY INTEREST (520,635) (712,729) (2,071,541) (757,831)
Minority interest in income of
consolidated 33,271 -- 54,656 (134,188)
------------ ------------ ------------ ------------
NET LOSS AND COMPREHENSIVE LOSS $ (487,364) $ (712,729) $ (2,016,885) $ (892,019)
============ ============ ============ ============
Weighted average number of
common shares outstanding 91,484,823 66,574,449 81,185,630 48,221,542
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE - BASIC $ (0.01) $ (0.01) $ (0.02) $ (0.02)
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE - DILUTED $ (0.01) $ (0.01) $ (0.02) $ (0.02)
------------ ------------ ------------ ------------
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
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
Operating activities:
Net loss $ (2,016,885) $ (892,019)
Depreciation, depletion and amortization 2,758,832 2,640,080
Issuance of common stock for services -- 112,700
Equity loss (income) from investments (74,292) 237,154
Allowance for doubtful accounts 100,000 --
Minority interest in income of consolidated subsidiaries (54,656) 134,188
Changes in assets and liabilities:
Accounts receivable (1,909,043) (186,090)
Advances to operator (285,698) (1,063,972)
Inventory (690,636) (33,181)
Other current assets (225,456) 69,238
Accounts payable (1,527,021) (259,426)
China projects payables 700,940 --
Accrued liabilities (423,938) (71,141)
Receipt (use of) advances from joint venture partner (5,888,573) 5,200,334
------------ ------------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES (9,536,426) 5,887,865
------------ ------------
Investing activities:
Capital expenditures (12,860,984) (6,266,871)
Acquisitions, net of cash acquired (4,044,973) --
Proceeds from disposition of investment 125,000 13,408
Investments in and advances to oil and gas and other
ventures (589,232) (580,467)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (17,370,189) (6,833,930)
------------ ------------
Financing Activities:
Proceeds from sales of common stock 7,235,337 32,928,728
Share issue costs (643,075) (2,560,512)
Advances from minority interest 1,806,874 400,000
Increase in bank loan 460,220 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,859,356 30,768,216
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,047,259) 29,822,151
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,627,013 3,534,983
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,579,754 $ 33,357,134
============ ============
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
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 (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, 2000 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.
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 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, 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) Acquisitions
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, the Ukrainian State Oil
Company, a Joint Investment Production Activity 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.
Under purchase accounting, LVR's results have been included in
CanArgo's consolidated financial statements since April 30, 2001 the
date of the initial acquisition of the LVR shares. Including
acquisition costs, total cash consideration paid was allocated to the
net assets of LVR as follows:
Cash $ 52,618
Other current assets 273,251
Accounts payable and accrued liabilities (1,662,880)
Capital assets (a) 4,956,984
Minority interest --
----------
Total cash consideration paid $ 3,619,973
==========
(a) Includes $4,256,044 of unevaluated properties.
In April 2001, CanArgo acquired the remaining 50% interest it did not
own in CanArgo Power Corporation ("CanArgo Power") for cash
consideration of $425,000. On completion of the acquisition, CanArgo
Power became a wholly owned subsidiary of CanArgo. Under purchase
accounting, CanArgo Power's results have been included in CanArgo's
consolidated financial statements since the date of acquisition. Total
cash consideration paid was allocated to the net assets of CanArgo
Power as follows:
Cash $ 223
Other current assets 69
Accounts payable and accrued liabilities (33,733)
Capital assets 458,441
Minority interest --
---------
Total cash consideration paid $ 425,000
=========
7
(5) Capital Assets, Net
Capital assets, net of accumulated depreciation and impairment, at
September 30, 2001 and December 31, 2000 include the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------------------------------------- ------------
ACCUMULATED
DEPRECIATION NET NET
AND CAPITAL CAPITAL
COST IMPAIRMENT ASSETS ASSETS
------------ ------------ ------------ ------------
OIL AND GAS PROPERTIES
Proved properties $ 38,633,110 $ (7,739,509) $ 30,893,601 $ 22,702,703
Unproved properties 17,328,613 -- 17,328,613 13,897,096
------------ ------------ ------------ ------------
55,961,723 (7,739,509) 48,222,214 36,599,799
PROPERTY AND EQUIPMENT
Oil and gas related
equipment 12,963,761 (3,395,576) 9,568,185 8,895,300
Office furniture,
fixtures and
equipment and other 1,235,872 (693,378) 542,494 462,502
------------ ------------ ------------ ------------
14,199,633 (4,088,954) 10,110,679 9,357,802
REFINING AND MARKETING 8,797,081 (503,807) 8,293,274 4,519,743
------------ ------------ ------------ ------------
$ 78,958,437 $(12,332,270) $ 66,626,167 $ 50,477,344
============ ============ ============ ============
Oil and gas related equipment includes new or refurbished drilling rigs
and related equipment, substantially all of which have been transported
to the Republic of Georgia for use by CanArgo in the development of the
Ninotsminda field.
8
(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 September 30, 2001 and December 31, 2000
is set out below:
SEPTEMBER 30, DECEMBER 31,
INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 2001 2000
------------ ------------
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil Company $ 6,636,254 $ 6,086,254
Republic of Georgia
Through 50.0% effective ownership CanArgo Power Corporation -- 676,583
Republic of Georgia - Ninotsminda
Through an effective 50% ownership of East Georgian Pipeline Co. 152,500 90,500
Uentech International Corporation
Through an effective 45% voting interest -- 304,943
Other Investments 75,001 75,001
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES $ 6,863,755 $ 7,233,281
=========== ===========
EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw (490,169) (626,461)
Republic of Georgia - CanArgo Power Corporation -- (186,074)
Republic of Georgia - East Georgian Pipeline Co. (112,000) (50,000)
Uentech International Corporation -- (214,579)
----------- -----------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES $ (602,169) $(1,077,114)
IMPAIRMENT - STYNAWSKE FIELD (5,459,793) (5,459,793)
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS
AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 801,793 $ 696,374
=========== ===========
In April 2001, CanArgo acquired from a wholly owned subsidiary of
Terrenex Acquisition Corporation the remaining 50% interest it did not
own in CanArgo Power for cash consideration of $425,000. In a related
but separate transaction, CanArgo sold in April 2001 all of its voting
and non-voting shares of Uentech International Corporation to a wholly
owned subsidiary of Terrenex Acquisition Corporation. Proceeds from the
sale of Uentech International Corporation were $125,000. On completion
of the acquisition, CanArgo Power became a wholly owned subsidiary of
CanArgo. The transactions were approved by an independent committee of
the Board of Directors.
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.
9
(7) Accrued Liabilities
Accrued liabilities at September 30, 2001 and December 31, 2000 include
the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Professional fees $100,000 $175,000
Office relocation -- 126,666
Other 72,393 22,270
-------- --------
$172,393 $323,936
======== ========
(8) Stockholders' Equity
COMMON STOCK
-----------------------------
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
---------- ------------ ------------ ------------ -------------
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 period (423,791) (42,379) (795,712) -- (838,091)
Issuance of common stock upon
exchange of CanArgo Oil & Gas Inc.
Exchangeable Shares 75,285 7,528 141,355 -- 148,883
Issuance of common stock pursuant
to July Private Placement 16,057,765 1,605,776 4,986,486 -- 6,592,262
Net income (loss) -- -- -- (2,016,885) (2,016,885)
---------- ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2001 91,659,940 $ 9,165,994 $143,403,160 $(76,257,321) $ 76,311,833
Shares issuable upon exchange of
CanArgo Oil & Gas Inc.
Exchangeable Shares without
receipt of further consideration 348,506 34,851 654,357 -- 689,208
---------- ------------ ------------ ------------ ------------
TOTAL, SEPTEMBER 30, 2001 92,008,446 $ 9,200,845 $144,057,517 $(76,257,321) $ 77,001,041
========== ============ ============ ============ ============
10
(9) Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share for the nine month
periods ended September 30, 2001 and 2000 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 nine month periods ended September
30, 2001 and 2000 are 81,185,630 and 48,221,542 respectively. Options
to purchase CanArgo's common stock were outstanding at September 30,
2001 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.
(10) Commitments and Contingencies
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional
obligations, absolute and contingent, with respect to acquiring and
developing oil and gas properties and ventures. At September 30, 2001,
CanArgo had the contingent obligation to issue an aggregate of 187,500
shares of its common stock, subject to the satisfaction of conditions
related to the achievement of specified performance standards by the
Stynawske field project. In December 2000, CanArgo announced that a
preliminary development plan had been reached with the joint venture
partner.
11
(11) Segment Information
For the nine month period ended September 30, 2000, CanArgo operated
through one business segment, oil and gas exploration and production.
In the fourth quarter of 2000, CanArgo expanded its oil and gas
exploration and production activities to include the refining and
marketing of crude oil and crude oil products.
Operating revenues for the nine month periods ended September 30, 2001
and 2000 by geographical area were as follows:
SEPTEMBER 30, September 30,
2001 2000
------------- -------------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe $ 4,726,230 $ 4,759,348
REFINING AND MARKETING
Eastern Europe 6,824,176 --
INTERSEGMENT ELIMINATIONS (906,545) --
----------- -----------
TOTAL $10,643,861 $ 4,759,348
=========== ===========
Operating income (loss) for the nine month periods ended September 30,
2001 and 2000 by geographical area was as follows:
SEPTEMBER 30, September 30,
2001 2000
------------- -------------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe $ 645,542 $ 975,227
REFINING AND MARKETING
Eastern Europe (64,283) --
CORPORATE AND OTHER EXPENSES (3,313,356) (1,828,111)
INTERSEGMENT ELIMINATIONS (66,228) --
----------- -----------
TOTAL OPERATING INCOME (LOSS) $(2,798,325) $ (852,884)
=========== ===========
12
Net income (loss) before minority interest for the nine month periods
ended September 30, 2001 and 2000 by geographic area was as follows:
SEPTEMBER 30, September 30,
2001 2000
------------- -------------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe $ 754,470 $ 738,073
REFINING AND MARKETING
Eastern Europe (116,809) --
CORPORATE AND OTHER EXPENSES (2,642,974) (1,495,904)
INTERSEGMENT ELIMINATIONS (66,228) --
----------- -----------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST $(2,071,541) $ (757,831)
=========== ===========
Identifiable assets as of September 30, 2001 and December 31, 2000 by
business segment and geographical area were as follows:
SEPTEMBER 30, December 31,
2001 2000
------------- -------------
CORPORATE
Eastern Europe $ 1,452,778 $ 695,909
Western Europe 15,379,645 30,894,569
----------- -----------
TOTAL 16,832,423 31,590,478
----------- -----------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe 57,949,764 45,957,601
China 700,490 --
----------- -----------
TOTAL 58,250,254 45,957,601
REFINING AND MARKETING
Eastern Europe 8,375,913 4,519,743
OTHER ENERGY PROJECTS
Eastern Europe 801,793 696,374
----------- -----------
IDENTIFIABLE ASSETS - TOTAL $84,260,383 $82,764,196
=========== ===========
13
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, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
In July 2001, CanArgo closed a private placement of 16,057,765 new shares at NOK
4.25 per share (approximately US$0.45 per share) to certain institutions and
qualified purchasers. Gross proceeds from the placement were some NOK 68 million
(approximately US$7.2 million). After completion of the private placement,
CanArgo had 92,008,446 common and Exchangeable shares issued and issuable. From
the net proceeds, CanArgo was required to pay subscribers to the private
placement a cash fee of 3.33% of the purchase price of their shares for each
full 30 day period after closing until a registration statement registering such
shares was declared effective by the Securities and Exchange Commission. The
cash fee paid was 3.33% of the purchase price.
CanArgo's management believes that cash and cash equivalents at September 30,
2001 should be sufficient to cover CanArgo's near term funding requirements with
respect to its activities in the Republic of Georgia. Existing cash and cash
equivalents at September 30, 2001, however, are not sufficient to adequately
finance the acquisition and subsequent development of the Bugruvativske field in
Eastern Ukraine. The July 2001 private placement of 16,057,765 new shares to
certain institutions and qualified purchasers provided CanArgo with funds
necessary to begin development of the Bugruvativske field, but both the
Bugruvativske field and the 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 wells N100 and M11, two deep
exploration wells in the Republic of Georgia. Preparations for a third
exploration well in the Norio block in the Republic of Georgia have also
commenced and quantification of the reserve and production potential of
discoveries in the Saramatian and Upper Eocene sequences continues.
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, 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.
14
To pursue all of its existing projects and new opportunities, CanArgo will
require additional capital. Potential sources of funds include additional
equity, project financing, debt financing and the participation of other oil and
gas entities in CanArgo's projects. Based on CanArgo's past history of raising
capital and continuing discussions including those with major stockholders,
investment bankers and other institutions, CanArgo believes that such required
funds may be available. However, there is no assurance that such funds will be
available, and if available, will be offered on attractive or acceptable terms.
Development of the oil and gas properties and ventures in which CanArgo has
interests involves multi-year efforts and substantial cash expenditures. Full
development of CanArgo's oil and gas properties and ventures will require the
availability of substantial additional financing from external sources. CanArgo
also may, where opportunities exist, seek to transfer portions of its interests
in oil and gas properties and ventures to entities in exchange for such
financing. CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has an
interest. There can be no assurance, however, that CanArgo or the entities that
are developing the oil and gas properties and ventures will be able to arrange
the financing necessary to develop the projects being undertaken or to support
the corporate and other activities of CanArgo. There can also be no assurance
that such financing as is available will be on terms that are attractive or
acceptable to or are deemed to be in the best interest of CanArgo, such entities
and their respective stockholders or participants.
Ultimate realization of the carrying value of CanArgo's oil and gas properties
and ventures will require production of oil and gas in sufficient quantities and
marketing such oil and gas at sufficient prices to provide positive cash flow to
CanArgo. Establishment of successful oil and gas operations is dependent upon,
among other factors, the following:
o mobilization of equipment and personnel to implement effectively
drilling, completion and production activities;
o achieving significant production at costs that provide acceptable
margins;
o reasonable levels of taxation, or economic arrangements in lieu of
taxation in host countries; and
o the ability to market the oil and gas produced at or near world
prices.
CanArgo has plans to mobilize resources and achieve levels of production and
profits sufficient to recover the carrying value of its oil and gas properties
and ventures. However, if one or more of the above factors, or other factors,
are different than anticipated, these plans may not be realized, and CanArgo may
not recover the carrying value of its oil and gas properties and ventures.
CanArgo will be entitled to distributions from the various properties and
ventures in which it participates in accordance with the arrangements governing
the respective properties and ventures.
CHANGES IN FINANCIAL POSITION
As of September 30, 2001, CanArgo had working capital of $12,906,000, compared
to working capital of $22,687,000 as of December 31, 2000. The $9,781,000
decrease in working capital from December 31, 2000 to September 30, 2001 is
principally due to a reduction in cash as a result of the acquisition of LVR,
capital and operating expenditures.
Cash and cash equivalents decreased from $28,627,000 at December 31, 2000 to
$10,580,000 at September 30, 2001. The decrease was primarily due to the cost of
a three-well exploration program currently underway at the Ninotsminda field,
workovers, investment in refining and marketing activities and the acquisition
of LVR.
Accounts receivable increased from $787,000 at December 31, 2000 to $2,862,000
at September 30, 2001. The increase is primarily a result of accounts receivable
generated from oil, natural gas and refined product sales in 2001, remaining
proceeds from the July private placement received subsequent to September 30,
2001 and $980,000 due from AES Gardabani relating to their contractual
participation in a three well exploration in the Republic of Georgia.
15
Advances to operator increased from $1,147,000 at December 31, 2000 to
$1,432,000 at September 30, 2001 as a result of advances to the operator of the
Ninotsminda and Norio fields for future expenditures on behalf and at the
direction of CanArgo.
Inventory increased from $696,000 at December 31, 2000 to $1,387,000 at
September 30, 2001 primarily as result of the sale of oil by Ninotsminda Oil
Company to Georgian American Oil Refinery. Crude oil and refined product
inventory increased to provide the refinery feedstock to commence operations and
re-establish its position in the domestic and regional market. In addition to
crude oil and refined product inventory at Georgian American Oil Refinery,
approximately 24,000 barrels of oil were held in storage by Ninotsminda Oil
Company at September 30, 2001 for sale either to Georgian American Oil Refinery
or the Georgian domestic, region or international market.
Capital assets, net increased from $50,477,000 at December 31, 2000 to
$66,626,000 at September 30, 2001, primarily as a result of investment of
$12,861,000 in capital assets including oil and gas properties and equipment,
principally related to the Ninotsminda field. Capital assets also increased as a
result of construction of new petrol stations and the acquisition of LVR and
CanArgo Power in April 2001. Included in oil and gas related equipment acquired
as part of the acquisition of LVR is $701,000 with respect to oil and gas
equipment located in China which CanArgo intends to either sell or apply against
outstanding liabilities of LVR.
Investments in and advances to oil and gas and other ventures, net increased
from $696,000 at December 31, 2000 to $802,000 at September 30, 2001. The
increase is primarily due to advances to Boryslaw Oil Company of $550,000
relating to a three well workover program currently underway on the Stynawske
field, partially offset by the sale in April 2001 of CanArgo's investment in
Uentech and the purchase of a 50% interest in CanArgo Power resulting in CanArgo
Power becoming a wholly owned subsidiary of CanArgo.
CanArgo has contingent obligations and may incur additional obligations,
absolute or contingent, with respect to the acquisition and development of oil
and gas properties and ventures in which it has interests that require or may
require CanArgo to expend funds and to issue shares of its Common Stock. At
September 30, 2001, CanArgo had a contingent obligation to issue 187,500 shares
of common stock to a third party upon satisfaction of conditions relating to the
achievement of specified Stynawske field project performance standards. As
CanArgo develops current projects and undertakes other projects, it could incur
significant additional obligations.
Accounts payable decreased to $2,593,000 at September 30, 2001 from $2,691,000
at December 31, 2000. China projects payables increased to $701,000 at
September 30, 2001 from nil at December 31, 2000 due to liabilities related to a
previous LVR project in China. To fund construction of new petrol stations in
Georgia, a short term bank loan by CanArgo Standard Oil Products in Tbilisi,
Georgia was drawn at an effective rate of 18% per annum. Accrued liabilities
decreased to $172,000 at September 30, 2001 from $324,000 at December 31, 2000
as identified in note 7 to the unaudited consolidated financial statements.
Advances from joint venture partner decreased to nil at September 30, 2001
compared to $5,889,000 at December 31, 2000 as capital expenditures were
incurred as part of a three well exploration program in the Republic of Georgia.
Amounts due from the joint venture partner, AES, of $980,000 are included in
accounts receivable.
Minority interest in subsidiaries increased to $3,271,000 at September 30, 2001
compared to $1,394,000 at December 31, 2000 following the expansion of CanArgo
Standard Oil Products in Tbilisi, Georgia and related investment by CanArgo's
partners in the venture. CanArgo consolidates its 50% interest in CanArgo
Standard Oil Products as it has the ability to control the strategic operating
and financial activities of the joint venture.
RESULTS OF OPERATIONS
Nine Month Period Ended September 30, 2001 Compared to Nine Month Period Ended
September 30, 2000
In November 2000, CanArgo acquired a 51% interest in Georgian American Oil
Refinery and Georgian American Oil Refinery became a subsidiary of CanArgo.
Under purchase accounting, Georgian American Oil Refinery's results have been
included in CanArgo's consolidated financial statements since the date of
acquisition. In December 2000, the first of several petrol stations planned by
CanArgo Standard Oil Products also opened in Tbilisi, Georgia.
16
CanArgo recorded operating revenue of $10,644,000 during the nine month period
ended September 30, 2001 compared with $4,759,000 for the nine month period
ended September 30, 2000. The increase is primarily due to refining and
marketing revenue from Georgian American Oil Refinery and CanArgo Standard Oil
Products.
Ninotsminda Oil Company generated $3,820,000 of oil and gas revenue in the nine
month period ended September 30, 2001. Its net share of the 323,000 barrels
(1,183 barrels per day) of gross oil production for sale from the Ninotsminda
field in the period amounted to 193,689 barrels. An additional 14,800 barrels of
oil were removed from storage and sold in the period. For the nine month period
ended September 30, 2000, Ninotsminda Oil Company's net share of the 382,500
barrels (1,400 barrels per day) of gross production was 191,600 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 nine months of 2001 averaged $19.79 per
barrel as compared with an average of $18.46 per barrel in the first nine months
of 2000. Its net share of the 951,688 mcf of gas delivered was 618,600 mcf at an
average net sale price of $1.14 per mcf of gas. For the nine month period ended
September 30, 2000, Ninotsminda Oil Company's net share of the 1,379,000 mcf of
gas delivered was 896,000 mcf at an average net sales price of $1.16 per mcf of
gas.
Refining and marketing revenue for the nine month period ended September 30,
2001 relates to operating activities of Georgian American Oil Refinery and
CanArgo Standard Oil Products. In the first nine months of 2001, sales from the
refinery continued to be nominal following the imposition of restrictions and
subsequent excise tax on feedstock and refined product. Although in April 2001
new legislation addressing indigenous refining activities was passed by the
Republic of Georgia that removed or reduced excise taxes on feedstock and
refined product, the refinery has since experienced unexpected technical
difficulties which has effectively curtailed the production of gasoline. As a
result, 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. Due to
these taxes, production of naptha is currently commercially uneconomic and hence
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, which 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.
CanArgo had no revenue from equipment rentals in the first nine months of 2001
compared to other revenue from equipment rentals of $365,000 for the nine month
period ended, September 30, 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 are expected
to continue through January 2002.
The operating loss for the nine month period ended September 30, 2001 amounted
to $2,798,000 compared with an operating loss of $853,000 for the corresponding
period in 2000. The increase in operating loss is attributable primarily to
lower oil and gas revenue as a result of lower production and significant
increases in operating and corporate activity.
Lease operating expenses increased to $1,566,000 for the nine month period ended
September 30, 2001 as compared to $864,000 for the nine month period ended
September 30, 2000. The increase is primarily a result of increased activity at
the Ninotsminda field.
Purchases of crude oil and products and refinery operating expenses of
$4,251,000 and $847,000 respectively for the nine month period ended September
30, 2001 relate to operating activities of Georgian American Oil Refinery and
CanArgo Standard Oil Products.
Direct project costs increased to $937,000 for the nine month period ended
September 30, 2001, from $562,000 for the nine month period ended September 30,
2000, reflecting increased activity within Georgia and reestablishment of
activity with respect to the license Boryslaw Oil Company holds in the Stynawske
field, Ukraine. Direct project costs are expected to further increase following
the acquisition of Lateral Vector Resources Inc. LVR negotiated and concluded a
Joint Investment Production Activity (JIPA) agreement in 1998 to develop the
Bugruvativske field
17
in eastern Ukraine together with Ukrnafta. CanArgo believes that under the terms
of this JIPA, LVR has certain rights to incremental production from the field.
Ukrnafta and LVR are required under the terms of the JIPA to make a total
initial contribution of $2 million prior to December 31, 2000. LVR's portion of
the initial contribution was $960,000, which it failed to make. Furthermore,
until such time as an investment agreement and valuation of the assets to be
contributed by Ukrnafta is completed and accepted by LVR, LVR is not entitled to
any of this production and any sharing of future production is to be determined
after consideration of base oil. CanArgo is presently evaluating LVR's interest
and obligations under the JIPA and information regarding the field, and is in
discussions with Ukrnafta to resolve these and other open issues under the JIPA.
There is no assurance as to whether such discussions will be successfully
completed or, if completed, on what terms.
General and administrative costs increased to $3,083,000 for the nine month
period ended September 30, 2001, from $1,547,000 for the nine month period ended
September 30, 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 and general and administrative costs of $637,000
related to refining and marketing activities.
The increase in depreciation, depletion and amortization expense to $2,759,000
from $2,640,000 for the nine month period ended September 30, 2000 is
attributable principally to higher capital costs related to Ninotsminda field
oil production and depreciation of drilling equipment.
CanArgo recorded net other income of $727,000 for the nine months ended
September 30, 2001, as compared to net other income of $95,000 during the nine
months ended September 30, 2000. The principal reason for the increase is
interest income on cash balances and equity income from investments.
The equity income from investments increased to $74,000 for the nine month
period ended September 30, 2001, from a loss of $237,000 for the nine month
period ended September 30, 2000 as a result of equity income from production and
sales of crude oil by Boryslaw Oil Company and the sale of Uentech International
Corporation. Equity income from Boryslaw Oil Company was partially offset by
expenses related to operation of the gas pipeline from Ninotsminda to the
Gardabani power station and Rustavi industrial complex.
The net loss of $2,017,000 or $0.02 per share for the nine month period ended
September 30, 2001 compares to a net loss of $892,000, or $0.02 per share for
the nine month period ended September 30, 2000. The weighted average number of
common shares outstanding was substantially higher during the nine month period
ended September 30, 2001 than during the nine month period ended September 30,
2000, due in large part to private placements in April, June and August 2000 and
July 2001.
Three Month Period Ended September 30, 2001 Compared to Three Month Period Ended
September 30, 2000
In November 2000, CanArgo acquired a 51% interest in Georgian American Oil
Refinery and Georgian American Oil Refinery became a subsidiary of CanArgo.
Under purchase accounting, Georgian American Oil Refinery's results have been
included in CanArgo's consolidated financial statements since the date of
acquisition. In December 2000, the first of several petrol stations planned by
CanArgo Standard Oil Products also opened in Tbilisi, Georgia.
CanArgo recorded operating revenue of $4,082,000 during the three month period
ended September 30, 2001 compared with $1,163,000 for the three month period
ended September 30, 2000. The increase is due to refining and marketing revenue
from Georgian American Oil Refinery and CanArgo Standard Oil Products. In the
three month period ended September 30, 2001 no oil was sold from Ninotsminda Oil
Company to its affiliate, Georgian American Oil Refinery.
Ninotsminda Oil Company generated $1,202,000 of revenue in the three month
period ended September 30, 2001. Its net share of the 90,800 barrels (987
barrels per day) of gross oil production for sale from the Ninotsminda field in
the period amounted to 53,500 barrels. 2,200 barrels of oil were added to
storage in the period. For the three month period ended September 30, 2000,
Ninotsminda Oil Company's net share of the 126,053 barrels (1,370 barrels per
day) of gross production was 65,000 barrels.
18
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 third quarter of 2001 averaged $19.69 per barrel
as compared with an average of $19.88 per barrel in the third quarter of 2000.
Its net share of the 259,006 mcf of gas delivered was 168,354 mcf at an average
net sale price of $1.13 per mcf of gas. For the three month period ended
September 30, 2000, Ninotsminda Oil Company's net share of the 588,303 mcf of
gas delivered was 382,397 mcf at an average net sales price of $1.18 per mcf of
gas.
Refining and marketing revenues for the three month period ended September 30,
2001 relate to operating activities of Georgian American Oil Refinery and
CanArgo Standard Oil Products. In the third quarter of 2001, sales from the
refinery continued to be nominal following the imposition of restrictions and
subsequent excise tax on feedstock and refined product. Although in April 2001
new legislation addressing indigenous refining activities was passed by the
Republic of Georgia that removed or reduced excise taxes on feedstock and
refined product the refinery has since experienced unexpected technical
difficulties which has effectively curtailed the production of gasoline. As a
result, 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, production of naptha is currently commercially uneconomic and hence
refining activity has been suspended.
The operating loss for the three month period ended September 30, 2001 amounted
to $699,000 compared with an operating loss of $788,000 for the corresponding
period in 2000. The decrease in operating loss is attributable primarily to
refining and marketing sales partially offset by increases in operating and
corporate activity.
Lease operating expenses increased to $453,000 for the three month period ended
September 30, 2001 as compared to $231,000 for the three month period ended
September 30, 2000. The increase is primarily a result of increased activity at
the Ninotsminda field.
Purchases of crude oil and products and refinery operating expenses of
$1,621,000 and $650,000 respectively for the three month period ended September
30, 2001 relate to operating activities of Georgian American Oil Refinery and
CanArgo Standard Oil Products.
Direct project costs increased to $366,000 for the three month period ended
September 30, 2001, from $178,000 for the three month period ended September 30,
2000, reflecting increased activity within Georgia and reestablishment of
activity with respect to the licence Boryslaw Oil Company holds in the Stynawske
field, Ukraine. Direct project costs are expected to further increase following
the acquisition of Lateral Vector Resources Inc. See the discussion regarding
the acquisition of LVR and projected activities on the Bugruvativske field under
the nine-month comparison of operating results set forth above.
General and administrative costs increased to $1,035,000 for the three month
period ended September 30, 2001, from $781,000 for the three month period ended
September 30, 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 and general and administrative costs of $262,000
related to refining and marketing activities.
The decrease in depreciation, depletion and amortization expense to $657,000
from $761,000 for the three month period ended September 30, 2000 is
attributable principally to lower production from the Ninotsminda oil field.
CanArgo recorded net interest income of $144,000 for the three months ended
September 30, 2001, as compared to other income of $268,000 during the three
months ended September 30, 2000 as a result of lower cash balances in 2001.
Equity income from investments increased to $45,000 for the three month period
ended September 30, 2001, from a loss of $155,000 for the three month period
ended September 30, 2000 as a result of equity income from production and sales
of crude oil by Boryslaw Oil Company and the sale of Uentech International
Corporation. Equity income
19
from Boryslaw Oil Company was partially offset by expenses related to operation
of the gas pipeline from Ninotsminda to the Gardabani power station.
The net loss of $487,000 or $0.01 per share for the three month period ended
September 30, 2001 compares to a net loss of $713,000, or $0.01 per share for
the three month period ended September 30, 2000. The weighted average number of
common shares outstanding was substantially higher during the three month period
ended September 30, 2001 than during the three month period ended September 30,
2000, due in large part to private placements in April, June and August 2000 and
July 2001.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria, which must be met, for intangible assets acquired in a purchase method
business combination to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
CanArgo is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Based on present
circumstances SFAS No. 141 and No. 142 would not have any material effect on
CanArgo's financial statements.
20
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 that CanArgo may pursue in Eastern Europe
such as the Bugruvativske and Stynawske field projects, even though CanArgo may
be the designated operator of the oil or gas field. In such circumstances, the
concurrence of co-venturers may be required for various actions. Other parties
influencing the timing of events may have priorities that differ from those of
CanArgo, even if they generally share CanArgo's objectives. As a result of all
of the foregoing, among other matters, the forward looking statements regarding
the occurrence and timing of future events may well anticipate results that will
not be realized.
The availability of equity or debt financing to CanArgo or to the entities that
are developing projects in which CanArgo has interests is affected by many
factors including:
o world economic conditions;
o international relations;
o the stability and policies of various governments;
o fluctuations in the price of oil and gas and the outlook for the oil
and gas industry;
o competition for funds; and
o an evaluation of CanArgo and specific projects in which CanArgo has an
interest.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of CanArgo and its projects and comparisons with alternative investment
opportunities. CanArgo's ability to finance all of its present oil and gas
projects and other ventures according to present plans is dependent upon
obtaining additional funding. An inability to obtain financing could require
CanArgo to scale back its project development, capital expenditure, production
and other plans.
The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to CanArgo's properties are subject to change as additional
information becomes available.
Most of CanArgo's interests in oil and gas properties and ventures are located
in Eastern European countries. Operations in those countries are subject to
certain additional risks including the following:
o enforceability of contracts;
o currency convertibility and transferability;
o unexpected changes in tax rates;
o sudden or unexpected changes in demand for crude oil and or natural
gas;
o availability of trained personnel; and
o availability of equipment and services and other factors that could
significantly change the economics of production.
21
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 including recent
political events in the Republic of Georgia could affect CanArgo's ability to
proceed with or to effectively operate projects in various foreign countries. In
addition, we are unable to predict the effects, if any, of the September 11,
2001 terrorist attacks in the United States and their related aftermath on the
markets in which we operate.
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 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. Accordingly, at present CanArgo does not believe that
any exposure to the risk of fluctuations in currency values will materially
affect CanArgo's financial position. There can be no assurance, however, that
this continues into the future.
CanArgo had no material interest in investments subject to market risk during
the period covered by this report.
22
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
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,
23
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) Workorder between CanArgo Energy Inc. and Nils N. Trulsvik as
Consultant (Incorporated herein by reference from September
30, 1998 Form 10-Q).
*10(5) Employment Contract between CanArgo Energy Inc. and Anthony J.
Potter (Incorporated herein by reference from September 30,
1998 Form 10-Q).
10(6) Put Option Agreement between CanArgo Energy Corporation, JKX
Oil & Gas PLC. and IFC dated December 17, 1998 (Incorporated
herein by reference from Form S-1 Registration Statement, File
No. 333-72295 filed on February 12, 1999).
10(7) Guarantee Agreement between CanArgo Energy Corporation and IFC
dated December 17, 1998 (Incorporated herein by reference from
Form S-1 Registration Statement, File No. 333-72295 filed on
February 12, 1999).
10(8) 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(9) 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(10) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and JKX Navtobi
24
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(11) Agreement and Promissory Note dated July 19, 1999, with
Terrenex Acquisition Corporation (Incorporated herein by
reference from Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 333-72295 filed on July 29,
1999).
10(12) Agreement between CanArgo Energy Corporation, Ninotsminda Oil
Company and IFC dated October 19, 1999 (Incorporated herein by
reference from September 30, 1999 Form 10-Q).
10(13) 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(14) Form of Subscription Agreement (Incorporated herein by
reference from December 28, 1999 Form 8-K).
10(15) 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(16) Employment Agreement between CanArgo Energy Corporation and
Paddy Chesterman dated February 24, 2000 (Incorporated herein
by reference from December 31, 1999 Form 10-K).
10(17) Agreement between Ninotsminda Oil Company and AES Gardabani
dated March 10, 2000 (Incorporated herein by reference from
December 31, 1999 Form 10-K).
10(18) 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(19) 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(20) 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(21) 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(22) 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(23) Agreement between CanArgo Energy Corporation and Roger
Brittain dated August 18, 2000 (Incorporated herein by
reference from December 31, 2000 Form 10-K).
*10(24) 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(25) Employment Agreements between CanArgo Energy Corporation and
Anthony Potter dated October 1, 2000 (Incorporated herein by
reference from December 31, 2000 Form 10-K).
25
10(26) 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(27) Agreement between CanArgo Energy Corporation and Georgian
British Oil Services Company dated November 10, 2000relating
to the purchase of 9.35% interest in Georgian American Oil
Refinery (Incorporated herein by reference from December 31,
2000 Form 10-K).
10(28) Share Exchange Agreement between CanArgo Energy Corporation
and Argonaut Oil and Gas Limited dated November 10, 2000,
related to the purchase of 28.7% interest in Georgian American
Oil Refinery (Incorporated herein by reference from December
31, 2000 Form 10-K).
10(29) 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)
(b) Reports on Form 8-K:
On July 5, 2001 CanArgo completed the acquisition of the remaining outstanding
common shares of Lateral Vector Resources Inc. ("LVR") and LVR became a wholly
owned subsidiary of CanArgo. LVR is an oil and gas company with activities
principally in east Ukraine. According to publicly available information, LVR
negotiated and concluded a Joint Investment Production Activity (JIPA) agreement
in 1998 to develop the Bugruvativske Field (the "Field") in eastern Ukraine
together with Ukrnafta. Under the terms of this JIPA, LVR have certain rights to
incremental production from the Field, which CanArgo understands is currently
producing oil, and is one of the larger oil fields in that area.
On July 4, 2001, CanArgo announced that it closed a private placement of
approximately 16 million shares of its common stock for net proceeds of
approximately $6.8 million. Such proceeds will be used to replenish cash
resources used to acquire LVR, to initiate development of its Ukrainian
properties and for working capital purposes. Sundal Collier & Co ASA and Den
norske Bank ASA, DnB Markets acted as placement agents for this transaction and
received a success fee of 5.75% of the gross proceeds of NOK 68,245,500
(approximately US$ 7,280,000). The shares to be issued in connection with this
placement were issued under Regulation S of the Securities Act of the United
States and have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States or to U.S. persons
(as defined in such Regulation) absent registration or an applicable exemption
from registration.
26
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: November 14, 2001 By: /s/Anthony J. Potter
-----------------------------------
Anthony J. Potter
Chief Financial Officer
27