-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MQpyEGtpA+Ehs70J4mLZ6EO+ojZRLqBIw3wThTrh/skFKovi320rICqnUFisrK93 Q50MbBZFZkZ8L63XKqjNiw== 0001156973-03-000412.txt : 20030324 0001156973-03-000412.hdr.sgml : 20030324 20030324172347 ACCESSION NUMBER: 0001156973-03-000412 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANARGO ENERGY CORP CENTRAL INDEX KEY: 0000310316 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 910881481 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09147 FILM NUMBER: 03614532 BUSINESS ADDRESS: STREET 1: 1580 GUINNESS HOUSE 727 AVENUE SW STREET 2: CALGARY CITY: ALBERTA CANADA STATE: A0 ZIP: T2P 0T5 BUSINESS PHONE: 4037771185 MAIL ADDRESS: STREET 1: 1580 GUINNESS 727 AVENUE SW STREET 2: CALGARY CITY: ALBERTA CANADA ZIP: T2P 0T5 FORMER COMPANY: FORMER CONFORMED NAME: ORS CORP /OK/ DATE OF NAME CHANGE: 19910515 FORMER COMPANY: FORMER CONFORMED NAME: ELECTROMAGNETIC OIL RECOVERY INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FOUNTAIN OIL INC DATE OF NAME CHANGE: 19950119 10-K 1 u46006e10vk.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 ----------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________
Commission File Number 0-9147 CANARGO ENERGY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 91-0881481 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
C/O CANARGO SERVICES (UK) LIMITED 150 BUCKINGHAM PALACE ROAD, LONDON, ENGLAND SW1W 9TR (Address of Principal Executive Offices) Registrant's telephone number, including area code: (44) 207 808 4700 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.10 PER SHARE --------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated herein by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, $0.10 par value, 97,356,206 shares outstanding as of February 28, 2003. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X ------- -------- The aggregate market value of the common equity held by non-affiliates of the registrant, as of February 28, 2003, was $4,186,317. DOCUMENTS INCORPORATED BY REFERENCE None - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION The United States Private Securities Litigation Reform Act of 1995 provides a "safe harbour" for certain forward looking statements. Such forward looking statements are based upon the current expectations of CanArgo Energy Corporation ("CanArgo") and speak only as of the date made. These forward looking statements involve risks, uncertainties and other factors. The factors discussed in Item 1. "Business - Risks Associated with CanArgo's Oil and Gas Activities", Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K are among those factors that in some cases have affected CanArgo's historic results and could cause actual results in the future to differ significantly from the results anticipated in forward looking statements made in this Annual Report on Form 10-K, future filings by CanArgo with the Securities and Exchange Commission, in CanArgo's press releases and in oral statements made by authorized officers of CanArgo. When used in this Annual Report on Form 10-K, the words "estimate," "project," "anticipate," "expect," "intend," "believe," "hope," "may" and similar expressions, as well as "will," "shall" and other indications of future tense, are intended to identify forward looking statements. ITEM 1. BUSINESS General Development of Business CanArgo Energy Corporation was formed in 1994 to continue, through re-incorporation in Delaware, the business of a predecessor Oklahoma corporation which was formed in 1980. CanArgo changed its name from Fountain Oil Incorporated to CanArgo Energy Corporation in connection with a business combination with CanArgo Oil & Gas Inc. completed on July 15, 1998. CanArgo conducts its principal operations through subsidiaries, and unless otherwise indicated by the context, the term CanArgo refers to CanArgo Energy Corporation and its consolidated subsidiaries, including Ninotsminda Oil Company. CanArgo initially operated as an oil and gas exploration and production company. It altered its principal focus to the application of electrically enhanced heavy oil recovery technology in 1988, and that focus continued through 1994. In early 1995, CanArgo shifted its principal activities to acquiring and developing interests in Eastern European oil and gas properties. From 1995 to 1997 CanArgo, then known as Fountain Oil Incorporated, established significant ownership interests in four Eastern European oil and gas development projects. As a result of disappointing results and other negative indications, CanArgo during the fourth quarter of 1997 wrote-off its entire investment in three of those four projects and began to actively seek a business combination or similar transaction with another oil and gas company. As a result of this effort, CanArgo then known as Fountain Oil Incorporated entered into a business combination with CanArgo Oil & Gas Inc. Upon completion of the business combination in July 1998, CanArgo Oil & Gas Inc. became a subsidiary of CanArgo, the management of CanArgo Oil & Gas Inc. assumed the senior management positions in CanArgo, and CanArgo changed its name from Fountain Oil Incorporated to CanArgo Energy Corporation. At the time of the business combination, the principal operations and assets of CanArgo Oil & Gas Inc. were associated with the Ninotsminda oil field in the Republic of Georgia. Since completion of the business combination, a large portion of CanArgo's resources have been focused on the development of the producing areas of the Ninotsminda field and its Georgian exploration programme and in 1999, CanArgo wrote-down the fourth and last significant project that was being developed by Fountain Oil Incorporated prior to the business combination. To increase efficiency within the company's current structure and to better position the company for future growth, CanArgo announced in November 2001 plans to recommend to its shareholders a move of the company's domicile from the United States to Europe. These plans continue to progress and will be subject to shareholder, regulatory, tax and all other related approvals and rulings as applicable. Further information will be provided to shareholders once a formal plan is completed. CanArgo's principal activities are oil and gas exploration, development and production of oil and gas. These activities are carried out under three production sharing arrangements (PSC's), these being the 1 Ninotsminda, Manavi and West Rustavi Production Sharing Contract, the Nazvrevi and Block XIII Production Sharing Contract and the Norio (Block XI(c)) and North Kumisi Production Sharing Agreement. In late 2000 CanArgo also began to engage in oil and gas marketing and refining activities in Georgia. In November 2000, CanArgo acquired a 51% interest in Georgian American Oil Refinery which held a refurbished American refinery with a design capacity of approximately 4,000 barrels per day. Shortly thereafter, in December 2000, CanArgo expanded its interest in Georgia to include a 50% controlling interest in CanArgo Standard Oil Products with the objective of developing within Georgia a chain of retail petrol stations. In 2001 the refinery ceased operations, as it was no longer economic to refine product under the existing Georgian fiscal regime. Management continues to discuss possible fiscal changes with the Georgian government that may make this a viable business going forward. In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding with legal ownership being transferred upon receipt of final payment due in August 2003. Discontinued Operation activity and segment and geographical information for refining including revenue from external customers, operating profit (loss) and total assets is incorporated herein by reference from notes 17 and 18 to the consolidated financial statements. EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES In Georgia CanArgo's exploration, development and production activities are carried out under three production sharing arrangements (PSC's), these being the Ninotsminda, Manavi and West Rustavi Production Sharing Contract, the Nazvrevi and Block XIII Production Sharing Contract both in which CanArgo owns a 100% interest through its subsidiaries Ninotsminda Oil Company Limited and CanArgo (Nazvrevi) Limited respectively, and the Norio (Block XI(c)) and North Kumisi Production Sharing Agreement which CanArgo entered into through its subsidiary CanArgo Norio Limited in which CanArgo holds a 64.2% interest. In November and December 2000 respectively, CanArgo expanded this activity with the acquisition of a controlling interest in a refinery and investment in a chain of petrol stations all located in and around Tbilisi, the capital of Georgia. In 2001 the refinery ceased operations, as it was no longer economic to refine product under the existing Georgian fiscal regime. Management continues to discuss possible fiscal changes with the Georgian government that may make this a viable business going forward. In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products, its investment in the chain of petrol stations, to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding to Westrade Alliance LLC, an unaffiliated company, for $4 million in an arms-length transaction, with legal ownership being transferred upon receipt of final payment due in August 2003. CanArgo continues to direct most of its efforts and resources to the development of the exploration programme and the Ninotsminda field. [MAP SHOWING EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES] NINOTSMINDA OIL FIELD Since completion of the business combination with CanArgo Oil & Gas Inc., CanArgo's resources have, through its wholly owned subsidiary Ninotsminda Oil Company, been focused on the development of the Ninotsminda oil field and some associated activities. The Ninotsminda oil field covers some 10 square kilometres and is located 40 kilometres north east of the Georgian capital, Tbilisi. It is adjacent to and east of the Samgori oil field, which was Georgia's most productive oil field. The Ninotsminda field was discovered later than the Samgori field and has experienced substantially less development activity. The state oil company, Georgian Oil, and others including Ninotsminda Oil Company have drilled eighteen wells in the Ninotsminda field, of which fourteen are currently classified as producing. CanArgo believes the Ninotsminda field license to have significant exploration potential, and has invested substantial funds in an exploration programme. OTHER PROJECTS CanArgo also has additional exploratory and developmental oil and gas properties and prospects in Georgia and Ukraine and owns interests in other Eastern European oil and gas projects. In Ukraine, CanArgo's activities are focused on the further development of the Stynawske oilfield, through the Boryslaw Oil Company joint venture, and the Bugruvativske oilfield, through a Joint Investment Production Activity (JIPA) agreement. CanArgo's principal product is crude oil, and the sale of crude oil and crude oil products is its principal source of revenue. [MAP SHOWNING HYDROCARBON PRODUCING REGIONS] 3 BUSINESS STRUCTURE CanArgo and its active subsidiaries are as follows: [FLOWCHART SHOWING CANARGO AND ITS ACTIVE SUBSIDIARIES] CanArgo's activities at the Ninotsminda oil field are conducted through Ninotsminda Oil Company, which is currently a 100% subsidiary. In November 1999, CanArgo had increased its percentage ownership of Ninotsminda Oil Company from 68.5% to 78.8% when JKX Oil & Gas plc chose not to subscribe for its pro rata portion of shares being offered to increase Ninotsminda Oil Company capital. In May 2000, CanArgo Energy Corporation reached an agreement with JKX Oil & Gas plc to acquire its 21.2% interest in Ninotsminda Oil Company for a direct equity interest in CanArgo. In July 2000, this transaction was completed and Ninotsminda Oil Company became a wholly owned subsidiary of CanArgo. Ninotsminda Oil Company obtained its rights to the Ninotsminda field, including all existing wells, and two other fields under a 1996 production sharing contract with Georgian Oil and the State of Georgia. Ninotsminda Oil Company's rights under the agreement expire in December 2019, subject to possible loss of undeveloped areas prior to that date and possible extension with regard to developed areas. Under the production sharing contract, Ninotsminda Oil Company is required to relinquish at least half of the area then covered by the production sharing contract, but not any portions being actively developed, at five year intervals commencing December 1999. In 1998, these terms were amended with the initial relinquishment being due in 2006 and a reduction in the area to be relinquished at each interval from 50% to 25%. 4 Under the production sharing contract, Georgian Oil had a priority right to receive oil representing a projection of what the Ninotsminda field would have yielded through 2001 based upon the wells and equipment in use at the time the contract was entered into. The priority right amounts to approximately: o 740 barrels of oil per day during 1998; o 542 barrels of oil per day during 1999; o 280 barrels of oil per day during 2000; o 93 barrels of oil per day during 2001; and o none thereafter. These priority rights represented 49%, 48%, 21% and 8% of gross production respectively. Of the remaining production, up to 50% will be allocated to Ninotsminda Oil Company for the recovery of the cumulative allowable capital, operating and other project costs associated with the Ninotsminda field, which Ninotsminda Oil Company initially pays. The balance of production is allocated on a 70/30 basis between Georgian Oil and Ninotsminda Oil Company respectively. While Ninotsminda Oil Company continues to have unrecovered costs, it will receive 65% of production in excess of the oil allocated to Georgian Oil on a priority. After recovery of its cumulative capital, operating and other allowable project costs, Ninotsminda Oil Company will receive 30% of production after Georgian Oil's priority allocation. Thus, while Ninotsminda Oil Company is responsible for all of the costs associated with development of the Ninotsminda field, it is only entitled to receive 30% of production after cost recovery and Georgian Oil's priority allocation. The allocation of a share of production to Georgian Oil, however, relieves Ninotsminda Oil Company of all obligations it would otherwise have to pay the Republic of Georgia for taxes and similar levies related to activities covered by the production sharing contract. Georgian Oil and Ninotsminda Oil Company take their respective shares of production in kind, and they market their oil independently. Pursuant to the terms of CanArgo's PSC's in Georgia, including the Ninotsminda, Manavi and West Rustavi production sharing contract, a Georgian not-for-profit company must be appointed as field operator. Currently there are three such field operating companies, relating to CanArgo's three PSC's: Georgian British Oil Company Ninotsminda, Georgian British Oil Company Nazvrevi and Georgian British Oil Company Norio, each of which is 50% owned by a company within the CanArgo group with the remainder owned by Georgian Oil. The Ninotsminda operating entity, Georgian British Oil Company Ninotsminda, is 50% owned by Ninotsminda Oil Company. The second operating entity, Georgian British Oil Company Nazvrevi, is 50% owned CanArgo (Nazvrevi) Ltd. The third operating entity, Georgian British Oil Company Norio, is 50% owned by CanArgo Norio Ltd. The field operator provides the operating personnel and is responsible for day-to-day operations. CanArgo or a company within the CanArgo group pays the operating company's expenses associated with the development of the fields, and the operating company performs on a non-profit basis. Georgian British Oil Company Ninotsminda currently has 86 full time employees, and substantially all of its activities relate to the development of the Ninotsminda field. The use of such Georgian companies as field operator gives CanArgo less control of operations than it might have if it were conducting operations directly, although CanArgo has board control of these field operating companies. Ninotsminda field operations are determined by a governing body composed of members designated by Georgian Oil and Ninotsminda Oil Company, with the deciding vote on field development issues allocated to Ninotsminda Oil Company. If Georgian Oil believes that action proposed by Ninotsminda Oil Company with which Georgian Oil disagrees would result in permanent damage to a field or reservoir or in a material reduction in production over the life of a field or reservoir, it may refer the disagreement to a western independent expert for binding resolution. Since CanArgo acquired its interest in Ninotsminda Oil Company, there has been no such disagreement. Similar procedures apply to CanArgo's other two Georgian PSC's. NINOTSMINDA FIELD DEVELOPMENT When Ninotsminda Oil Company assumed developmental responsibility for the Ninotsminda field in 1996, production was minimal. CanArgo believed that the development and production obtainable from the Ninotsminda field had in the past been hampered by, among other factors, a lack of funding, civil strife and utilization of old technology and methods. 5 Ninotsminda Oil Company's initial approach to Ninotsminda field development was to produce oil from one zone or underground formation, the Middle Eocene. This development included repairing and adding perforations to existing wells, obtaining additional seismic data and a limited drilling programme. The first exploration well in search of a new reservoir was completed in October 1997 and initially produced at the rate of 400 to 600 barrels of oil per day but is currently shut-in. A second exploration well was completed in October 1998 and has been producing at the rate of 203 barrels of oil per day. A third oil exploration well commenced in October 1998 but drilling was suspended in December 1998 at a depth of 700 meters as a result of undependable electrical supply. Drilling of this well recommenced in July 2000 as a potential gas exploration well but in October 2000, CanArgo announced that as a result of difficult drilling conditions, the well could not be completed to the deeper Cretaceous zone as originally planned but rather would be tested in the newly discovered Sarmatian zone. While some work has been undertaken to identify the reserve and production potential of this and a previously identified Upper Eocene zone from which oil has been produced from one well, further work is required. Such information may, however, also open up new potential in the upper zones of other areas currently under license in Georgia. See "Other Georgian Licenses". While most of the exploration and development of the Ninotsminda field prior to 2000 focused on oil, a layer of gas above the oil or gas cap was known to exist above the principal producing zone. In December 1999, Ninotsminda Oil Company began commercial production of this gas cap following regulatory approval from the Georgian government. This production was sold pursuant to a one year gas contract with AES - Telasi, a subsidiary of AES Corporation, for delivery to the Gardabani thermal power plant. Under terms of the gas contract, AES-Telasi had agreed to purchase all the gas produced by Ninotsminda Oil Company in priority to all other suppliers with no maximum or minimum volume. AES continued to purchase gas from Ninotsminda Oil Company on similar contractual terms during 2000 and into 2001. Gas deliveries to AES for 2002 declined significantly due to lower oil and gas production and the temporary shutdown by AES of its thermal power generating station following an accident at the facility. Although AES has now re-opened, CanArgo had not sold any further gas to AES since their demand for gas was too great for CanArgo to meet from production. A gas exploration programme to explore and determine the future development potential of gas prospects in the Sub Middle Eocene on CanArgo's Ninotsminda field in Georgia was initiated under a binding Participation Agreement with AES Gardabani dated July 19, 2000. Under the agreement, AES Gardabani was to earn a 50% interest in identified prospects at the Sub Middle Eocene stratigraphic level (rock older than the Middle Eocene sequence) by funding two thirds of the cost of a three-well exploration programme. Under terms of the Participation Agreement, the exploration was to be implemented by CanArgo's existing operations unit in Georgia. Ninotsminda Oil Company commenced the first and second wells of this three-well exploration programme in 2001. In January 2002, the first of these wells, N100, reached target depth and underwent testing to determine if hydrocarbons were present in the well and if present, the possible extent of the hydrocarbons. In January 2002, the initial planned testing programme on the N100 exploration oil discovery was completed and the production rates were deemed to be non-commercial at the initial stage. Drilling of the second well in the exploration programme, M11, began in June 2001 (see "Other fields and prospects under Ninotsminda Production Sharing Contract" below). Prior to completion of the exploration programme as defined in the Participation Agreement ("the Agreement"), AES indicated in January 2002 that it wished to withdraw from the Agreement in order to focus on its core business. In 2002 the agreement with AES was terminated without AES earning any rights to any of the Ninotsminda field reservoirs. Under a separate Letter Agreement, if gas from the Sub Middle Eocene is discovered and produced, AES will be entitled to recover at the rate of 15% of future gas sales from the Sub Middle Eocene, net of operating costs, their funding under the Participation Agreement. AES also has an option to enter into a five year take or pay gas sales agreement for a quantity up to 200 million cubic meters per year at an initial contract price of $46.00 per one thousand cubic meters. Gas purchased by AES would likely be supplied to the Gardabani thermal power plant. 6 As a result of AES Gardabani withdrawing from the Participation Agreement with respect to the Cretaceous gas exploration programme and unexpected mechanical difficulties drilling exploration wells M11 at the Ninotsminda field and MK72 at the Norio field, and delays in testing well N100, capital expenditures exceeded initial estimates and production volumes available for sale are less than anticipated. These events resulted in lower than expected cash resources from which CanArgo could continue its development activities in Georgia. In order to preserve available cash resources while still maintaining essential field operations and development activities in Georgia, a significant cost reduction plan was implemented with both direct project and general and administrative costs being reduced. These reductions together with the receipt of the final $3 million payment from the agreed sale of CanArgo's interest in its retail operation CanArgo Standard Oil Products, the planned selective sale of certain non-core assets including CanArgo's generator, and a portion or all of CanArgo's drilling equipment should provide CanArgo the working capital necessary to cover CanArgo's immediate and near term funding requirements with respect to its activities in the Republic of Georgia. Should such funding not be forthcoming and CanArgo be unable to sell some or all of its non-core assets, further cost reductions will be required in order for CanArgo to remain a going concern. In January 2003, in an attempt to increase production at the Ninotsminda field and further improve working capital, drilling of a new horizontal well, NH4, commenced targeting an existing producing reservoir. Provided funds are available, immediate and near term development plans include the completion of testing of well N100 and the continued drilling of wells M11 and Norio MK72, two deep exploration wells. CanArgo has temporarily suspended further drilling of well M11 below its current casing point at 4,182 metres in order to fully review available technical data, and to estimate the cost to complete the well. Norio MK72, has been cased at a depth of 2,932 metres in the Lower Sarmatian. Farm-in partners are currently being sought to provide additional capital for completing these wells. CanArgo has not yet fully evaluated the reserves and economics of production from the upper oil zones, the gas cap or from potential oil and gas zones below the Middle Eocene. To fully evaluate these zones, further seismic, technical interpretation and drilling will be required. Drilling sites tentatively selected by Ninotsminda Oil Company must be approved by Georgian regulatory authorities before drilling may commence. With respect to gas production, no gas supply contracts currently exist for production directly from the gas cap. Gas currently produced from the Middle Eocene and upper zones is subject to market conditions and environmental constraints within Georgia and the ability of Ninotsminda Oil Company to arrange short term gas supply agreements as required. In January 2003, in an attempt to increase production at the Ninotsminda field, drilling of a new horizontal well N4H, commenced, targeting an existing producing reservoir. OTHER FIELDS AND PROSPECTS UNDER NINOTSMINDA PRODUCTION SHARING CONTRACT In addition to the Ninotsminda field, Ninotsminda Oil Company has under the 1996 production sharing contract rights to one other field, West Rustavi, and a number of currently identified prospects including Manavi. As well as the producing Middle Eocene horizon at Ninotsminda, the West Rustavi field has additional prospective horizons at the Cretaceous/Paleocene levels. The West Rustavi field is located some 40 km southeast of Ninotsminda. Ten wells were drilled by Georgian Oil in the West Rustavi field area, two of which produced oil. One of the ten wells was drilled to the deeper Cretaceous/Paleocene horizon. This well was tested and produced at rates of 1 million cubic feet of gas and 3,500 barrels of water per day. Further geo-technical work is required on this horizon to determine its prospectivity and commerciality. Drilling of the M11 well on the Manavi Cretaceous gas prospect, began in June 2001. CanArgo has temporarily suspended further drilling of well M11 below its current casing point at 4,182 metres in order to 7 fully review available technical data, and secure funding to complete the well. Farm-in partners are currently being sought to provide additional capital for completing this well. Seismic and well data are currently being interpreted to identify further prospects in the Ninotsminda area at several different stratigraphic levels. OIL AND GAS PRODUCTION PRODUCTION HISTORY The Ninotsminda field was discovered and initial development began in 1979. CanArgo is currently producing from the Ninotsminda field approximately 900 barrels of oil equivalent (BOE) per day, comprising approximately 755 barrels of oil per day and 145 BOE of gas per day (1 BOE =6,000 cubic feet = 170 (m3) gas) from thirteen wells. Gross production from the Ninotsminda field for the past three years was as follows:
YEAR ENDED DECEMBER 31, OIL - GROSS BARRELS - ------------ ------------------- 2002 292,289 2001 413,724 2000 478,999
Productive Wells and Acreage The following table summarizes as of December 31, 2002 Ninotsminda Oil Company's number of productive oil and gas wells and Ninotsminda Oil Company's total developed acreage for the Ninotsminda field. Such information has been presented on a gross basis, representing the interest of Ninotsminda Oil Company, and on a net basis, representing the interest of CanArgo based on its 100% interest in Ninotsminda Oil Company.
GROSS NET ------------------------------- -------------------------------- NUMBER OF WELLS ACREAGE NUMBER OF WELLS ACREAGE ----------------- ----------- ----------------- ------------- Ninotsminda field 14 2,500 14 2,500
On December 31, 2002, there were no productive wells or developed acreage on any of CanArgo's other Georgian properties, except for one gross well on the West Rustavi field which was shut-in at that date. Reserves The following table summarizes net hydrocarbon reserves for the Ninotsminda field. This information is derived from a report dated as of January 1, 2003 prepared by Ashton Jenkins Mann, independent petroleum consultants. This report is available for inspection at CanArgo's principal executive offices during regular business hours. The reserve information in the table below has also been filed with the Oslo Stock Exchange.
OIL RESERVES - PSC ENTITLEMENT OIL RESERVES GROSS VOLUMES(1) ----------------- ----------------- (MILLION BARRELS) (MILLION BARRELS) ----------------- ----------------- Proved Developed 4.0 2.8 Proved Undeveloped 0.1 0.1 ------------------ ------------------ TOTAL PROVEN 4.1 2.9 ================== ==================
8
GAS RESERVES - PSC ENTITLEMENT GAS RESERVES GROSS VOLUMES(1) ------------------ ------------------ (BILLION CUBIC (BILLION CUBIC FEET) FEET) ------------------ ------------------ Proved Developed 8.0 2.4 Proved Undeveloped -- -- ------------------ ------------------ TOTAL PROVEN 8.0 2.4 ================== ==================
(1) PSC Entitlement Volumes attributed to CanArgo are calculated using the "economic interest method" applied to the terms of the production sharing contract. PSC Entitlement Volumes are those produced volumes which, through the production sharing contract, accrue to the benefit of Ninotsminda Oil Company after deduction of Georgian Oil's share which includes all Georgian taxes, levies and duties. As a result of CanArgo's interest in Ninotsminda Oil Company, these volumes accrue to the benefit of CanArgo for the recovery of capital, repayment of operating costs and share of profit. Proved reserves are those reserves estimated as recoverable under current technology and existing economic conditions from that portion of a reservoir which can be reasonably evaluated as economically productive on the basis of analysis of drilling, geological, geophysical and engineering data, including the reserves to be obtained by enhanced recovery processes demonstrated to be economically and technically successful in the subject reservoir. Proved reserves include proved developed reserves (producing and non-producing reserves) and proved undeveloped reserves. Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive wells that are reasonably certain of production when drilled. Uncertainties exist in the interpretation and extrapolation of existing data for the purposes of projecting the ultimate production of oil from underground reservoirs and the corresponding future net cash flows associated with that production. The estimating process requires educated decisions relating to the evaluation of all available geological, engineering and economic data for each reservoir. The amount and timing of cost recovery is a function of oil and gas prices. The oil and gas price used in the report by Ashton Jenkins Mann as of January 1, 2003 were $17.80 per barrel and $1.29 per mcf respectively. Having considered the geological and engineering data in the interpretation process, the Company believes with reasonable certainty that the stated proven reserves represent the estimated quantities of oil and gas to be recoverable in future years under existing operating and economic conditions. No independent reserves have been assessed for the West Rustavi field, and independent reserve estimates for other properties are described in the appropriate part of the text in this document. PROCESSING, SALES AND CUSTOMERS Georgian Oil built a considerable amount of infrastructure in and adjacent to the Ninotsminda field prior to entering into the production sharing contract with Ninotsminda Oil Company. That infrastructure, including initial processing equipment, is now used by Ninotsminda Oil Company. The mixed oil, gas and water fluid produced from the Ninotsminda field wells flows into a two-phase separator located at the Ninotsminda field, where gas associated with the oil is separated. The oil and water mixture is then transported eleven kilometres either in a pipeline or by truck to Georgian Oil's central processing facility at Sartichala for further treatment. The gas is transported to Sartichala in a separate pipeline where some is used for fuel and the rest is piped 34 kilometres to Rustavi where it is delivered to the Rustavi industrial complex for sale to a number of customers. 9 At Sartichala, the water is separated from the oil. Ninotsminda Oil Company then sells oil in this state to buyers at Sartichala for local consumption or transfers it by pipeline 20 kilometres to a railhead at Gatchiani or by road tanker to Vaziani rail loading terminal primarily for export sales. At the railheads, the oil is loaded into railcars for transport to the Black Sea port of Batumi, Georgia, where oil can be loaded onto tankers for international shipment. Buyers transport the oil at their own risk and cost from the delivery point at Sartichala. Ninotsminda Oil Company sells its oil directly to local and international buyers. In 2002, Ninotsminda Oil Company sold its oil production to eight customers. Of these customers, four customers represented sales greater than 10% of oil revenue:
CUSTOMER PERCENT OF OIL REVENUE - ---------------------------------------- --------------------------- Caspian Trading 28.4% Sveti 26.4% Crownhill 20.1% Trafigura 19.9%
In 2001, Ninotsminda Oil Company sold its oil production to three customers.
CUSTOMER PERCENT OF OIL REVENUE - ---------------------------------------- --------------------------- Caspian Trading 63.8% Georgian American Oil refinery(1) 23.5% MS 12.7%
In 2000, Ninotsminda Oil Company sold its production to three customers.
CUSTOMER PERCENT OF OIL REVENUE - ---------------------------------------- --------------------------- Georgian American Oil Refinery(1) 54.4% MS 31.4% Caspian Trading 14.2%
- ------------ (1) 51% owned by CanArgo effective November 2000 Sales to both the domestic and international markets are based on the average of a number of quotations for dated Brent Mediterranean with an appropriate discount for transportation and other charges. Sales in 2002 were at an average discount of $5.09 to Brent. Prices for oil and natural gas are subject to wide fluctuations in response to a number of factors including: o global changes in the supply and demand for oil and natural gas; o actions of the Organization of Petroleum Exporting Countries o weather conditions; o domestic and foreign governmental regulations; o the price and availability of alternative fuels; o political conditions in the Middle East and elsewhere; and o overall economic conditions. OTHER GEORGIAN LICENSES Nazvrevi/Block XIII In February 1998, CanArgo entered into a second production sharing contract with Georgian Oil and the State of Georgia. This contract covers the Nazvrevi and Block XIII areas of East Georgia, a 2,008 square 10 kilometre exploration area adjacent to the Ninotsminda and West Rustavi fields and containing existing infrastructure. The agreement extends for twenty-five years. CanArgo is required to relinquish at five year intervals commencing in 2003 at least 25 percent of the area then covered by the production sharing contract, but not any portions being actively developed. Under the production sharing contract, CanArgo pays all operating and capital costs. CanArgo first recovers its cumulative operating costs from production. After deducting production attributable to operating costs, 50% of the remaining production, considered on an annual basis, is applied to reimburse CanArgo for its cumulative capital costs. While cumulative capital costs remain unrecovered, the other 50% of remaining production is allocated on a 50/50 basis between Georgian Oil and CanArgo. After all cumulative capital costs have been recovered by CanArgo, remaining production after deduction of operating costs is allocated on a 70/30 basis between Georgian Oil and CanArgo respectively. Thus, while CanArgo is responsible for all of the costs associated with development of the Nazvrevi field, it is only entitled to receive 30% of production after cost recovery. The allocation of a share of production to Georgian Oil, however, relieves CanArgo of all obligations it would otherwise have to pay the Republic of Georgia for taxes and similar levies related to activities covered by the production sharing contract. Both Georgian Oil and CanArgo will take their respective shares of production under this production sharing contract in kind. The first phase of the preliminary work programme under the Nazvrevi/Block XIII production sharing agreement involved primarily a seismic survey of a portion of the exploration area and the processing and interpretation of the data collected. The seismic survey has been completed at a cost of approximately $1.5 million, and met the minimum obligatory work commitment under the contract. The Department for Protection of Mineral Resources and Mining has confirmed that CanArgo has met the requirements of the work programme defined in the production sharing agreements. As the Nazvrevi and Block XIII license is an exploration area and no discoveries have been made on this license, it is not possible to estimate the expenditures needed to discover and if discovered, produce commercial quantities of oil and gas. Norio (Block XI(c)) and North Kumisi Blocks In December 2000, CanArgo entered into a third PSC with the State of Georgia represented by Georgian Oil and the State Agency for Regulation of Oil and Gas Resources in Georgia. This agreement covers the Norio and North Kumisi blocks of East Georgia, a 1,542 square kilometre exploration area adjacent to the Ninotsminda, West Rustavi and Samgori fields. There are two existing oil fields on the Norio block, Norio and Satskhenisi which are relatively shallow fields and which have produced oil from the Miocene and Sarmatian sequences. The commercial terms of the production sharing agreement are similar to those of the Nazvrevi/Block XIII production sharing contract with the exception that after all cumulative capital costs have been recovered by CanArgo, remaining production after deduction of operating costs is allocated on a 60/40 basis between Georgian Oil and CanArgo respectively. Thus, while CanArgo is responsible for all of the costs associated with development of the Norio field, it is only entitled to receive 40% of production after cost recovery. CanArgo currently owns a 64.2% controlling interest in CanArgo Norio Limited with the remainder held by Georgian and other private investors. The first phase of the preliminary work programme under the Norio and North Kumisi production sharing agreement involved primarily a seismic survey of a portion of the exploration area and the processing and interpretation of the data collected. The seismic survey has been completed, and the results of those studies have and will continue to be interpreted. In addition to the existing upper sequences, the potential of the blocks to produce from the Middle Eocene, Cretaceous and Upper Eocene are being assessed. The cost of the seismic programme was approximately $1.5 million. The second phase of the preliminary work programme under the Norio and North Kumisi production sharing agreement commenced in January 2002 with the first exploration well at an estimated cost of up to $4.4 million of which CanArgo's estimated share of costs is $3.2 million. The State Agency for Oil and Gas Regulations in Georgia has confirmed that CanArgo has satisfied all drilling and work obligations under the terms of the Norio and Kumisi production sharing agreement. The well is currently suspended while CanArgo actively seeks partners for funding to deepen the well to the target zone. 11 In November 2002, CanArgo reached agreement with the other shareholders in CanArgo's subsidiary, CanArgo Norio Limited (Norio), on increasing CanArgo's interest in Norio. Under the agreement CanArgo's interest increased from 50% to 64.2% in Norio and its existing Norio and North Kumisi production sharing agreement. The Norio production sharing agreement provides Georgian Oil with a one time option to take up to a 15% participating interest in petroleum operations. The option period begins on submission of the first development plan and must be exercised within 180 days thereafter. To exercise the option, Georgian Oil must pay their pro rata share of back costs, bear a pro rata share of all future costs and expenses incurred from and after the date of submittal of the first development plan in proportion to the participating interest which it acquired through exercise of the option and execute a joint operating agreement. The two shallow oilfields on the block (Norio and Satskhenisi) are currently producing small amounts of oil. These oilfields are currently being operated by Georgian Oil under permission from CanArgo, the licence holder. Georgian Oil takes the production from these fields as full payment for any costs. CanArgo is currently reviewing the potential for economic rehabilitation of these small fields, and if CanArgo wishes to proceed it could take over field operations and production forthwith. As the area in which CanArgo is currently drilling is an exploration area with no discoveries, it is not possible to estimate the expenditures needed to discover and if discovered, produce commercial quantities of oil and gas. Norio Block XI(G) (Tbilisi) and Block XI(H) (Rustavi) In November 2002, CanArgo's subsidiary, CanArgo Norio Limited (Norio), won the tender for the oil and gas exploration and production rights to Block XI(G) (Tbilisi) and Block XI(H) (Rustavi) in Eastern Georgia. By successfully winning the tender, under the tender conditions issued by the Georgian State Agency for Regulation of Oil and Gas Resources, CanArgo should be awarded a licence for these blocks following negotiation of a Production Sharing Agreement with the Georgian State authorities. REFINING AND OTHER ACTIVITIES CanArgo also engages in oil and gas, refining and other activities in Georgia. Segment and geographical information including revenue from continuing operations from external customers, operating profit (loss) from continuing operations and total assets is incorporated herein by reference from note 18 to the consolidated financial statements. Georgian American Oil Refinery In September 1998, CanArgo purchased for $1,000,000 a 12.9% equity interest in Georgian American Oil Refinery, a company which owns a small refinery located at Sartichala, Georgia. On November 12, 2000, CanArgo acquired a further 38.1% of the common stock of Georgian American Oil Refinery for Common Stock consideration valued at $1,666,575. On completion of the acquisition, CanArgo holds 51% of the common stock of Georgian American Oil Refinery and Georgian American Oil Refinery became a subsidiary of CanArgo. Under purchase accounting, Georgian American Oil Refinery's results have been included in CanArgo's consolidated financial statements since the date of acquisition. The refinery, which utilizes primarily refurbished American equipment, began operations in July 1998 and has a potential design capacity of approximately 4,000 barrels per day. Operating as a straight-run distillation unit it can potentially produce naphtha, diesel, fuel oil and kerosene. Further product expansion is possible with the addition of additives and or a catalytic reformer. For much of 2001 and to date, the refinery has not been operating. Since its acquisition, sales from the refinery have been negatively impacted by the imposition of restrictions and subsequent excise tax on feedstock and refined products. Although in April 2001, new legislation addressing indigenous refining activities was passed by the Republic of Georgia that removed or reduced excise taxes on feedstock and refined product, the refinery has since experienced unexpected product quality concerns which has effectively curtailed the enhancement of the basic product stream into gasoline. As a result, the refinery can 12 only produce straight distillation products such as naptha, diesel and mazut and not high octane gasoline as required by petrol stations. Due to the presence of excise tax on naphtha, there is limited economic demand for the product in Georgia, either as a feedstock for a separate refining company or for the blending with higher octane gasoline to produce "normal" grade gasoline for the local market. Currently only naptha, diesel and mazut can be produced and of these products, an excise tax on naptha and diesel sales remain in place. As a result of these taxes and the local market for naptha in the Republic of Georgia, CanArgo deemed production of naptha as commercially uneconomic and suspended refining activity in the fourth quarter of 2001. In January 2002, GAOR entered into a short-term lease of the refinery to a third party for nominal revenue. During the lease period, all operating costs of the refinery were borne by the lessee. This lease expired in May 2002 and has not been renewed. CanArgo continues to monitor demand for products allowed to be produced by the refinery and is seeking changes to the legislation in support of indigenous refining activities, although no assurance can be given that such changes can be made. As a result of the uncertainty as to the ultimate recoverability of the carrying value of the refinery, CanArgo recorded in 2001 a write-down of the refinery's property, plant and equipment of approximately $3.5 million. The refinery is now in a care and maintenance condition. In 2001, Ninotsminda Oil Company sold approximately 49,055 barrels of oil to the refinery and in 2000 sold 136,400 barrels of oil to the refinery. Drilling Rigs and Associated Equipment CanArgo owns several items of drilling equipment, and other related machinery which are primarily for use in its Georgian operations. These include three drilling rigs, pumping equipment and ancillary machinery. In addition CanArgo owns a mobile 3 megawatt duel fuel power plant. The rigs and related equipment are used in CanArgo's Georgian operations, and from time to time have also been leased out to other operators on a service basis. In January 2002, CanArgo established a well services subsidiary, which will bid in local tenders for drilling contracts. In 2002, a plan to sell the 3 megawatt duel fuel power plant has been agreed and this asset is classified in "Assets held for sale" for all periods presented. OTHER EASTERN EUROPEAN PROJECTS Stynawske Field, Western Region, Ukraine In November 1996, CanArgo entered into a joint venture arrangement with the Ukrainian state oil company, Ukrnafta, for the development of the 24 square kilometre Stynawske field, located in Western Ukraine near the town of Stryv. CanArgo has a 45% interest in Boryslaw Oil Company, the joint venture entity, with Ukrnafta holding the remaining 55% interest. Ukrnafta retains rights to base production, representing a projection of what the Stynawske field would produce in the future, based on the physical plant and technical processes in use at the time of license grant, on a declining basis through 2001. The joint venture will be entitled to all incremental production above that declining base. Under the terms of the license Boryslaw Oil Company holds in the Stynawske field, field operations were to be transferred to Boryslaw Oil Company effective January 1, 1999. While negotiations continued on the transfer of the field, by the fall of 1999 it was apparent from the length and difficulty of the negotiations that significant uncertainty existed as to CanArgo's ability to raise funds for the project or enter into a satisfactory farm-out agreement on a timely basis. As a result, CanArgo recorded in the year ended December 31, 1999 an impairment charge of $5,459,793 against its investment in and advances to Boryslaw Oil Company. CanArgo's investment in the Stynawske field was the fourth and last significant project that was being developed by Fountain Oil Incorporated prior to the business combination between Fountain Oil Incorporated and CanArgo Oil & Gas Inc. In December 2000, CanArgo reached agreement with Ukrnafta on certain commercial arrangements and for the transfer of field operations to Boryslaw Oil Company. To commence a three well workover programme (the Pilot Development Scheme), a $500,000 credit facility was established for Boryslaw Oil Company in 2001 and $550,000 advanced as a deposit against the facility. In 2001 an agreement was reached to 13 undertake a limited investment and development program by June 2002 in respect of Boryslaw Oil Company to increase production and to meet certain work commitments under the Stynawske field licence. These obligations have not been fully met, however, Boryslaw Oil Company is seeking modifications to the licence agreement to allow a proper assessment of the workovers and development plans completed to date. A repayment schedule of CanArgo's advances to Boryslaw Oil Company has also been agreed of which $360,000 was repaid by December 31, 2002 and has been fully paid in 2003. Boryslaw Oil Company has so far not been given notice by the Ukrainian licensing body of early termination of the license. CanArgo is actively seeking to farm-out part of its interest in Boryslaw Oil Company in return for finance to carry out the work programme. If Boryslaw Oil Company does not proceed with the Stynawske field development programme or if an extension to the current licence cannot be obtained, it may be in breach of obligations it has with regard to the field license. This could place Boryslaw Oil Company's rights to the Stynawske field at risk. The following table summarizes net hydrocarbon reserves for the Pilot Development Scheme for the Stynawske field. This information is derived from a report as of January 1, 2003 prepared by Ashton Jenkins Mann, independent petroleum consultants. This report is available for inspection at CanArgo's principal executive offices during regular business hours. The reserve information in the table below has also been filed with the Oslo Stock Exchange.
CANARGO SHARE OIL RESERVES OIL RESERVES - ----------------- GROSS (45%) ----------------- ----------------- (MILLION BARRELS) (MILLION BARRELS) ----------------- ----------------- Proved Developed 0.7 0.3 Proved Undeveloped -- -- ----------------- ----------------- TOTAL PROVEN 0.7 0.3 ================= =================
GAS RESERVES - CANARGO SHARE GROSS (45%) GAS RESERVES ----------------- ---------------- (BILLION CUBIC (BILLION CUBIC FEET) FEET) ----------------- ----------------- Proved Developed 4.9 2.2 Proved Undeveloped -- -- ----------------- ---------------- TOTAL PROVEN 4.9 2.2 ================= ================
For information as to the definition of proved, proved producing and proved undeveloped reserves and considerations with respect to estimations of proved reserves, see the description of Ninotsminda reserves. The oil and gas price used in the report by Ashton Jenkins Mann as of January 1, 2003 was $15.64 per barrel and $0.64 per mcf respectively. No assurance can be given that the projections included in the report by Ashton Jenkins Mann will be realized. The evaluation by Ashton Jenkins Mann represents the efforts of Ashton Jenkins Mann to predict the performance of the oil recovery project using their expertise and the available data at the effective date of their report. CanArgo has contingent obligations and may incur additional obligations, absolute and contingent, with respect to acquiring and developing oil and gas properties and ventures. At December 31, 2002, CanArgo had the contingent obligation to issue an aggregate of 187,500 shares of its common stock, subject to the satisfaction of conditions related to the achievement of specified performance standards by the Stynawske field project. 14 Bugruvativske Field, Ukraine In April 2001, CanArgo acquired approximately 82% (77% on a fully diluted basis) of the outstanding common shares of Lateral Vector Resources Inc. ("LVR") pursuant to an unsolicited offer to purchase all of its outstanding common shares. According to publicly available information at the time CanArgo made its offer in March 2001, LVR negotiated and concluded with Ukrnafta a Joint Investment Production Activity (JIPA) agreement in 1998 to develop the Bugruvativske Field in Eastern Ukraine. In July 2001, CanArgo completed the acquisition of the remaining outstanding common shares and LVR became a wholly owned subsidiary of CanArgo. In September 2002 CanArgo agreed terms with Ukrnafta, the Ukrainian State Oil Company, on revisions to the existing Joint Investment Production Activity agreement (JIPA) for the development of the Bugruvativske field in Ukraine and reached an agreement with Gals-K Limited, an unaffiliated local Ukrainian oil and gas company on the terms of a farm-in to the JIPA. The terms of the farm-in, arrived at in arms-length negotiations, are that the local Ukrainian oil and gas company will invest approximately $3 million in the Bugruvativske field over the course of 12 months in order to drill two new wells and will bear the financial risk under the JIPA during this period. CanArgo can match up to the amount invested by the local Ukrainian oil and gas company, prior to December 31, 2003. Additionally, agreement has been reached with Ukrnafta, on revisions to the commercial terms of the JIPA. The revised JIPA provides that (assuming CanArgo matches the local Ukrainian oil and gas company's initial expenditure) the financing risk shall be shared between CanArgo and a subsidiary of the local Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all net profits distributed to the parties to the JIPA and the remainder shall be shared between CanArgo and IPEC. Assuming that CanArgo matches the local Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to approximately 34.5% of net profits generated under the JIPA (or a proportionally smaller amount if the amount invested is less than that invested by IPEC). In the event that CanArgo decides not to invest in the project by December 31, 2003, it will receive an ongoing project fee of between 3-4 % of the net profits generated under the JIPA in recognition of its earlier involvement in the project. To date, CanArgo has not made any investment in the Bugruvativske field and subsequently, hydrocarbon reserves are classified as unproved until CanArgo's investment is made. Both the Bugruvativske field and the Stynawske field in Western Ukraine are in the early stage of evaluation and development and are themselves relatively new to CanArgo and additional financing will be required to fully develop and exploit these fields. Potential Caspian Exploration Project In May 1998, CanArgo led a consortium which submitted a bid in a tender for two large exploration blocks in the Caspian Sea, located off the shore of the autonomous Russian republic of Dagestan. The consortium was the successful bidder in the tender and was awarded the right to negotiate licenses for the blocks. Following negotiations, licenses were issued in February 1999 to a majority-owned subsidiary of CanArgo. During 1999 CanArgo concluded that it did not have the resources to progress this project. Accordingly, in November 1999, CanArgo reduced its interest to a 9.5% in exchange for $250,000 credit to CanArgo should additional financing or an equity partner be found for the project. Subsequent to this, a restructuring of interests in the project took place with CanArgo increasing its interest slightly to 10%, and with Rosneft, the Russian State owned oil company, becoming the majority owner of the project with 75.1%. Seismic was acquired as part of this restructuring, and future plans include interpretation of this data and possible drilling. Potential Syrian Exploration Project In January 2003, CanArgo won exclusive rights to negotiate a Production Sharing Contract (PSC) for Block XIX in southern Syria. The block comprises 6,000 km2 of under-explored acreage in the Sirhan Basin in the south of the country, bordering Jordan. There are two oil and gas plays in the block, one Paleozoic and one Mesozoic; these plays have been successfully exploited in both western Iraq and more recently in neighbouring north-eastern Jordan. 15 DISCONTINUED OPERATIONS CanArgo Standard Oil Products CanArgo originally moved into the retail gasoline sector in Georgia in April 2000 with the formation of CanArgo Standard Oil Products. The original objective of CanArgo was to create a premium chain of petroleum product outlets. In December 2000, CanArgo expanded its downstream retail business in Georgia through an agreement to acquire an interest in several existing petrol stations and sites in Tbilisi. These stations and sites, together with several existing CanArgo stations, operate under the name "CanArgo Standard Oil Products", a Georgian company in which CanArgo owns a 50% controlling interest. Of the remaining 50%, 41.65% is held by Standard Oil Products, an unrelated third party entity, and 8.35% is held by an individual, Mr Levan Pkhakadze, who is one of the founders of Standard Oil Products and is an officer and director of CanArgo Standard Oil Products. In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding to Westrade Alliance LLC, an unaffiliated company, for $4 million in an arms-length transaction, with legal ownership being transferred upon receipt of final payment due in August 2003. Discontinued Operation activity is incorporated herein by reference from note 17 to the consolidated financial statements. As at 31 December, 2002, CanArgo Standard Oil Products had a total of 23 licences/sites in its portfolio with 19 sites in operation. CanArgo Standard Oil Products sells several different grades of petrol to a broad range of corporate and retail customers. No one customer purchases more than 10% of total sales. RISKS ASSOCIATED WITH CANARGO'S ACTIVITIES CanArgo's ability to remain a going concern CanArgo has incurred recurring operating losses, and its current operations are not generating positive cash flows. The ability of CanArgo to continue as a going concern and to pursue its principal activities of acquiring interests in and developing oil and gas fields is dependent upon CanArgo reducing costs, generating funds from internal sources including the sale of certain non-core assets, external sources and, ultimately, achieving sufficient positive cash flows from operating activities. In order to preserve available cash resources while still maintaining essential field operations and development activities in Georgia, a significant cost reduction plan was implemented with both direct project and general and administrative costs being reduced. These reductions and the receipt of the final $3 million payment from the agreed sale of CanArgo's interest in its retail operation CanArgo Standard Oil Products (CSOP) (explained below), the planned selective sale of certain non-core assets including CanArgo's generator, and a portion or all of CanArgo's drilling equipment should provide CanArgo the working capital necessary to cover CanArgo's immediate and near term funding requirements with respect to its activities in the Republic of Georgia. Should such funding not be forthcoming and CanArgo be unable to sell some or all of its non-core assets, further cost reductions will be required in order for CanArgo to remain a going concern. The financial statements have been prepared on a going concern basis, which assumes the additional funding and/or proceeds from the sale of non-core assets is received. If this additional finance is not received, in particular the receipt of the final $3 million payment from the sale of CSOP, or receipt of an equivalent amount, adjustments may have to be made to reduce the balance sheet values of assets to their recoverable amounts, to provide for further liabilities that might arise and to reclassify fixed assets and long term liabilities as current assets and liabilities. 16 In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding for $4 million of which $1 million has been received to date as a non-refundable deposit. Legal ownership will transfer upon receipt of the final payment of $3 million due in August 2003. Whilst the directors presently cannot be certain as to the outcome of the matters mentioned above, they believe that it is appropriate for the financial statements to be prepared on a going concern basis. Development of the oil and gas properties and ventures in which CanArgo has interests involves multi-year efforts and substantial cash expenditures. Full development of these properties will require the availability of substantial funds from internal and/or external sources. CanArgo believes that it will be able to generate funds from quasi-governmental financing agencies, conventional lenders, equity investors and other oil and gas companies that may desire to participate in CanArgo's oil and gas projects, although no firm funding commitments have been received. Current Operations Dependent on Success of the Ninotsminda Oil Field and Georgian Exploration We have directed substantially all of our efforts and most of our available funds to the development of the Ninotsminda oil field in the Republic of Georgia, exploration in that area and some ancillary activities closely related to the Ninotsminda field project. This decision is based on management's assessment of the promise of the Ninotsminda field area. However, our focus on the Ninotsminda field has over the past several years resulted in overall losses for CanArgo and CanArgo has yet to be profitable. We cannot assure investors that the exploration and development plans for the Ninotsminda field will be successful. For example, the Ninotsminda field may not produce sufficient quantities of oil and gas to justify the investment we have made and are planning to make in the field, and we may not be able to produce the oil and gas at a sufficiently low cost or to market the oil and gas produced at a sufficiently high price to generate a positive cash flow and a profit. Ninotsminda Oil Company has also entered into certain supply and purchase agreements for natural gas production from the Ninotsminda field. Such agreements may benefit us, but may in the future also limit our ability to sell associated natural gas at then market prices. Our Georgian exploration programme is an important factor for future success, and this programme may not be successful, as it carries substantial technical risk. Minimum Investment Requirements in Ukraine Have Not Been Met Under the terms of the farm-in for the development of the Bugruvativske field in Ukraine the local Ukrainian oil and gas company, Gals-K Limited, will invest approximately $3 million in the Bugruvativske field over the course of 12 months in order to drill two new wells and will bear the financial risk under the JIPA during this period. CanArgo can match up to the amount invested by the local Ukrainian oil and gas company, prior to December 31, 2003. Agreement has also been reached with Ukrnafta, on revisions to the commercial terms of the Joint Investment Production Activity (JIPA) agreement. The revised JIPA provides that (assuming CanArgo matches the local Ukrainian oil and gas company's initial expenditure) the financing risk shall be shared between CanArgo and a subsidiary of the local Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all net profits distributed to the parties to the JIPA and the remainder shall be shared between CanArgo and IPEC. Assuming that CanArgo matches the local Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to approximately 34.5% of net profits generated under the JIPA (or a proportionally smaller amount if the amount invested is less than that invested by IPEC). In the event that CanArgo decides not to invest in the project by December 31, 2003, it will receive an ongoing project fee of between 3-4 % of the net profits generated under the JIPA in recognition of its earlier involvement in the project. To date, CanArgo has not made any investment in the Bugruvativske field and subsequently, hydrocarbon reserves are classified as unproved until CanArgo's investment is made. In 2001 an agreement was reached to undertake a limited investment and development program by June 2002 in order for Boryslaw Oil Company, a company in which CanArgo has a 45% ownership interest, to retain the field licence including the drilling of one new well. These obligations have not been fully met, however, Boryslaw Oil Company is seeking modifications to the licence agreement to allow a proper assessment of the workovers and development plans completed to date. A repayment schedule of CanArgo's 17 advances to Boryslaw Oil Company has also been agreed of which $360,000 was repaid at December 31, 2002 and has been fully paid in 2003. Boryslaw Oil Company has so far not been given notice by the Ukrainian licensing body of early termination of the license. CanArgo is actively seeking to farm-out part of its interest in Boryslaw Oil Company in return for finance to carry out the work programme. If Boryslaw Oil Company does not proceed with the Stynawske field development programme or if an extension to the current licence cannot be obtained, it may be in breach of obligations it has with regard to the field license. This could place Boryslaw Oil Company's rights to the Stynawske field at risk. Ukraine Projects in Early Stage of Evaluation and Development The Bugruvativske field together with the Stynawske field in Western Ukraine, are both in the early stage of evaluation and development and are themselves relatively new to us. Write Off of Unsuccessful Properties and Projects In order to realize the carrying value of our oil and gas properties and ventures, we must produce oil and gas in sufficient quantities and then sell such oil and gas at sufficient prices to produce a profit. We have a number of unevaluated oil and gas properties. The risks associated with successfully developing unevaluated oil and gas properties are even greater than those associated with successfully continuing development of producing oil and gas properties, since the existence and extent of commercial quantities of oil and gas in unevaluated properties have not been established. In 2002, we recorded an impairment charge of $1.6 million, and in 2001, we recorded an impairment charge of $7.3 million following application of the full cost ceiling limitation to capitalized oil and gas property costs. The impairments are as a result of a decline in Brent oil prices at December 31, 2001, lower reserve quantities following production declines in 2001 and reduced development plans in 2002. During 1997, we recorded impairment charges totalling $19.4 million relating to three unsuccessful ventures and in 1999, recorded impairment charges totalling $5.5 million relating to a fourth venture. We could be required in the future to write off our investments in additional projects, including the Ninotsminda field project, if such projects prove to be unsuccessful. Possible Inability to Finance Present Oil and Gas Projects CanArgo's ability to finance all of its present oil and gas projects and other ventures according to present plans is dependent upon obtaining additional funding. An inability to obtain financing could require CanArgo to scale back or abandon part or all of its project development, capital expenditure, production and other plans. The availability of equity or debt financing to CanArgo, or to the entities that are developing projects in which CanArgo has interests, is affected by many factors, including: o world economic conditions; o international relations; o the stability and policies of various governments; o fluctuation in the price of oil and gas, the outlook for the oil and gas industry and competition for funds; and o an evaluation of CanArgo and specific projects in which CanArgo has an interest. Rising interest rates might affect the feasibility of debt financing that is offered. Potential investors and lenders will be influenced by their evaluations of us and our projects and comparison with alternative opportunities. Additional Funds Needed For Long-Term Oil and Gas Development Plans It will take many years and substantial cash expenditures to develop fully our oil and gas properties. We generally have the principal responsibility to provide financing for our oil and gas properties and ventures. Accordingly, we need to raise additional funds from outside sources in order to pay for project development costs beyond those currently budgeted through 2003. We may not be able to obtain that additional financing. If adequate funds are not available, we will be required to scale back or even suspend our 18 operations, or such funds may only be available on commercially unattractive terms. The carrying value of the Ninotsminda and Bugruvativske fields may not be realized unless additional capital expenditures are incurred to develop the fields. Furthermore, additional funds will be required to pursue exploration activities on its existing undeveloped properties. While expected to be substantial, without further exploration work and evaluation the amount of funds needed to fully develop all of our oil and gas properties cannot at present, be quantified. Oil and Activities Involve Risks, Many of Which Are Beyond Our Control Our exploration, development and production activities are subject to a number of factors and risks, many of which may be beyond our control. First, we must successfully identify commercial quantities of oil and gas. The development of an oil and gas deposit can be affected by a number of factors which are beyond the operator's control, such as: o unexpected or unusual geological conditions; o the recoverability of the oil and gas on an economic basis; o the availability of infrastructure and personnel to support operations; o local and global oil prices; and o government regulation and legal uncertainties. Our activities can also be affected by a number of hazards, such as: o labour disputes; o natural phenomena, such as bad weather and earthquakes; o operating hazards, such as fires, explosions, blow-outs, pipe failures and casing collapses; and o environmental hazards, such as oil spills, gas leaks, ruptures and discharges of toxic gases. Any of these hazards could result in damage, losses or liability for us. There is also an increased risk of some of these hazards in connection with operations that involve the rehabilitation of fields where less than optimal practices and technology were employed in the past, as was often the case in Eastern Europe. We do not purchase insurance covering all of the risks and hazards that are involved in oil and gas exploration, development and production. Risk of Political Instability with Respect to Foreign Operations Our principal oil and gas properties and activities are in the Republic of Georgia, Ukraine and Russia, all of which are located in Eastern Europe. In addition, our refinery and all of our petrol stations are located in and around Tbilisi, Georgia. Operation and development of these assets is subject to a number of conditions endemic to Eastern European countries, including political instability. The present governmental arrangements in Eastern Europe and countries of the former Soviet Union in which we operate were established relatively recently, when they replaced Communist regimes. If they fail to maintain the support of their citizens, these governments could themselves be replaced by other institutions, including a possible reversion to totalitarian forms of government. Our operations typically involve joint ventures or other participatory arrangements with the national government or state-owned companies. The production sharing contract covering the Ninotsminda oil field and the Joint Investment Production Activity agreement covering the Bugruvativske oil field are examples of such arrangements. As a result of such dependency on government participants, our operations could be adversely affected by political instability, changes in government institutions, personnel, policies or legislation, or shifts in political power. There is also the risk that governments could seek to nationalize, expropriate or otherwise take over our oil and gas properties. We are not insured against such political risks because management deems the premium costs of such insurance to be currently prohibitively expensive. Risk of Social, Economic and Legal Instability The political institutions in Eastern Europe and countries of the former Soviet Union have recently become more fragmented, and the economic institutions of Eastern European countries have recently converted to a 19 market economy from a planned economy. New laws have recently been introduced, and the legal and regulatory regimes in such regions are often vague, containing gaps and inconsistencies, and are constantly subject to amendment. Application and enforceability of these laws may also vary widely from region to region within these countries. Due to this instability, Eastern European countries are subject to certain additional risks including the following: o enforceability of contracts; o sudden or unexpected changes in demand for crude oil and or natural gas; o availability of trained personnel; and o availability of equipment and services and other factors that could significantly change the economics of production. In early 2002, the Georgian government requested assistance from the United States to combat terrorism in the Pankisi Gorge, a region of Georgia bordering the separatist Chechnya region of Russia. Social, economic and legal instability have accompanied these changes due to many factors which include: o low standards of living; o high unemployment; o undeveloped and constantly changing legal and social institutions; and o conflicts within and with neighbouring countries. This instability can make continued operations difficult or impossible. Inadequate or Deteriorating Infrastructure in Eastern Europe Countries in Eastern Europe often either have underdeveloped infrastructures or, as a result of shortages of resources, have permitted infrastructure improvements to deteriorate. The lack of necessary infrastructure improvements can adversely affect operations. For example, the lack of a reliable power supply caused Ninotsminda Oil Company to suspend drilling of one well and the testing of a second well during the 1998-1999 winter season, although power supplies have been more regular since that time. Currency Risks in Eastern Europe Payment for oil and gas products sold in Eastern European countries may be in local currencies. Although we currently sell our oil principally for U.S. dollars, we may not be able to continue to demand payment in hard currencies. Although most Eastern European currencies are presently convertible into U.S. dollars, there is no assurance that convertibility will continue. Even if currencies are convertible, the rate at which they convert into U.S. dollars is subject to fluctuation. In addition, the ability to transfer currencies into or out of Eastern European countries may be restricted or limited in the future. We may enter into contracts with suppliers in Eastern European countries to purchase goods and services in U.S. dollars. We may also obtain from lenders credit facilities or other debt denominated in U.S. dollars. If we cannot receive payment for oil and oil products in U.S. dollars and the value of the local currency relative to the U.S. dollar deteriorates, we could face significant negative changes in working capital. Tax Risks in Eastern Europe Countries in Eastern Europe frequently add to or amend existing taxation policies in reaction to economic conditions including state budgetary and revenue shortfalls. Since we are dependent on international operations, specifically those in Georgia, we are subject to changing taxation policies including the possible imposition of confiscatory excess profits, production, remittance, export and other taxes. While CanArgo is not aware of any recent or proposed tax changes which could materially affect our operations, such changes could occur although CanArgo has negotiated economic stabilization clauses in its production sharing agreements in Georgia. Conflicting Interests with our Partners 20 Joint venture, acquisition, financing and other agreements and arrangements must be negotiated with independent third parties and, in some cases, must be approved by governmental agencies. These third parties generally have objectives and interests that may not coincide with ours and may conflict with our interests. Unless we are able to compromise these conflicting objectives and interests in a mutually acceptable manner, agreements and arrangements with these third parties will not be consummated. CanArgo does not have a majority of the equity in the entity that is the licensed developer of some projects, such as the Bugruvativske and Stynawkse field projects, that CanArgo may pursue in Eastern Europe, even though we may be the designated operator of the oil or gas field. In these circumstances, the concurrence of co-ventures may be required for various actions. Other parties influencing the timing of events may have priorities that differ from ours, even if they generally share our objectives. Demands by or expectations of governments, co-venturers, customers, and others may affect CanArgo's strategy regarding the various projects. Failure to meet such demand or expectations could adversely affect CanArgo's participation in such projects or our ability to obtain or maintain necessary licenses and other approvals. Demand by or expectations of governments, co-venturers, customers and others may affect CanArgo's strategy regarding the various projects. Failure to meet such demands or expectations could adversely affect CanArgo's participation in such projects or its ability to obtain or maintain necessary licenses and other approvals. Governmental Registration Operating entities in various foreign jurisdictions must be registered by governmental agencies, and production licenses for development of oil and gas fields in various foreign jurisdictions must be granted by governmental agencies. These governmental agencies generally have broad discretion in determining whether to take or approve various actions and matters. In addition, the policies and practices of governmental agencies may be affected or altered by political, economic and other events occurring either within their own countries or in a broader international context. Changes in the Market Price of Oil and Gas Prices for oil and natural gas and their refined products are subject to wide fluctuations in response to a number of factors which are beyond our control, including: o global changes in the supply and demand for oil and natural gas; o actions of the Organization of Petroleum Exporting Countries; o weather conditions; o domestic and foreign governmental regulations; o the price and availability of alternative fuels; o political conditions in the Middle East and elsewhere; and o overall economic conditions. A reduction in oil prices can affect the economic viability of our operations. For example, the significant decline in oil prices during 1998 adversely affected our results of operations and increased our operating loss in 1998. There can be no assurance that oil prices will be at a level that will enable us to operate at a profit. In 2002 the spot price for Brent crude oil increased from $19.29 per barrel at December 31, 2001 to $31.98 per barrel at December 31, 2002. CanArgo may also not benefit from continued increases in oil prices as have occurred in the first quarter of 2003 as the market for the levels of crude oil produced in Georgia by Ninotsminda Oil Company can in such an environment be relatively inelastic and contract prices are often set at a specified price determined with reference to Brent when the contract is entered into or over a short period when the crude oil is delivered. Oil and Gas Production Could Vary Significantly From Reserve Estimates Estimates of oil and natural gas reserves and their values by petroleum engineers are inherently uncertain. These estimates are based on professional judgments about a number of elements: 21 o the amount of recoverable crude oil and natural gas present in a reservoir; o the costs that will be incurred to produce the crude oil and natural gas; o the rate at which production will occur. Reserve estimates are also based on evaluations of geological, engineering, production and economic data. The data can change over time due to, among other things: o additional development activity; o evolving production history; and o changes in production costs, market prices and economic conditions. As a result, the actual amount, cost and rate of production of oil and gas reserves and the revenues derived from sale of the oil and gas produced in the future will vary from those anticipated in the most recent report on the oil and gas reserves prepared by Ashton Jenkins Mann as of January 1, 2003. The magnitude of those variations may be material. The rate of production from crude oil and natural gas properties declines as reserves are depleted. Except to the extent we acquire additional properties containing proved reserves, conduct successful exploration and development activities or, through engineering studies, identify additional productive zones in existing wells or secondary recovery reserves, our proved reserves will decline as reserves are produced. Future crude oil and natural gas production is therefore highly dependent upon our level of success in replacing depleted reserves. Oil and Gas Operations are Subject to Extensive Governmental Regulation Governments at all levels, national, regional and local, regulate oil and gas activities extensively. CanArgo must comply with laws and regulations which govern many aspects of our oil and gas business, including: o exploration; o development; o production; o refining; o marketing; o transportation; o occupational health and safety; o labour standards; and o environmental matters. We expect the trend towards more burdensome regulation of our business to result in increased costs and operational delays. This trend is particularly applicable in developing economies, such as those in Eastern Europe where we have our principal operations. In these countries, the evolution towards a more developed economy is often accompanied by a move towards the more burdensome regulations that typically exist in more developed economies. Competition The oil and gas industry including the refining and marketing of crude oil products is highly competitive. Our competitors include integrated oil and gas companies, independent oil and gas companies, drilling and income programmes, and individuals. Many of our competitors are large, well-established, well-financed companies. Because of our small size and lack of financial resources, we may not be able to compete effectively with these companies. Operations are Dependent on Chairman of the Board and Chief Executive Dr. David Robson, the Chairman of the Board and Chief Executive Officer of CanArgo, is our executive who has the most experience in the oil and gas industry and who has the most extensive business 22 relationships in Eastern Europe. Our business and operations could be significantly harmed if Dr. Robson were to leave us or become unavailable because of illness or death. Dr. Robson through his company, Vazon Energy Limited, has signed a comprehensive Management Services Agreement with a two-year non competition clause effective from the date of termination of the agreement. The agreement can be terminated by giving six months notice from either side. We do not carry key employee insurance on any of our employees. Employees As of December 31, 2002, CanArgo had 248 full time employees. Of its full time employees, the entity acting as operator of the Ninotsminda oil field for Ninotsminda Oil Company has 86 full time employees, and substantially all of that company's activities relate to the production and development of the Ninotsminda field. CanArgo Standard Oil Products has 145 full time employees at its office and petrol stations. ITEM 2. PROPERTIES CanArgo does not have through its production sharing contracts outright ownership of any real property. Its real property interests are limited to contractual leasehold and mineral interests. The refinery owned by CanArgo's subsidiary Georgian American Oil Refinery, is located next to Georgian Oil's central processing facility at Sartichala, Georgia. PRODUCTIVE WELLS AND ACREAGE Productive Wells and Acreage The following table summarizes as of December 31, 2002 Ninotsminda Oil Company's number of productive oil and gas wells and Ninotsminda Oil Company's total developed acreage for the Ninotsminda field. Such information has been presented on a gross basis, representing the interest of Ninotsminda Oil Company, and on a net basis, representing the interest of CanArgo based on its 100% interest in Ninotsminda Oil Company.
GROSS NET ------------------------------------ ----------------------------------- NUMBER SQUARE NUMBER ACREAGE SQUARE OF WELLS ACREAGE KILOMETRES OF WELLS KILOMETRES --------- ----------- ------------ --------- ---------- ------------ Ninotsminda field 14 2,500 10 14 2,500 10
On December 31, 2002, there were no productive wells or developed acreage on any of CanArgo's other Georgian properties, except for one well on the West Rustavi field which was shut-in at that date. Undeveloped Acreage The following table summarizes the gross and net undeveloped acreage held under the Ninotsminda, Nazvrevi/Block XIII and Norio/North Kumisi production sharing contracts as of December 31, 2002. The information regarding net acreage represents the interest of CanArgo based on its 100% interest in Ninotsminda Oil Company and the subsidiary holding the Nazvrevi/Block XIII contract and its current 50% interest in the subsidiary holding the Norio/North Kumisi contract. 23
GROSS NET ---------------------------- ---------------------------- PSC SQUARE SQUARE ACREAGE KILOMETRES ACREAGE KILOMETRES ------------ ------------- ------------ ------------- Ninotsminda Manavi and West Rustavi 27,739 113 27,739 113 Nazvrevi and Block XIII 492,914 2,008 492,914 2,008 Norio (Block XI(c)) and North Kumisi. 378,523 1,542 189,262 771 ------------- ------------- ------------ ------------- Total 899,176 3,663 709,915 2,892 ============ ============= ============ =============
CanArgo leases office space in London, England; Guernsey, Channel Islands; Calgary, Alberta; Tbilisi, Republic of Georgia and Kiev, Ukraine. The leases have remaining terms varying from three months to seven years and six months and annual rental charges ranging from $16,000 to $213,000. ITEM 3. LEGAL PROCEEDINGS At December 31, 2002 there were no legal proceedings pending involving CanArgo which, if adversely decided, would have a material adverse effect on CanArgo's financial position or business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of CanArgo's security holders during the fourth quarter of the year ended December 31, 2002. 24 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On March 30, 1999, CanArgo's common stock commenced trading on the OTC Bulletin Board after trading from April 6, 1995 through March 29, 1999 on the NASDAQ National Market System under the symbol "GUSH". The common stock was delisted from the NASDAQ Stock Market following the failure to meet Nasdaq's continued listing requirement that the bid price for a listed security be at least $1.00 per share. CanArgo's common stock is also listed on the Oslo Stock Exchange and has traded there under the symbol "CNR" since May 1995. As a result of the shift in the principal domestic market for CanArgo common stock from the NASDAQ National Market System to the OTC Bulletin Board, stockholders may: o find it more difficult to obtain accurate and timely quotations regarding the bid and asked prices for common stock; o experience greater spreads between bid and asked prices; o be charged relatively higher transactional costs when buying or selling common stock; and o encounter more difficulty in effecting sales or purchases of common stock. In addition, while securities listed on the NASDAQ National Market System are exempt from the registration requirements of state securities laws, securities traded on the OTC Bulletin Board must comply with the registration requirements of state securities laws, which increases the time and costs associated with complying with state securities laws when raising capital. The listing of CanArgo common stock on the Oslo Stock Exchange had until October 2000, been a secondary listing, with the primary listing being on the NASDAQ Stock Market. In October 2000, CanArgo obtained a primary listing on the Oslo Stock Exchange where it is now included on the main list. The following table sets forth the high and low sales prices of the common stock on the Oslo Stock Exchange, and the high and low bid prices on the NASDAQ OTC Bulletin Board for the periods indicated. Average daily trading volume on these markets during these periods is also provided. OTC Bulletin Board data is provided by the NASDAQ Trading and Market Services and/or published financial sources and Oslo Stock Exchange data is derived from published financial sources. The over-the-counter quotations reflect inter-dealer prices, without retail markup, mark-down or commissions, and may not represent actual transactions. Sales prices on the Oslo Stock Exchange were converted from Norwegian kroner into United States dollars on the basis of the daily exchange rate for buying United States dollars with Norwegian kroner announced by the central bank of Norway. Prices in Norwegian kroner are denominated in "NOK".
NASDAQ/OTCBB OSE ---------------------------------- ----------------------------------- AVERAGE AVERAGE HIGH LOW DAILY VOLUME HIGH LOW DAILY VOLUME ---- ---- ------------ ---- ---- ------------ FISCAL QUARTER ENDED March 31, 2000 1.00 0.63 95,167 0.97 0.73 144,854 June 30, 2000 1.45 0.69 103,033 1.57 0.79 469,500 September 30, 2000 1.66 1.03 69,800 1.78 1.04 1,097,007 December 31, 2000 1.38 0.75 24,500 1.45 0.75 881,592 March 31, 2001 1.19 0.75 12,933 1.32 0.79 754,976 June 30, 2001 0.87 0.50 4,467 0.86 0.43 301,201 September 30, 2001 0.50 0.24 20,923 0.56 0.21 261,900 December 31, 2001 0.43 0.24 12,757 0.49 0.23 830,746 March 31, 2002 0.36 0.26 32,697 0.36 0.25 550,687 June 30, 2002 0.38 0.19 3,508 0.32 0.14 250,000 September 30, 2002 0.20 0.05 9,156 0.20 0.05 256,500 December 31, 2002 0.15 0.04 29,404 0.08 0.04 712,500
At February 28, 2003, the closing price of our common stock on the OTC Bulletin Board and Oslo Stock Exchange was $0.040 and $0.043 respectively. On February 28, 2003 the number of holders of record of our common stock was approximately 8,150. We have not paid any cash dividends on our common stock. We currently intend to retain future earnings, if 25 any, for use in our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. The payment of future dividends, if any, will depend, among other things, on our results of operations and financial condition and on such other factors as our Board of Directors may, in their discretion, consider relevant. On February 12, 2002, CanArgo completed an offering of 5,210,000 shares of common stock at Norwegian Kroner 2.95 per share (approximately US$0.34 per share) to a financial institution and qualified purchasers for gross proceeds of approximately $1,762,000 in transactions intended to qualify for an exemption from registration under the Securities Act of 1933 afforded by Regulation S promulgated thereunder. ABG Sundal Collier ASA acted as placement agent for this transaction. The placement agent received a commission of 5.75% of the gross proceeds of the placement. Proceeds from the placement of approximately US$1.5 million were used for working capital purposes. In January 2003, a registration statement on Form S-1 registering resale of the common shares issued in the private placement under the Securities Act was declared effective by the United States Securities and Exchange Commission. On May 28, 2002, CanArgo completed an offering of 137,760 common shares at NOK 1.68 per share (approximately US$0.21 per share) to David Robson, CanArgo's Chief Executive Officer, for gross proceeds of approximately $29,000 in transactions intended to qualify for an exemption from registration under Section 4(2) of the Securities Act of 1933 afforded by Regulation S promulgated thereunder. The shares have not been registered under the Securities Act of 1933 and are "restricted" as that term is defined in Rule 144 under the Securities Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from registration under the Securities Act, the availability of which is to be established to the satisfaction of CanArgo. On January 24, 2002, CanArgo announced a redemption of all the outstanding Exchangeable Shares issued by our subsidiary CanArgo Oil & Gas, Inc., which redemption was completed on May 31, 2002 in exchange for the issuance of an aggregate of 148,826 shares of Common Stock, in accordance with the terms of such Exchangeable Shares. ITEM 6. SELECTED FINANCIAL DATA Reference is hereby made to the Section entitled "QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION" with respect to certain qualifications regarding the following information. The following data reflect the historical results of operations and selected balance sheet items of CanArgo and should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data" herein.
---------------------------------------------------------------- Reported in $000's except YEAR ENDED for per common share amounts DECEMBER 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- FINANCIAL PERFORMANCE Total revenue from continuing operations 5,576 7,171 7,010 2,783 821 Operating income (loss) from continuing operations (4,971) (16,107) (2,401) (8,119) (6,357)
26
---------------------------------------------------------------- Reported in $000's except YEAR ENDED for per common share amounts DECEMBER 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Other income (expense) and Minority Interest in income (loss) of consolidated subsidiaries (528) 2,545 258 (354) 247 Net income (loss) from continuing operations (5,499) (13,562) (2,143) (8,473) (6,110) Net income (loss) from discontinued operations, net of taxes and minority interest(1) 171 344 (8) -- -- Net income (loss) (5,328) (13,218) (2,151) (8,473) (6,110) Net loss per common share - basic and diluted from continuing operations (0.06) (0.16) (0.04) (0.32) (0.39) Net loss per common share - basic and diluted from discontinued operations (0.00) (0.00) (0.00) -- -- Net loss per common share - basic and diluted (0.06) (0.16) (0.04) (0.32) (0.39) Cash generated by (used in) operations 8 (11,829) 7,881 (1,210) (14,718) Working capital 5,585 14,590 23,315 2,729 1,366 Total assets 70,736 70,312 82,849 43,948 46,618 Minority shareholder advances -- 450 -- -- -- Stockholders' equity 62,105 65,800 72,426 37,863 40,031 Cash dividends per common share -- -- -- -- --
(1) In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding to Westrade Alliance LLC, an unaffiliated company, for $4 million in an arms-length transaction, with legal ownership being transferred upon receipt of final payment due in August 2003. The agreed consideration to be exchanged does not result in an impairment of the carrying value of assets held for sale. The assets and liabilities of CanArgo Standard Oil Products have been classified as "Assets held for sale" and "Liabilities for sale" for all periods presented. The results of operations of CanArgo Standard Oil Products have been classified as discontinued for all periods presented. The minority interest related to CanArgo Standard Oil Products has not been reclassified for any of the periods presented, however net income from discontinued operations is disclosed net of taxes and minority interest. CanArgo Standard Oil Products was purchased in 2000 and operations were developed in 2001, therefore prior to 2000 there is no effect on the financial statements in respect of discontinued operations. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING INFORMATION. See "Qualifying Statement With Respect To Forward-Looking Information" above and "Forward Looking Statements" below. LIQUIDITY AND CAPITAL RESOURCES CanArgo's activities and investment in CanArgo common stock involves a high degree of risk. Each of the risks in Item 1 may have a significant impact on CanArgo's future financial condition and results of operations. On February 12, 2002, CanArgo completed a private placement of 5,210,000 common shares at NOK 2.95 per share (approximately US$0.34 per share) an institution and another qualified purchaser for gross proceeds of approximately $1,762,000. As of December 31, 2002, CanArgo had working capital of $5,585,000, compared to working capital of $14,590,000 as of December 31, 2001. The $9,005,000 decrease in working capital from December 31, 2001 to December 31, 2002 is principally due to a reduction in cash and prepayments related to capital expenditures on the Ninotsminda, Manavi and Norio projects. As a result of AES Gardabani withdrawing from the Participation Agreement with respect to the Cretaceous gas exploration programme and unexpected mechanical difficulties drilling exploration wells M11 at the Ninotsminda field and MK72 at the Norio field, and delays in testing well N100, capital expenditures exceeded initial estimates and production volumes available for sale are less than anticipated. These events resulted in lower than expected cash resources from which CanArgo could continue its development activities in Georgia. In order to preserve available cash resources while still maintaining essential field operations and development activities in Georgia, a significant cost reduction plan was implemented with both direct project and general and administrative costs being reduced. These reductions together with the receipt of the final $3 million payment from the agreed sale of CanArgo's interest in its retail operation CanArgo Standard Oil Products, the planned selective sale of certain non-core assets including CanArgo's generator, and a portion or all of CanArgo's drilling equipment should provide CanArgo the working capital necessary to cover CanArgo's immediate and near term funding requirements with respect to its activities in the Republic of Georgia. Should such funding not be forthcoming and CanArgo be unable to sell some or all of its non-core assets, further cost reductions will be required in order for CanArgo to remain a going concern. In January 2003, in an attempt to increase production at the Ninotsminda field and further improve working capital, drilling of a new horizontal well, NH4, commenced targeting an existing producing reservoir. Provided funds are available, immediate and near term development plans include the completion of testing of well N100 and the continued drilling of wells M11 and Norio MK72, two deep exploration wells. CanArgo has temporarily suspended further drilling of well M11 below its current casing point at 4,182 metres in order to fully review available technical data, and to estimate the cost to complete the well. Norio MK72, has been cased at a depth of 2,932 metres in the Lower Sarmatian. Farm-in partners are currently being sought to provide additional capital for completing these wells. In April 2001, CanArgo acquired Lateral Vector Resources Inc. ("LVR") for total cash consideration of $3,421,000 which according to publicly available information at the time had concluded with Ukrnafta a Joint Investment Production Activity (JIPA) agreement to develop the Bugruvativske Field in Eastern Ukraine. Funding for the LVR acquisition was provided from existing cash resources. In September 2002 CanArgo agreed terms with Ukrnafta, the Ukrainian State Oil Company, on revisions to the existing Joint Investment Production Activity agreement (JIPA) for the development of the Bugruvativske field in Ukraine and reached an agreement with a local Ukrainian oil and gas company on the 28 terms of a farm-in to the JIPA. The terms of the farm-in are that the local Ukrainian oil and gas company will invest approximately $3 million in the Bugruvativske field over the course of 12 months in order to drill two new wells and will bear the financial risk under the JIPA during this period. CanArgo can match up to the amount invested by the local Ukrainian oil and gas company, prior to 31 December 2003. Additionally, agreement has been reached with Ukrnafta, on revisions to the commercial terms of the JIPA. The revised JIPA provides that (assuming CanArgo matches the local Ukrainian oil and gas company's initial expenditure) the financing risk shall be shared between CanArgo and a subsidiary of the local Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all net profits distributed to the parties to the JIPA and the remainder shall be shared between CanArgo and IPEC. Assuming that CanArgo matches the local Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to approximately 34.5% of net profits generated under the JIPA (or a proportionally smaller amount if the amount invested is less than that invested by IPEC). In the event that CanArgo decides not to invest in the project by 31 December 2003, it will receive an ongoing project fee of between 3-4% of the net profits generated under the JIPA in recognition of its earlier involvement in the project. Initial costs in respect of CanArgo's investment in the Bugruvativske field, through its direct investment in LVR, are included in "capital assets - unproved properties". These costs will continue to be disclosed as unproved properties until CanArgo participates in the JIPA by investing an amount up to the cash contribution made by its JIPA partner, IPEC. Any contribution must be made prior to 31 December 2003 in order for CanArgo to participate in the existing JIPA. In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding for $4 million with legal ownership being transferred upon receipt of the final $3 million payment due in August 2003. In 2001 an agreement was reached to undertake a limited investment and development program by June 2002 in respect of Boryslaw Oil Company to increase production and to meet certain work commitments under the Stynawske field licence. These obligations have not been fully met, however, Boryslaw Oil Company is seeking modifications to the licence agreement to allow a proper assessment of the workovers and development plans completed to date. A repayment schedule of CanArgo's advances to Boryslaw Oil Company has also been agreed of which $360,000 was repaid at December 31, 2002 and has been fully paid in 2003. Boryslaw Oil Company has so far not been given notice by the Ukrainian licensing body of early termination of the license. CanArgo is actively seeking to farm-out part of its interest in Boryslaw Oil Company in return for financing to carry out the work programme. If Boryslaw Oil Company does not proceed with the Stynawske field development programme or if modifications to the current licence agreement cannot be obtained, it may be in breach of obligations it has with regard to the field license and an impairment charge against CanArgo's investment in and advances to Boryslaw Oil Company may be required. Despite limited funding an assessment of both the Bugruvativske and Stynawske fields and preparation of a development program with Ukrnafta continues. Based on its efforts to date and, should funding be available, CanArgo plans to significantly increase production from these fields by investing in both remedial workover activity and potential infill drilling, horizontal drilling and pressure maintenance utilising appropriate technologies. While a considerable amount of infrastructure for the Ninotsminda, Bugruvativske and Stynawske fields has already been put in place, CanArgo cannot provide assurance that: o for the Bugruvativske and Stynawske fields, an adequate investment agreement and development plan can be put in place; o funding of field development plans will be timely; o that development plans will be successfully completed or will increase production; or o that field operating revenues after completion of the development plan will exceed operating costs. To pursue existing projects beyond CanArgo's immediate development plan and to pursue new opportunities, CanArgo will require additional capital. While expected to be substantial, without further exploration work and evaluation the exact amount of funds needed to fully develop all of our oil and gas properties cannot at present, be quantified. Potential sources of funds include additional equity, project financing, debt financing and the participation of other oil and gas entities in CanArgo's projects. Based on CanArgo's past history of raising capital and continuing discussions, CanArgo believes that such required funds may be available. However, there is no assurance that such funds will be available, and if available, will be offered on attractive or acceptable terms. Should such funding not be forthcoming and CanArgo be 29 unable to sell some or all of its non-core assets, further cost reductions and additional funding will be required in order for CanArgo to remain a going concern. Development of the oil and gas properties and ventures in which CanArgo has interests involves multi-year efforts and substantial cash expenditures. Full development of CanArgo's oil and gas properties and ventures will require the availability of substantial additional financing from external sources. CanArgo may also, where opportunities exist, seek to transfer portions of its interests in oil and gas properties and ventures to entities in exchange for such financing. CanArgo generally has the principal responsibility for arranging financing for the oil and gas properties and ventures in which it has an interest. There can be no assurance, however, that CanArgo or the entities that are developing the oil and gas properties and ventures will be able to arrange the financing necessary to develop the projects being undertaken or to support the corporate and other activities of CanArgo. There can also be no assurance that such financing as is available will be on terms that are attractive or acceptable to or are deemed to be in the best interest of CanArgo, such entities and their respective stockholders or participants. Ultimate realization of the carrying value of CanArgo's oil and gas properties and ventures will require production of oil and gas in sufficient quantities and marketing such oil and gas at sufficient prices to provide positive cash flow to CanArgo. Establishment of successful oil and gas operations is dependent upon, among other factors, the following: o mobilization of equipment and personnel to implement effectively drilling, completion and production activities; o raising of additional finance; o achieving significant production at costs that provide acceptable margins; o reasonable levels of taxation, or economic arrangements in lieu of taxation in host countries; and o the ability to market the oil and gas produced at or near world prices. Subject to the raising of additional capital, above, CanArgo has plans to mobilize resources and achieve levels of production and profits sufficient to recover the carrying value of its oil and gas properties and ventures. However, if one or more of the above factors, or other factors, are different than anticipated, these plans may not be realized, and CanArgo may not recover the carrying value of its oil and gas properties and ventures. CanArgo should be entitled to distributions from the various properties and ventures in which it participates in accordance with the arrangements governing the respective properties and ventures. STATEMENT OF CASH FLOWS All balances represent results from continuing operations, unless disclosed otherwise. Cash and cash equivalents decreased $4,293,000 from $5,891,000 at December 31, 2001 to $1,598,000 at December 31, 2002. The decrease was primarily due to the cost of the Manavi and Norio exploration programmes in Georgia. Operating Activities Net cash generated from operations in 2002 was $1,619,000 compared to cash used in operations in 2002 of $11,829,000 in 2001. Cash used in operating activities decreased primarily due to the use in 2001 of cash received from the joint venture partner, AES Gardabani, with respect to its participation in a three well exploration; changes in accounts receivable in 2002 and 2001 related to rental income due from the lease of one of CanArgo's drilling rigs to a third party, and amounts due from AES Gardabani relating to the termination of their participation in the three well exploration programme in Georgia; changes in accounts payable in 2001 due to payments of liabilities at December 31, 2000 relating to the 2000 Norio seismic progamme; and an increase in deferred revenue in 2002 from a prepayment on the sale of crude oil, and proceeds from the sale of CanArgo's 50% holding in CanArgo Standard Oil Products. 30 Accounts receivable decreased from $2,007,000 at December 31, 2001 to $306,000 at December 31, 2002. The decrease is primarily a result of the receipt of $1,000,000 from AES relating to the termination of AES's participation in a three well exploration programme, and an increase in allowance for a doubtful debt of $275,000, generated from gas sales to the Rustavi Plant in Georgia in 2000 and the receipt of payment for services from a third party relating to the use of one of CanArgo's drilling rigs. Inventory decreased from $406,000 at December 31, 2001 to $186,000 at December 31, 2002 primarily as result of the sale of oil by Ninotsminda Oil Company from storage. Approximately 33,000 barrels of oil were held in storage by Ninotsminda Oil Company at December 31, 2002 for sale to the Georgian domestic, regional or international market. Prepayments decreased from $2,236,000 at December 31, 2001 to $212,000 at December 31, 2002 as a result of receipt of materials and services related to CanArgo's exploration activities transferred to capital assets in the period. This decrease is included in the statement of cash flows as an investing activity. Assets held for sale, consisting of assets of discontinued operations and a 3 megawatt duel fuel power generator, increased by $1,741,000 to $8,096,000 at December 31, 2002 from $6,355,000 at December 31, 2001 primarily due to activity at CanArgo Standard Oil Products relating to the addition of new petrol stations in Georgia. Other currents assets increased from $162,000 at December 31, 2001 to $176,000 at December 31, 2002 as a result of a deposit to secure the rental of CanArgo's representative office in Ukraine. Accounts payable increased to $872,000 at December 31, 2002 from $ 828,000 at December 31, 2001 primarily due to an absolute increase in corporate payables. Deferred revenue of $1,500,000 at December 31, 2002 relates to a 12 month crude oil sales agreement for Ninotsminda Oil Company to sell its monthly share of oil produced under the Ninotsminda production sharing contract. As security over payment the buyer provided $1 million to be repaid by Ninotsminda Oil Company at the end of the twelve month period through the delivery of crude oil equal to the value of the security; and $500,000 advanced proceeds received for the sales of CanArgo Standard Oil Products. Accrued liabilities decreased to $204,000 at December 31, 2002 from $400,000 at December 31, 2001 primarily due to a reduction in accrued professional fees mainly in respect of share capital issues, and liabilities relating to the winding up of East Georgian Pipeline Company. Liabilities held for sale, in respect of discontinued operations, increased by $1,175,000 to $2,352,000 at December 31, 2002 from $1,177,000 at December 31, 2001 primarily due to additional bank loans drawn by CanArgo Standard Oil Products in Tbilisi at an effective interest rate of 18% per annum, in order to fund the construction of new petrol stations in Georgia. Investing Activities Net cash used in investing activities decreased to $8,692,000 in the year ended December 31, 2002 from $17,189,000 in the year ended December 31, 2001. The decrease in cash used in investing activities was primarily due to capital expenditures related to the Ninotsminda field and the 2001 acquisition of LVR. Capital assets, net increased from $52,535,000 at December 31, 2001 to $59,703,000 at December 31, 2002, primarily as a result of investment of $10,996,000 in capital assets including oil and gas properties and equipment, principally related to the Ninotsminda and Norio production sharing contracts. During 2002, CanArgo wrote down its oil and gas properties in the Ninotsminda field by an aggregate $1,600,000 on application of the full cost ceiling test as a result of lower reserve quantities following production declines in 2002 and reduced development plans. If oil prices or production levels further decline, CanArgo may experience additional impairment of this property. 31 Investments in and advances to oil and gas and other ventures, net deceased from $719,000 at December 31, 2001 to $459,000 at December 31, 2002. The decrease reflects repayments by Boryslaw Oil Company of CanArgo's advances in 2002 partially offset by an increase in equity income related to CanArgo's investment in Boryslaw Oil Company. Financing Activities Cash from financing activities decreased to $3,175,000 for the year ended December 31, 2002 from $8,974,000 for the year ended December 31, 2001 due primarily to proceeds from the sale of common stock issued and received in 2001. On February 12, 2002, CanArgo completed an offering of 5,210,000 common shares at NOK 2.95 per share (approximately US$0.34 per share) to certain institutions and qualified purchasers for gross proceeds of approximately $1,762,000 in transactions intended to qualify for an exemption from registration under the Securities Act of 1933 afforded by Regulation S promulgated thereunder. On May 28, 2002, CanArgo completed an offering of 137,760 common shares at NOK 1.68 per share (approximately US$0.21 per share) to David Robson, CanArgo's Chief Executive Officer, for gross proceeds of approximately $29,000 in transactions intended to qualify for an exemption from registration under Section 4(2) of the Securities Act of 1933 afforded by Regulation S promulgated thereunder. The shares have not been registered under the Securities Act of 1933 and are "restricted" as that term is defined in Rule 144 under the Securities Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from registration under the Securities Act, the availability of which is to be established to the satisfaction of CanArgo. Minority shareholder advances as at December 31, 2001 related to the receipt of convertible loans from new minority shareholders of CanArgo's subsidiary, CanArgo Norio Limited (Norio). The cash amount received represented part of the new minority shareholder's share of the cost of drilling an exploration well under the Norio and North Kumisi production sharing agreement. In November 2002, CanArgo reached agreement with the other shareholders in Norio on increasing CanArgo's interest in Norio. Under the agreement CanArgo's interest increased from 50% to 64.2% in Norio and its existing Norio and North Kumisi production sharing agreement. Subsequently, the convertible loans have been reclassified as minority interest on finalisation of respective equity shares. Minority interest in continuing and discontinued subsidiaries increased by $1,988,000 to $3,519,000 at December 31, 2002 from $1,531,000 at December 31, 2001 due to the reclassification of $1,207,000 from minority shareholder advances resulting from finalisation of CanArgo's equity interest from 50% to 64.2% in Norio and its existing Norio and North Kumisi production sharing agreement, an increase of $444,000 resulting from CanArgo's adjusted interest in its final share of the carrying net asset value of Norio, and minority interest shareholder's share of income in the period. Discontinued Operations Assets held for sale include the results of discontinued operations and the generator. This increased by $1,741,000 to $8,096,000 at December 31, 2002 from $6,355,000 at December 31, 2001 primarily due to activity at CanArgo Standard Oil Products relating to the addition of new petrol stations in Georgia. Liabilities held for sale, resulting from discontinued operations, increased by $1,175,000 to $2,352,000 at December 31, 2002 from $1,177,000 at December 31, 2001 primarily due to additional bank loans drawn by CanArgo Standard Oil Products in Tbilisi at an effective interest rate of 18% per annum, in order to fund the construction of new petrol stations in Georgia. 32 CONTRACTUAL OBLIGATIONS AND COMMERCIAL TERMS Our principal business and assets are derived from production sharing contracts in the Republic of Georgia. The legislative and procedural regimes governing production sharing contracts and mineral use licenses in Georgia have undergone a series of changes in recent years resulting in certain legal uncertainties. Our production sharing contracts and mineral use licenses, entered into prior to the introduction in 1999 of a new Petroleum Law governing such agreements have not, as yet, been amended to reflect or ensure compliance with current legislation. As a result, despite references in the current legislation grandfathering the terms and conditions of our production sharing contracts, conflicts between the interpretation of our production sharing contracts and mineral use licenses and current legislation could arise. Such conflicts, if they arose, could cause an adverse effect on our rights under the production sharing contracts. However the Norio (Block XI(c)) and North Kumisi Production Sharing Agreement was concluded after enactment of the Petroleum Law, and under the terms and conditions of this legislation. To confirm that the Ninotsminda production sharing contract and the mineral usage license issued prior to the introduction in 1999 of the Petroleum Law were validly issued, in connection with its preparation of the Convertible Loan Agreement with us, the International Finance Corporation, an affiliate of the World Bank received in November 1998 confirmation from the State of Georgia, that among other things: o The State of Georgia recognizes and confirms the validity and enforceability of the production sharing contract and the license and all undertakings the State has covenanted with Ninotsminda Oil Company thereunder; o the license was duly authorized and executed by the State at the time of its issuance and remained in full force and effect throughout its term; and o the license constitutes a valid and duly authorized grant by the State, being and remaining in full force and effect as of the signing of this confirmation and the benefits of the license fully extend to Ninotsminda Oil Company by virtue of its interest in the license holder and the contractual rights under the production sharing contract. Despite this confirmation and the grandfathering of the terms of existing production sharing contracts in the Petroleum Law, subsequent legislative or other governmental changes could conflict with, challenge our rights or otherwise change current operations under the production sharing contract. In 2002 the Participation Agreement for the three well exploration programme on the Ninotsminda field with AES was terminated without AES earning any rights to any of the Ninotsminda field reservoirs. The Company therefore has not present obligations in respect of AES. However, under a separate Letter of Agreement, if gas from the Sub Middle Eocene is discovered and produced, AES will be entitled to recover at the rate of 15% of future gas sales from the Sub Middle Eocene, net of operating costs, of approximately $7.5 million, representing their prior funding under the Participation Agreement. In January 2003, CanArgo won exclusive rights to negotiate a Production Sharing Contract (PSC) for Block XIX in southern Syria. CanArgo has the contingent obligation to issue an aggregate of 333,000 stock options at a proposed exercise price of $0.17 per share, subject to the successful award of the PSC for Block XIX in southern Syria. CanArgo has contingent obligations and may incur additional obligations, absolute or contingent, with respect to the acquisition and development of oil and gas properties and ventures in which it has interests that require or may require CanArgo to expend funds and to issue shares of its Common Stock. At December 31, 2002, CanArgo had a contingent obligation to issue 187,500 shares of common stock to a third party upon satisfaction of conditions relating to the achievement of specified Stynawske field project performance standards. As CanArgo develops current projects and undertakes other projects, it could incur significant additional obligations. The second phase of the preliminary work programme under the Norio and North Kumisi production sharing agreement commenced in January 2002 with the first exploration well at a cost of up to $4.4 million of which CanArgo's share of costs was $3.2 million. The State Agency for Oil and Gas Regulations in Georgia has confirmed that CanArgo has satisfied all drilling and work obligations under the terms of the Norio and Kumisi production sharing agreement. The well is currently suspended while CanArgo actively seeks partners for funding to deepen the well to the target zone. The shareholders agreement with the other shareholder of Norio calls for a bonus payment of $800,000 to be paid by CanArgo should commercial production be obtained from the Middle Eocene or older strata and a second bonus payment of $800,000 should production from the Block from the Middle Eocene or older strata exceed 250 tonnes of oil per day over any 90 day period. In 2001 an agreement was reached to undertake a limited investment and development program by June 2002 in respect of Boryslaw Oil Company to increase production and to meet certain work commitments 33 under the Stynawske field licence. These obligations have not been fully met, however, Boryslaw Oil Company is seeking modifications to the licence agreement to allow a proper assessment of the workovers and development plans completed to date. A repayment schedule of CanArgo's advances to Boryslaw Oil Company has also been agreed of which $360,000 was repaid by December 31, 2002 and has been fully paid in 2003. Boryslaw Oil Company has so far not been given notice by the Ukrainian licensing body of early termination of the license. CanArgo is actively seeking to farm-out part of its interest in Boryslaw Oil Company in return for finance to carry out the work programme. If Boryslaw Oil Company does not proceed with the Stynawske field development programme or if modifications to the current licence agreement cannot be obtained, it may be in breach of obligations it has with regard to the field license and an impairment charge against CanArgo's investment in and advances to Boryslaw Oil Company may be required. In August 2002, Ninotsminda Oil Company entered into a 12 month crude oil sales agreement to sell its monthly share of oil produced under the Ninotsminda production sharing contract. As security for payment the buyer has paid to Ninotsminda Oil Company $1 million to be repaid at the end of the twelve month period through the delivery of additional crude oil equal to the value of the security. Under the agreement, crude oil will be sold at dated Brent less a fixed discount per barrel depending on the Brent price. The discount ranges from a minimum of $6.00 per barrel when dated price is less than $15.00 per barrel to a maximum $7.50 per barrel when dated Brent is greater than $25.01 per barrel. The following tables sets forth information concerning the amounts of payments due under specified contractual obligations for periods of less than one year, one to three years, three to five years and more than five years as at December 31, 2002 and December 31, 2001. CONTRACTUAL OBLIGATIONS
DUE IN LESS DUE IN 1 TO 3 DUE IN 3 TO 5 DUE IN MORE THAN 1 YEAR YEARS YEARS THAN 5 YEARS ----------- ------------- ------------- ------------ Operating lease obligations $250,000 690,000 440,000 440,000 Other long-term liabilities(1) -- -- -- 122,290 ----------- ------------- ------------- ------------ $250,000 690,000 440,000 562,290 =========== ============= ============= ============
(1) Other long-term liabilities represent costs provided for future site restoration. (2) CanArgo has no contractual obligations in respect of long-term debt, capital leases or purchase obligations. RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 CanArgo recorded operating revenue of $5,576,000 during the year ended December 31, 2002 compared with $7,171,000 for the year ended December 31, 2001. The decrease is primarily attributable to there being no refining revenue in 2002 following suspension of activity in 2001, offset by other revenue, representing provision of drilling services in Georgia. Ninotsminda Oil Company generated $4,163,000 of oil and gas revenue in the year ended December 31, 2002 compared with $3,967,000 for the year ended December 31, 2001 due principally to a a lower average net sales price achieved in 2002. Its net share of the 292,289 barrels (801 barrels per day) of gross oil production for sale from the Ninotsminda field in the period amounted to 189,988 barrels. In 2002, 44,483 barrels of oil were removed from storage and sold. For the year ended December 31, 2001, Ninotsminda Oil Company's net share of the 413,724 barrels (1,133 barrels per day) of gross oil production was 247,179 barrels. The decline in production is due to limited workover investment resulting in a natural reservoir rate of decline. 34 Ninotsminda Oil Company's entire share of production was sold locally in Georgia under both national and international contracts. Net sale prices for Ninotsminda oil sold during 2002 averaged $17.09 per barrel as compared with an average of $19.43 per barrel in 2001. Its net share of the 212,499 thousand cubic feet (mcf) of gas delivered was 138,124 mcf at an average net sale price of $1.25 per mcf of gas. For the year ended December 31, 2001, Ninotsminda Oil Company's net share of the 1,110,390 mcf of gas delivered was 721,754 mcf at an average net sales price of $1.14 per mcf of gas. Gas deliveries for the year ended December 31, 2002 declined significantly due to lower oil and gas production and the temporary shutdown by AES of its thermal power generating station following an accident at the facility. Although AES has now re-opened, CanArgo has not sold any further gas to AES since their demand for gas was too great for CanArgo to meet from production. CanArgo had no refining revenue for the year ended December 31, 2002 compared to revenue from refining of $2,596,000 for the year ended, December 31, 2001. Refining revenues for 2001 related solely to the refinery owned by Georgian American Oil Refinery. Currently only naptha, diesel and mazut can be produced and of these products, an excise tax on both naptha and diesel sales remains in place. As a result of these taxes and the local market for naptha in the Republic of Georgia, CanArgo deemed production of naptha as commercially uneconomic and suspended refining activity in the fourth quarter of 2001. In 2002 CanArgo entered into a short-term lease of the refinery to a third party for nominal revenue. During the lease period, all operating costs of the refinery were borne by the lessee. This lease expired in May 2002 and has not been renewed . CanArgo continues to monitor demand for product able to be produced by the refinery and is seeking changes to the legislation in support of indigenous refining activities, although no assurance can be given that such changes can be made. The refinery is now in a care and maintenance condition. CanArgo had other revenue of $1,413,000 for the year ended December 31, 2002 compared to other revenue of $608,000 for the year ended December 31, 2002. In 2002, other revenue consisted of $1,324,000 for the provision of drilling services and $89,000 of rental income from leasing its refinery. In 2001, other revenue was all in respect of the provision of drilling services. In September 2001, CanArgo entered into an agreement to provide drilling services to a third party using one of CanArgo's rigs. Commercial drilling operations commenced in October 2001 and continued through February 2002. No new drilling service contracts have been signed, although the company has established a well services subsidiary, which will bid in local tenders for drilling contracts. The operating loss from continuing operations for the year ended December 31, 2002 amounted to $4,971,000 compared with an operating loss of $16,107,000 for 2001. The decrease in operating loss is attributable primarily to reduced impairment of oil and gas properties and other assets in 2002, refining activity, profit generated from a drilling services contract, a reduced depreciation, and reduced depletion and amortization in the period. Field operating expenses decreased to $1,538,000 ($4.69 per BOE) for the year ended December 31, 2002 as compared to $1,568,000 ($2.62 per BOE) for 2001. The decrease is primarily a result of decreased activity at the Ninotsminda field offset partially by costs relating to sales of oil from storage in the year. Operating costs per BOE increased as day to day field operations in Georgia include a proportionately higher fixed to variable cost component combined with lower production rates. CanArgo recorded no Purchases of crude oil and products and Refinery operating expenses for the year ended December 31, 2002 compared to Purchases of crude oil and products of $1,451,000 and Refinery operating expenses of $791,000 respectively for the year ended, December 31, 2001. Purchases of crude oil and products and Refinery operating expenses for the year ended December 31, 2001 related solely to refining activity which was suspended in the fourth quarter of 2001. Direct project costs increased to $1,429,000 for the year ended December 31, 2002, from $1,300,000 for the year ended December 31, 2001, reflecting additional costs associated with the provision of drilling services in Georgia. 35 Selling, general and administrative costs decreased to $3,652,000 for the year ended December 31, 2002, from $3,742,000 for the year ended December 31, 2001. The decrease is primarily as a result of the impact of a corporate cost reduction programme initiated in the last quarter of 2002 offset partially by increased costs resulting from business development activity. The decrease in depreciation, depletion and amortization expense to $2,317,000 for the year ended December 31, 2002 from $3,250,000 for the year ended December 31, 2001 is attributable principally to lower production, due to limited workover investment resulting in a natural reservoir rate of decline. During 2002, CanArgo wrote down its oil and gas properties in the Ninotsminda field by an aggregate $1,600,000 on application of the full cost ceiling test as a result of lower reserve quantities following production declines in 2002. The write-down was a non-cash write-down. In 2001, CanArgo wrote down its oil and gas properties in the Ninotsminda field by an aggregate $7,300,000 on application of the full cost ceiling test as a result of a decline in Brent oil prices at December 31, 2001, lower reserve quantities following production declines in 2001 and reduced development plans. If oil prices or production levels decline further, CanArgo may experience additional impairment of this property. In 2001, as a result of both product instability and continued difficulties addressing excise taxes on refined products, refinery and related equipment was written-down by $3,360,000 to reflect, under current conditions, the estimated net recoverable amount of the refinery. In 2001, CanArgo further wrote down other oil and gas related equipment by $500,000 following a decision to dispose of a power generating unit. In 2002, a plan was agreed to sell this equipment and it is included in assets held for sale as at December 31, 2002. CanArgo recorded net other expenses of $536,000 for the year ended December 31, 2002, as compared to net other income of $407,000 during the year ended December 31, 2001. This is primarily due to CanArgo's adjusted interest in its share of the carrying net asset value of its subsidiary CanArgo Norio Limited (Norio) giving rise to a non-operating loss of $444,000, in accordance with the application of SAB 51, following agreement with the minority shareholders on the finalization of respective equity interest in Norio. Additional movements are explained by lower cash balances in 2002, an allowance for doubtful accounts of $275,000 from previous gas sales, and a bad debt write-off of $93,000 relating to the provision of drilling services in Georgia. Equity income from investments increased to $86,000 for the year ended December 31, 2002 from an equity loss of $160,000 for the year ended December 31, 2001 as a result of increased equity income from production and sales of crude oil by Boryslaw Oil Company and 2001 expenses relating to operation by East Georgian Pipeline Company of the gas pipeline from Ninotsminda to the Gardabani power station. The net loss from continuing operations of $5,499,000 or $0.06 per share for the year ended December 31, 2002 compares to a net loss from continuing operations of $13,562,000 or $0.16 per share for the year ended December 31, 2001. The weighted average number of common shares outstanding was substantially higher during the year ended December 31, 2002 than during the year ended December 31, 2001, due in large part to private placements in July 2001, February and May 2002. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 CanArgo recorded operating revenue of $7,171,000 during the year ended December 31, 2001 compared with $7,010,000 for the year ended December 31, 2000. The increase is primarily due to increased refining revenue from Georgian American Oil Refinery and other revenue, representing rental of CanArgo equipment in Georgia partially offset by lower oil and gas revenues. Ninotsminda Oil Company generated $3,967,000 of oil and gas revenue in the year ended December 31, 2001. Its net share of the 414,000 barrels (1,133 barrels per day) of gross oil production for sale from the Ninotsminda field in the period amounted to 247,179 barrels. In 2001, 38,731 barrels of oil were added to storage. For the year ended December 31, 2000, Ninotsminda Oil Company's net share of the 479,000 barrels (1,312 barrels per day) of gross oil production was 245,947 barrels. 36 Ninotsminda Oil Company's entire share of production was sold into the Georgian local and regional market. Because lower transportation costs are involved, CanArgo believes that sales of Ninotsminda oil to customers in the Georgian local and regional market generally yield relatively higher net sales prices to Ninotsminda Oil Company than sales to other customers. Net sale prices for Ninotsminda oil sold during 2001 averaged $19.43 per barrel as compared with an average of $20.14 per barrel in 2000. Its net share of the 1,110,390 thousand cubic feet (mcf) of gas delivered was 721,754 mcf at an average net sale price of $1.14 per mcf of gas. For the year ended December 31, 2000, Ninotsminda Oil Company's net share of the 1,764,000 mcf of gas delivered was 1,146,000 mcf at an average net sales price of $1.16 per mcf of gas. Refining revenue for the year ended December 31, 2001 relates solely to operating activities of Georgian American Oil Refinery. In 2001, sales from the refinery continued to be affected following the imposition of restrictions and subsequent excise tax on feedstock and refined product. Although in April 2001 new legislation addressing indigenous refining activities was passed by the Republic of Georgia that removed or reduced excise taxes on feedstock and refined product, the refinery has since experienced unexpected technical difficulties which have effectively curtailed the production of gasoline. Due to excise taxes, production of naphtha is currently commercially uneconomic and refining activity has been suspended. CanArgo has initiated discussions with authorities in the Republic of Georgia to remove or reduce the excise tax to a level that would support the recommencement of refining operations. While CanArgo believes from discussions to date that such changes are possible, no assurance can be given that any such changes will be made. As a result, CanArgo recorded a write-down of $3,360,000 to reflect, under current conditions, the estimated net recoverable amount of the refinery. CanArgo had revenue from equipment rentals in 2001 of $608,000 compared to other revenue from equipment rentals of $365,000 for the year ended, December 31, 2000. In September 2001, CanArgo entered into an agreement to provide drilling services to a third party using one of CanArgo's rigs. Commercial drilling operations commenced in October 2001 and continued through February 2002. The operating loss from continuing operations for the year ended December 31, 2001 amounted to $16,107,000 compared with an operating loss of $2,401,000 for 2000. The increase in operating loss is attributable primarily to the impairment of oil and gas properties of $7,300,000, impairment of refinery assets of $3,860,000, lower oil and gas revenue of $2,141,000 as a result of lower production and significant increases in operating and corporate activity. Field operating expenses increased to $1,568,000 ($2.62 per BOE) for the year ended December 31, 2001 as compared to $1,287,000 ($1.66 per BOE) for 2000. The increase is primarily a result of increased activity at the Ninotsminda field. Operating costs per BOE increased as day to day field operations in Georgia include a proportionately higher fixed to variable cost component combined with lower production rates. Purchases of crude oil and products and refinery operating expenses of $1,451,000 and $791,000 respectively for the year ended December 31, 2001 relate to operating activities of Georgian American Oil Refinery. The increase is due to a full year of consolidation of activity in 2001. Direct project costs increased to $1,300,000 for the year ended December 31, 2001, from $738,000 for the year ended December 31, 2000, reflecting project cost associated with an agreement to provide drilling services to a third party using CanArgo rig equipment, increased activity within Georgia, reestablishment of activity with respect to the license Boryslaw Oil Company holds in the Stynawske field, Ukraine and the acquisition of LVR. Selling, general and administrative costs increased to $3,742,000 for the year ended December 31, 2001, from $3,050,000 for the year ended December 31, 2000. The increase is primarily attributable to significant increased operating and corporate activity, higher costs attributed to the London office following the move of administrative and finance functions from Calgary to London in 2000, an allowance for $200,000 against a potential bad debt and general and administrative costs of $261,000 related to refining activity. 37 The decrease in depreciation, depletion and amortization expense to $3,250,000 for the year ended December 31, 2001 from $3,876,000 for the year ended December 31, 2000 is attributable principally to lower depletion resulting from lower sales of oil and gas during the year. During 2001, CanArgo wrote down its oil and gas properties in the Ninotsminda field by an aggregate $7,300,000 on application of the full cost ceiling test as a result of a decline in Brent oil prices at December 31, 2001, lower reserve quantities following production declines in 2001 and reduced development plans. The write-down was a non-cash write-down. As a result of both product instability and continued difficulties addressing excise taxes on refined products, refinery and related equipment was written-down by $3,360,000 to reflect, under current conditions, the estimated net recoverable amount of the refinery. During 2001, CanArgo further wrote down other oil and gas related equipment by $500,000 following a decision to dispose of a power generating unit which CanArgo has identified as surplus to its existing requirements. This equipment is included in current assets as at December 31, 2001. CanArgo recorded net other income of $407,000 for the year ended December 31, 2001, as compared to net other income of $231,000 during the year ended December 31, 2000. The principal reason for the increase in net other income is a decrease in loss from equity investments and higher cash balances in 2001. Equity loss from investments primarily relate to expenses related to operation by East Georgian Pipeline Company of the gas pipeline from Ninotsminda to the Gardabani power station and Rustavi industrial complex. Equity loss from investments decreased to $160,000 for the year ended December 31, 2001, from a loss of $240,000 for the year ended December 31, 2000 as a result of equity income from production and sales of crude oil by Boryslaw Oil Company and the sale of CanArgo's small investment in Uentech International Corporation. No material gain resulted from the sale of Uentech International Corporation. The net loss from continuing operations of $13,562,000 or $0.16 per share for the year ended December 31, 2001 compares to a net loss from continuing operations of $2,143,000 or $0.04 per share for the year ended December 31 2000. The weighted average number of common shares outstanding was substantially higher during the year ended December 31, 2001 than during the year ended December 31, 2000, due in large part to private placements in April, June and August 2000 and July 2001. RESULTS OF DISCONTINUED OPERATIONS Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 The net income from discontinued operations, net of taxes and minority interest for the year ended December 31, 2002 amounted to $171,000 compared with net income of $344,000 for the corresponding period in 2001. The decrease in net income from discontinued operations, net of taxes and minority interest relates entirely to the activities of CanArgo standard Oil Products, and is due to more competitive operating margins for the year ended December 31, 2002 compared with the corresponding period in 2001 and interest on additional bank loans drawn by CanArgo Standard Oil Products in Tbilisi at an effective interest rate of 18% per annum, in order to fund the construction of new petrol stations in Georgia. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 The net income from discontinued operations, net of taxes and minority interest for the year ended December 31, 2001 amounted to $344,000 compared with a loss of $8,000 for the corresponding period in 2000. The increase in net income from discontinued operations, net of taxes and minority interest is due to additional operating petrol stations in Georgia and relates entirely to the activities of CanArgo standard Oil Products. CanArgo Standard Oil Products was purchased in 2000 and operations were developed in 2001. RELATED PARTY TRANSACTIONS Of the 50% of CanArgo Standard Oil Products not held by CanArgo, 41.65% is held by Standard Oil Products, an unrelated third party entity, and 8.35% is held by an individual, Mr Levan Pkhakadze, who is 38 one of the founders of Standard Oil Products and is an officer and director of CanArgo Standard Oil Products. The majority of refined product purchased by CanArgo Standard Oil Products for resale at its petrol stations is purchased from a company controlled by Standard Oil Products who together with an individual shareholder, own the 50% interest in CanArgo Standard Oil Products not held by CanArgo. Total product purchases from the related company in 2002 were $5,263,000. Certain equipment is provided to Georgian British Oil Company Ninotsminda by a company owned by significant employees of Georgian British Oil Company Ninotsminda. Total rental payments for this equipment in 2002 were $125,729. In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex Acquisition Corporation the remaining 50% interest it did not own in CanArgo Power for cash consideration of $425,000. In a related but separate transaction, CanArgo sold in April 2001 all of its voting and non-voting shares of Uentech International Corporation to a wholly owned subsidiary of Terrenex Acquisition Corporation. Proceeds from the sale of Uentech International Corporation were $125,000. On completion of the acquisition, CanArgo Power became a wholly owned subsidiary of CanArgo. The transactions were approved by an independent committee of the Board of Directors. Two members of the Board of Directors of CanArgo who were also members of the Board of Directors of Terrenex Acquisition Corporation, Messrs. Hammond and Paus, abstained from voting on the transactions. Dr. David Robson, Chief Executive Officer, provides all of his services to CanArgo through Vazon Energy Limited of which he is the Managing Director. J.F. Russell Hammond, a non-executive director of CanArgo, is also an investment advisor to Provincial Securities who became a minority shareholder in the Norio and North Kumisi Production Sharing Agreement through a farm-in agreement to the Norio MK72 well. Transactions with affiliates or other related parties including management of affiliates are to be undertaken on the same basis as third party arms-length transactions. Transactions with affiliates are reviewed and voted on solely by non-interested directors. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to establish accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities. Such accounting policies include the method used to account for capital assets such as oil and gas properties, property and equipment and refining and marketing assets. Capital assets - capital assets are recorded at cost less accumulated provisions for depreciation, depletion and amortization unless the carrying amount is viewed as not recoverable in which case the carrying value of the assets is reduced to the estimated recoverable amount. Expenditures for major renewals and betterments, which extend the original estimated economic useful lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expenses as incurred. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon is reflected in operations. Unproved properties are not deemed to be impaired until the right to drill on those properties is lost and planned development has ceased. Oil And Gas Properties - CanArgo and the entities for which it accounts using the equity method account for oil and gas properties and interests under the full cost method. Under this accounting method, costs, including a portion of internal costs associated with property acquisition and exploration for and development of oil and gas reserves, are capitalized within cost centers established on a country-by-country basis. Capitalized costs within a cost center, as well as the estimated future expenditures to develop proved reserves and estimated net costs of dismantlement and abandonment, are amortized using the unit-of-production method based on estimated proved oil and gas reserves. All costs relating to production activities are charged to expenses as incurred. 39 Capitalized oil and gas property costs, less accumulated depreciation, depletion and amortization and related deferred income taxes, are limited to an amount (the ceiling limitation) equal to (a) the present value (discounted at 10%) of estimated future net revenues from the projected production of proved oil and gas reserves, calculated at prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by fixed and determinable contractual arrangements), plus (b) the lower of cost or estimated fair value of unproved and unevaluated properties, less (c) income tax effects related to differences in the book and tax basis of the oil and gas properties. Estimated undiscounted future site restoration, dismantlement and abandonment costs of $820,000 at December 31, 2002 are amortized on a unit of production basis and reflected with accumulated depreciation, depletion and amortization. CanArgo identifies and estimates such costs based upon its assessment of applicable regulatory requirements, its operating experience and oil and gas industry practice in the areas in which its properties are located. To date CanArgo has not been required to expend any material amounts to satisfy such obligations. Property and Equipment - Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets ranging from three to five years for office furniture and equipment to three to fifteen years for oil and gas related equipment. Discontinued Operations - CanArgo Standard Oil Products petrol stations and additions thereto were depreciated over the estimated useful lives of the assets ranging from ten to fifteen years until operations were reclassified as discontinued. NEW ACCOUNTING STANDARDS In August 2001, FASB issued Statement No. 143 Accounting for Asset Retirement Obligations. Statement 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred concurrent with an increase in the long-lived assets carrying value. The increase and subsequent adjustments in the related long-lived assets carrying value is amortised over its useful life. Upon settlement of the liability a gain or loss is recorded for the difference between the settled liability and the recorded amount. This standard will be effective for CanArgo on January 1, 2003. We are in the process of assessing the impact that the adoption of this standard will have on our financial position and results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). This standard will require companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The standard replaces the existing guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The statement is effective for fiscal years beginning after December 31, 2002. CanArgo does not expect the adoption of this standard to have a material effect on its financial statements. We have applied the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123," for the years ended December 31, 2002, 2001, and 2000. SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS No. 148, we continue to account for stock options under APB Opinion No. 25. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to 40 recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. To date we have not entered into or modified any such guarantees. FORWARD LOOKING STATEMENTS The forward looking statements contained in this Item 7 and elsewhere in this Annual Report on Form 10-K are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated in such forward looking statements. Included among the important risks, uncertainties and other factors are those hereinafter discussed. Few of the forward-looking statements in this Annual Report deal with matters that are within CanArgo's unilateral control. Joint venture, acquisition, financing and other agreements and arrangements must be negotiated with independent third parties and, in some cases, must be approved by governmental agencies. These third parties generally have objectives and interests that may not coincide with CanArgo's and may conflict with CanArgo's interests. Unless we are able to compromise these conflicting objectives and interests in a mutually acceptable manner, agreements and arrangements with these third parties will not be consummated. Operating entities in various foreign jurisdictions must be registered by governmental agencies, and production licenses for development of oil and gas fields in various foreign jurisdictions must be granted by governmental agencies. These governmental agencies generally have broad discretion in determining whether to take or approve various actions and matters. In addition, the policies and practices of governmental agencies may be affected or altered by political, economic and other events occurring either within their own countries or in a broader international context. Finally, due to the developing nature of the legal regimes in many Eastern European countries where CanArgo operates, our contractual rights and remedies may be subject to certain legal uncertainties. CanArgo does not have a majority of the equity in the entity that is the licensed developer of some projects, such as the Bugruvativske and Stynawske field projects, that CanArgo may pursue in Eastern Europe, even though we may be the designated operator of the oil or gas field. In these circumstances, the concurrence of co-venturers may be required for various actions. Other parties influencing the timing of events may have priorities that differ from ours, even if they generally share our objectives. As a result of all of the foregoing, among other matters, any forward-looking statements regarding the occurrence and timing of future events may well anticipate results that will not be realized. Demands by or expectations of governments, co-venturers, customers and others may affect CanArgo's strategy regarding the various projects. Failure to meet such demands or expectations could adversely affect CanArgo's participation in such projects or our ability to obtain or maintain necessary licenses and other approvals. CanArgo's ability to finance all of its present oil and gas projects and other ventures according to present plans is dependent upon obtaining additional funding. An inability to obtain financing could require CanArgo to scale back or abandon part of all of CanArgo's project development, capital expenditure, production and other plans. The availability of equity or debt financing to CanArgo or to the entities that are developing projects in which CanArgo has interests is affected by many factors, including: - world economic conditions; - international relations; - the stability and policies of various governments; - fluctuations in the price of oil and gas, the outlook for the oil and gas industry and competition for funds; and - an evaluation of CanArgo and specific projects in which CanArgo has an interest. Rising interest rates might affect the feasibility of debt financing that is offered. Potential investors and lenders will be influenced by their evaluations of us and our projects and comparisons with alternative investment opportunities. 41 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CanArgo's principal exposure to market risk is due to changes in oil and gas prices and currency fluctuations. As indicated elsewhere in this Report, as a producer of oil and gas CanArgo is exposed to changes in oil and gas prices as well as changes in supply and demand which could affect its revenues. CanArgo does not engage in any commodity hedging activities. Due to the ready market for its production in the Republic of Georgia, CanArgo does not believe that any current exposures from this risk will materially affect CanArgo's financial position at this time, but there can be no assurance that changes in such market will not affect CanArgo adversely in the future. Also as indicated elsewhere in this Report, because all of CanArgo's operations are being conducted in Eastern Europe, CanArgo is potentially exposed to the market risk of fluctuations in the relative values of the currencies in areas in which it operates. At present CanArgo does not engage in any currency hedging operations since, to the extent it receives payments for its production and marketing activities in local currencies, it is utilizing such currencies to pay for its local operations. In addition, it currently has contracts to sell its production from the Ninotsminda field in the Republic of Georgia which provide for payment in dollars, although we may not always be able to continue to demand payment in U.S. dollars. While CanArgo Standard Oil Products marketing revenue is denominated in Lari, the local Georgian currency, and is used to pay Lari denominated operating costs, its long term debt is denominated in dollars. As a result, changes in the exchange rate could have a material adverse effect on its ability to pay off non-Lari denominated indebtedness such as its existing credit facility. The sensitivity to changes in exchange rates for CanArgo Standard Oil Products was determined using current market pricing models. We estimate that a 10% appreciation or devaluation in the foreign exchange rate of the Lari against the dollar in 2001 would not have had a significant impact on operations. No assurance can be given, however, that changes in exchange rates would be limited to a 10% appreciation or devaluation in the foreign exchange rate. CanArgo had no material interest in investments subject to market risk during the period covered by this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements required to be filed in this Report begin at Page F-1 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements between CanArgo and its principal accountants during the two most recent fiscal years. 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Current Directors and Executive Officers of the Company are as follows:
NAME AGE OFFICE OR OFFICES - ---- --- ---------------------------------------------------- David Robson(1) 45 Chairman of the Board, Managing Director and Chief Executive Officer Russell Hammond(2)(3) 61 Director Nils N. Trulsvik(2)(3) 54 Director Murray Chancellor 50 Chief Operating Officer Vincent McDonnell(4) 44 Chief Commercial Officer and Chief Financial Officer Liz Landles(5) 42 Corporate Secretary
- ------------ (1) On November 11 2002, Roger Brittain resigned as non-executive Chairman of the Board and on November 21 2002, the Board appointed Dr. Robson Chairman and Chief Executive Officer of the Company (2) Member of Audit Committee (3) Member of Compensation Committee (4) On September 23 2002, the Board appointed Vincent McDonnell Chief Commercial Officer and Chief Financial Officer of the Company to replace Anthony J. Potter who resigned in September 2002 and who previously held the position of Chief Financial Officer. (5) On August 1, 2002, Liz Landles was appointed Corporate Secretary. DAVID ROBSON, a resident of Guernsey, was elected a Director, Chairman of the Board and Chief Executive Officer of the Company on July 15, 1998 and subsequently Managing Director and Chief Executive Officer, being reappointed Chairman on November 27, 2002. He has also served as a Director, Chairman of the Board and Chief Executive Officer of the Company's subsidiary, CanArgo Oil & Gas Inc., since July 1997, as President of CanArgo Oil & Gas Inc.'s subsidiary, Ninotsminda Oil Company, since 1996, and as Managing Director and sole owner of Vazon Energy Limited, a company which provides consulting services to the energy industry, since March 1997. From April 1992 until July 1993, Dr. Robson was General Manager of JP Kenny/Intershelf Oil & Gas Resources, from July 1993 until December 1993, Operations Director of JP Kenny Exploration and Production Limited ("JP Kenny"), from December 1993 until November 1994, Managing Director, JP Kenny and from November 1994 until March 1997, Dr. Robson was Chief Executive Officer of JKX Oil &Gas. Prior to this he was employed in technical and commercial positions in Britoil plc, Hamilton Oil and Mobil. He holds a B.Sc. (Hons) in Geology and a Ph.D. in Geochemistry from the University of Newcastle upon Tyne, and an MBA from the University of Strathclyde. Dr. Robson devotes substantially all of his time to CanArgo. RUSSELL HAMMOND, a resident of the UK, was elected a Director of the Company on July 15, 1998. He has also served as a Director of the Company's subsidiary, CanArgo Oil & Gas Inc., since June 1997. Although retired, Mr. Hammond has over the past five years been an investment advisor to Provincial Securities Ltd., a private investment company. Mr. Hammond has been Chairman of Terrenex Acquisition Corporation, an oil and gas and joint venture company since 1992 and a director of Cadiz Inc., a Nasdaq National Market listed company, from 1989 to January 1999. NILS N. TRULSVIK, a resident of the UK, was elected a Director of the Company on August 17, 1994. He has served the Company as President and Chief Executive Officer from February 4, 1997 to July 15, 1998 and from November 21, 1994 to March 9, 1995; and as Executive Vice President from March 9, 1995 to February 4, 1997 and from September 8, 1994 until November 21, 1994. Since January 2, 1999 Mr. Trulsvik has served as the Chief Executive Officer of Force Petroleum. From August 1998 Mr. Trulsvik has been a partner in a consulting company, The Bridge Group, located in Norway. Mr. Trulsvik is a petroleum explorationist with extensive experience in petroleum exploration and development throughout the world. Prior to joining the Company, he held various positions with Nopec a.s. a Norwegian petroleum 43 consultant group of companies of which he was a founder, including Managing Director from 1987 to 1993 and Special Advisor from 1993 to August 1994. MURRAY CHANCELLOR, a resident of the UK, was elected Chief Operating Officer of the Company on September 11, 2000. Mr. Chancellor joined the company from Aminex PLC, a UK oil and gas exploration company, where he was most recently involved as General Director of Russian Operations from April 1998 until September 2000. From 1996 until April 1998, Mr. Chancellor served as Deputy General Director and Technical Director of Poltava Petroleum Company. Mr. Chancellor has an extensive experience in the oil and gas sector having worked in the UK, Norway, Australia, North America, the Middle East and the Former Soviet Union. An engineer by profession, he has been involved in engineering and project management activities both onshore and offshore. He has held senior management positions in oil and gas development projects in both Russia and Ukraine, as well as having extensive experience in the North Sea. Mr. Chancellor holds a Bachelor of Engineering (Civil) degree. VINCENT MCDONNELL, a resident of the UK, was appointed Chief Financial Officer on September 23, 2002. Prior thereto, he served CanArgo as Chief Commercial Officer of the Company since April 1, 2001 and Commercial Manager from December 2000. Prior to joining the Company, he was an independent oil and gas consultant from May 1999 until October 2000. From 1994 until April 1999, Mr. McDonnell served as Commercial Manager of JKX Oil & Gas plc. Prior to 1994, Mr. McDonnell worked in various business, commercial and technical roles with a number of companies, including Mobil Oil and Britoil. He holds a Bachelor of Science (Hons.) degree in Geology, a Master of Science degree in Geophysics together with a Master of Business Administration (MBA) degree. LIZ LANDLES, a resident of Guernsey, was appointed Corporate Secretary on August 1, 2002. Prior thereto, she served as Assistant Corporate Secretary of the Company since December 4, 2000. Mrs Landles also acts as the Company's Administration Manager and is responsible for organising the Company's administrative activities. Mrs Landles has worked for the Company since October 1997, principally in an administrative role and more recently as a Director of some of the Company's subsidiaries. Directors hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. Officers serve at the pleasure of the Board of Directors. SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires CanArgo's executive officers and directors, and persons who own more than 10% of the registered class of CanArgo's equity securities ("Reporting Persons"), to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Reporting persons are required by SEC Regulations to furnish CanArgo with copies of all forms they file pursuant to Section 16(a). Based solely on CanArgo's review of reports filed under Section 16(a) of the Securities Exchange Act of 1934 and certain representations, CanArgo believes that all filing requirements applicable to its officers, directors and persons who own more than 10% of a registered class of CanArgo's securities have been complied with. 44 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table shows all compensation paid or accrued by CanArgo and its subsidiaries during the years ended December 31, 2002, 2000 and 1999 to certain executive officers of CanArgo (the "Named Officers").
LONG-TERM ANNUAL COMPENSATION COMPENSATION ----------------------- -------------- SECURITIES UNDERLYING ALL OTHER NAME AND YEAR OPTIONS/SARS COMPENSATION PRINCIPAL POSITION ENDED SALARY($) BONUS($) (#) ($)(6) - ------------------- ----- --------- -------- ------------- ------------- David Robson(1) 12/02 217,500 29,000 -- 19,575 12/01 217,500 15,075 585,000 19,575 12/00 197,420 37,500 1,295,000 9,941 Murray Chancellor(2) 12/02 174,000 -- -- 15,660 12/01 174,000 -- 200,000 15,660 12/00 50,750 -- 250,000 4,568 Vincent McDonnell(3) 12/02 153,583 -- 100,000 13,822 12/01 137,750 -- 100,000 12,398 Anthony J. Potter(4) 12/02 188,500 -- -- 70,863 12/01 210,000 -- 100,000 1,333 12/00 120,116 -- 117,000 1,333 Liz Landles(5) 12/02 85,500 -- -- 7,695 12/01 70,875 -- 72,000 -- 12/00 29,100 -- 90,000 --
(1) Dr. Robson has served as Chief Executive Officer since July 15, 1998 and provides services to CanArgo through Vazon Energy Limited. (2) Mr. Chancellor has served as Chief Operating Officer since September 12, 2000. (3) Mr. McDonnell has served as Chief Commercial Officer since April 1, 2001. Prior thereto he served as Commercial Manager from December 1, 2000. In September 2002 he was appointed Chief Financial Officer of the Company. (4) Mr. Potter served as Chief Financial Officer from September 2000 until September 2002. Prior thereto he served as Vice-President Finance and Group Controller from July 15, 1998. (5) Mrs. Landles has served as Company Secretary since August 1, 2002. (6) Primarily CanArgo's contributions to or accruals with respect to individual retirement and pension plans, except for Mr Potter's other compensation in 2002 relating to severance. OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 2002 The following table sets forth information concerning options granted to the Named Officers who were employed during the year ended December 31, 2002.
NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO GRANT DATE OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT VALUE(2) NAME GRANTED 2002 PRICE DATE PER SHARE TOTAL - --------------------- ---------- ------------ -------- ---------- --------- ------ Vincent McDonnell(1) 100,000 77% $0.14 18/09/2006 $0.0921 $9,210
45 - ------------ (1) The options were granted at an exercise price in excess of the fair market value of CanArgo's Common Stock on the date of grant. The options vest 1/3 on 19/09/2003, 1/3 on 19/09/2004 and 1/3 on 19/09/2005. (2) These values were derived using the Black-Scholes option pricing model applying the following assumptions:
RISK-FREE INTEREST EXERCISE PRICE DIVIDEND YIELD VOLATILITY RATE EXPECTED TERM - ---------------- -------------- ---------- --------- ------------- $0.140 0% 80.47% 2.91% 3.37 years
Pursuant to the terms of CanArgo's various stock option plans, the Compensation Committee may, subject to each plan's limits, modify the terms of outstanding options, including the exercise price and vesting schedule thereof. These values are not intended to forecast future appreciation of CanArgo's stock price. The actual value, if any, that an executive officer may realize from his options (assuming that they are exercised) will depend solely on the increase in the market price of the shares acquired through option exercises over the exercise price, measured when the shares are sold. OPTION VALUES AT DECEMBER 31, 2002 The following table sets forth information concerning option exercises and the number and hypothetical value of stock options held by the Named Officers at December 31, 2002.
NUMBER OF SHARES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED NUMBER OF HELD AT FISCAL YEAR IN-THE-MONEY OPTIONS AT FISCAL SHARES VALUE END(1) YEAR END($) ACQUIRED ON REALIZED ------------------------------ ------------------------------- NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------ ------------ ---------- ----------- -------------- ----------- ------------- David Robson -- -- 2,488,334 178,333 -- -- Murray Chancellor -- -- 233,334 216,666 -- -- Vincent McDonnell -- -- 100,000 200,000 -- -- Anthony Potter -- -- 150,333 66,667 -- -- Liz Landles -- -- 112,667 59,333 -- --
- --------------- (1) The exercise of stock options is not dependent on performance criteria and may be exercised in full when vested. COMPENSATION OF DIRECTORS In 2002 CanArgo paid directors' fees on a quarterly basis at a rate of $37,500 per year plus Pound Sterling 1,000 for each meeting of the Audit Committee and Compensation Committee that they attend. CanArgo also reimburses ordinary out-of-pocket expenses for attending Board and Committee meetings. The Chairman of the Board of Directors, up until his resignation on November 12, 2002, was paid 35,000 Pound Sterling per year payable on a quarterly basis. On November 27, 2002 CanArgo announced that Dr David Robson had been appointed to the position of Chairman of the Board of CanArgo Energy Corporation in addition to his current duties as Chief Executive Officer. The following table shows the compensation paid to all persons who were non-employee directors, including their respective affiliates, during the year ended December 31, 2002: 46
OPTIONS AND DIRECTORS FEES AND CONSULTING WARRANTS NAME OTHER COMPENSATION PAYMENTS GRANTED - ---------------- ------------------ ---------- ----------- $ $ Roger Brittain 49,189 -- -- Russell Hammond 42,250 -- -- Nils N. Trulsvik 42,250 -- --
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2002, CanArgo's Compensation Committee consisted of Messrs. Trulsvik and Hammond and to November 12, 2002 Messr. Brittain, all of whom are or were non-employee directors. See the section entitled "Certain Relationships and Related Transactions". COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Committee's Responsibilities The Compensation Committee of the Board of Directors is composed entirely of non-employee directors. The Compensation Committee is responsible for setting and administering policies which govern CanArgo's executive compensation programs. The purpose of this report is to summarize the compensation philosophy and policies that the Compensation Committee applied in making executive compensation decisions in 2002. Compensation Philosophy The Compensation Committee has approved compensation programs intended to: o Attract and retain talented executive officers and key employees by providing total compensation competitive with that of other executives employed by companies of similar size, complexity and lines of business; o Motivate executives and key employees to achieve strong financial and operational performance; o Emphasize performance-based compensation, which balances rewards for short-term and long-term results; o Reward individual performance; o Link the interests of executives with shareholders by providing a significant portion of total pay in the form of stock incentives; and o Encourage long-term commitment to CanArgo. The Compensation Committee held four meetings during fiscal 2002. Stock Based Compensation Plan o At December 31, 2002, stock options and warrants had been issued from the following stock based compensation plans: 1995 Long-Term Incentive Plan. Adopted by CanArgo in February 1996, this plan allows for 7,500,000 shares of CanArgo's Common Stock to be issued to officers, directors, employees, consultants and advisors. As of December 31, 2002, 3,887,834 options were outstanding. o CAOG Plan. Adopted by CanArgo following the acquisition by CanArgo of CanArgo Oil & Gas Inc. in 1998, this plan allowed for 988,000 shares of CanArgo's Common Stock to be issued to employees, consultants and advisors. As of December 31, 2002, 626,667 options were outstanding. 47 o Special Stock Options and Warrants. Adopted by CanArgo in September 2000, this plan was created to allow CanArgo to retain and provide incentives to existing executive officers and directors and to allow recruitment of new officers and directors following the Company's decision to relocate finance and administrative functions from Calgary, Canada to London, England. As of December 31, 2002, 2,220,000 special stock options and warrants were outstanding. Compensation Methodology Each year the Compensation Committee reviews data from market surveys, proxy statements issued by competitors and independent consultants to assess CanArgo's competitive position with respect to the following three components of executive compensation: o base salary; o annual incentives; and o long-term incentives. The Compensation Committee also considers individual performance, level of responsibility, and skills and experience in making compensation decisions for each executive. Components of Compensation Base Salary: Base salaries for executives are determined based upon job responsibilities, level of experience, individual performance, comparisons to the salaries of executives in similar positions obtained from market surveys, and competitive data obtained from consultants and staff research. The goal for the base pay component is to compensate executives at a level which approximates the median salaries of individuals in comparable positions with comparable companies in the oil and gas industry. The Compensation Committee approves all salary increases for executive officers. Annual Incentives: An annual cash incentive has been developed and approved for the Chief Executive Officer. Long-Term Incentive Compensation: The Compensation Committee has structured long-term incentive compensation to provide for an appropriate balance between rewarding performance and encouraging employee retention. Long-term incentives are granted primarily in the form of stock options. The purpose of stock options is to align compensation directly with increases in shareholder value. The number of options granted is determined by reviewing survey data to determine the compensation made to other executives and management employees in comparable positions with comparable companies in the oil and gas sector. In determining the number of options to be awarded, the Compensation Committee also considers the grant recipient's qualitative and quantitative performance, the size of stock option awards in the past, and expectations of the grant recipient's future performance. In 2002, the Compensation Committee approved new stock options to one officer and one employee, and in 2001, approved a series of new stock options to a broad range of employees. The stock option awards were granted under the various plans available in the company. Compliance with Section 162(m) of the Internal Revenue Code Under Section 162(m) of the Internal Revenue Code, CanArgo Energy Corporation may not deduct annual compensation in excess of $1 million paid to certain employees, generally its Chief Executive Officer and its four other most highly compensated executive officers, unless that compensation qualifies as performance-based compensation. While the Compensation Committee intends to structure performance-related awards in a way that will preserve the maximum deductibility of compensation awards, the Compensation Committee may from time to time approve awards which would vest upon the passage of time or other compensation which would not result in qualification of those awards as performance-based compensation. It is not anticipated that compensation realized by 48 any executive officer under CanArgo Energy Corporation plans and programs now in effect will result in a material loss of tax deductions. Compensation of the Chief Executive Officer The Compensation Committee reviews annually the compensation of the Chief Executive Officer and recommends any adjustments to the Board of Directors for approval. The Chief Executive Officer participates in the same programs and receives compensation under the same programs as other executives. However, the Chief Executive Officer's compensation reflects the greater policy and decision-making authority that the Chief Executive Officer holds and the higher level of responsibility he has with respect to the strategic direction of CanArgo Energy Corporation and its financial and operating results. For 2002, the components of Dr. Robson's compensation were: o Base Salary: After considering CanArgo's overall performance and competitive practices, and the signing of a 3 year contract, the Compensation Committee recommended, and the Board of Directors approved, a base salary of Pound Sterling 150,000 (approx $217,500) for Dr. Robson, effective July 1, 2000. o Short-Term Incentives: In 2002, incentive compensation for Dr. Robson was based solely upon increase in cash flow per quarter. Based on 2002 cash flow performance each quarter, Dr. Robson qualified for a quarterly bonus in 2002 of $29,000. The bonus is capped at one times salary for a given quarter. In August 2000, the Compensation Committee elected to schedule its annual review of Chief Executive Officer performance and compensation for April of each year, to assure thorough consideration of year-end results. Actions taken by the Board of Directors in April 2003 with respect to Dr. Robson's 2003 compensation will be reflected in the proxy statement for the 2004 meeting of shareholders. It is the Compensation Committee's intention that, when taken together, the components of Dr. Robson's pay, including base salary, annual incentives, short-term incentive opportunity and long-term incentives, will result in compensation which approximates compensation paid by companies of similar size and industry. This report has been provided by the Compensation Committee. NILS N. TRULSVIK, CHAIRMAN. RUSSELL HAMMOND PERFORMANCE MEASUREMENT COMPARISON The chart set forth below shows the value of an investment of $100 on December 31, 1997 in each of CanArgo's Common Stock, the NASDAQ Composite Index and a peer group of certain oil and gas exploration and development companies. The peer group consists of the following independent oil and gas exploration companies: A&B Geoscience Corporation, Aminex plc, Bitech Petroleum Corporation, Bow Valley Energy Ltd., ASA, EuroGas, JKX Oil & Gas plc, Centurion Energy International Inc., Lundin Oil AB, Ramco Energy plc and Soco International plc. All values assume reinvestment of the pre-tax value of dividends paid by companies included in these indices and are calculated as of December 31 of each year. The historical stock price performance of the Common Stock shown in the performance graph below is not necessarily indicative of future stock price performance. 49 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Year End CanArgo Stock Price Peer Group Index N A S D A Q Composite Index - -------- ------------------- ---------------- --------------------------- 1997 100 100 100 1998 33 69 140 1999 82 82 260 2000 94 80 158 2001 31 75 110 2002 5 118 75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of December 31, 2002 with respect to aggregate beneficial ownership of outstanding shares of Common Stock and shares of Common Stock that would be issued upon exchange of Exchangeable Shares either outstanding or issuable for no additional consideration, by each person known by CanArgo to be the beneficial owner of more than 5% of the aggregate of such shares, by each Director and Named Officer of CanArgo and by all Directors and executive officers of CanArgo as a group.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS - --------------------------------------- -------------------- --------------- Roger Brittain 166,667(1) * David Robson 2,746,094(2) 2.8% Nils N. Trulsvik 419,700(3) * Russell Hammond 346,250(4) * Murray Chancellor 233,334(5) * Vincent McDonnell 100,000(6) * Anthony Potter 150,333(7) * Liz Landles 112,667(8) * All Directors and executive officers as a group (8 persons) 4,275,045(9) 4.4%
- ----------- o Less than 1%. (1) Includes 166,667 shares underlying presently exercisable options. (2) Includes 2,488,344 shares underlying presently exercisable options. (3) Includes 346,250 shares underlying presently exercisable options. (4) Includes 346,250 shares underlying presently exercisable options. (5) Includes 233,334 shares underlying presently exercisable options. (6) Includes 100,000 shares underlying presently exercisable options. (7) Includes 150,333 shares underlying presently exercisable options. (8) Includes 112,667 shares underlying presently exercisable options (9) Includes 3,943,845 shares underlying presently exercisable options held by directors and executive officers as a group. 50 The table below sets forth information concerning equity compensation plans adopted by CanArgo as at December 31 2002.
PLAN CATEGORY NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES ISSUED UPON THAT REMAIN AVAILABLE EXERCISE OF WEIGHTED AVERAGE FOR FUTURE ISSUANCE UNDER OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS OPTIONS, WARRANTS OUTSTANDING OPTIONS, (EXCLUDING SECURITIES AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) ----------------- ------------------- ------------------------- (a) (b) (c) Equity compensation plans approved by security holders 4,514,501 $0.69 2,468,835 Equity compensation plans not approved by security holders 2,200,000 $1.40 -- ----------------- ------------------- ------------------------ 6,734,501 $0.93 2,468,835
The material features of each equity compensation plan adopted by CanArgo as at December 31, 2002 are described in note 20 of the financial statements. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Of the 50% of CanArgo Standard Oil Products not held by CanArgo, 41.65% is held by Standard Oil Products, an unrelated third party entity, and 8.35% is held by an individual, Mr Levan Pkhakadze, who is one of the founders of Standard Oil Products and is an officer and director of CanArgo Standard Oil Products. The majority of refined product purchased by CanArgo Standard Oil Products for resale at its petrol stations is purchased from a company controlled by Standard Oil Products who together with and an individual shareholder, own the 50% interest in CanArgo Standard Oil Products not held by CanArgo. Total product purchases from the related company in 2002 were $5,263,000. Certain equipment is provided to Georgian British Oil Company Ninotsminda by a company owned by significant employees of Georgian British Oil Company Ninotsminda. Total rental payments for this equipment in 2002 were $125,729. In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex Acquisition Corporation the remaining 50% interest it did not own in CanArgo Power for cash consideration of $425,000. In a related but separate transaction, CanArgo sold in April 2001 all of its voting and non-voting shares of Uentech International Corporation to a wholly owned subsidiary of Terrenex Acquisition Corporation. Proceeds from the sale of Uentech International Corporation were $125,000. On completion of the acquisition, CanArgo Power became a wholly owned subsidiary of CanArgo. The transactions were approved by an independent committee of the Board of Directors. Two members of the Board of Directors of CanArgo who were also members of the Board of Directors of Terrenex Acquisition Corporation, Messrs. Hammond and Paus, abstained from voting on the transactions. Dr. David Robson, Chief Executive Officer, provides all of his services to CanArgo through Vazon Energy Limited of which he is the Managing Director. 51 J.F. Russell Hammond, a non-executive director of CanArgo, is also an investment advisor to Provincial Securities who became a minority shareholder in the Norio and North Kumisi Production Sharing Agreement through a farm-in agreement to the Norio MK72 well. Transactions with affiliates or other related parties including management of affiliates are to be undertaken on the same basis as third party arms-length transactions. Transactions with affiliates are reviewed and voted on solely by non-interested directors. ITEM 14. CONTROLS AND PROCEDURES Based upon an evaluation within the 90 days prior to the filing date of this report, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, are effective, as of the evaluation date, in timely alerting them to material information relating to our Company required to be included in our reports filed or submitted under the Exchange Act. Since the date of the evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect such controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 52 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 FINANCIAL STATEMENTS The following financial statements and related notes of the Company contained on pages F-1 through F-36 of the Company's Annual Report to the Stockholders for the year ended December 31, 2002 are incorporated herein by reference: Report of Independent Auditors Consolidated Statements of Operations - Years ended December 31, 2002, December 31 2001, and December 31, 2000. Consolidated Balance Sheets - December 31, 2002 and December 31, 2000. Consolidated Statements of Cash Flows - December 31, 2002, December 31 2001, and December 31, 2000. Consolidated Statements of Stockholders' Equity - Years ended December 31, 2002, December 31 2001, and December 31, 2000. Notes to Consolidated Financial Statements (a) 2 FINANCIAL STATEMENTS SCHEDULES None All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto. (a) 3 EXHIBITS Management Contracts, Compensation Plans and Arrangements are identified by an asterisk (*) Documents filed herewith are identified by a cross (+). 1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 9, 1999). 1(2) Selling Agent Agreement with each of Credifinance Securities Limited, David Williamson Associates Limited, and Orkla Finans (Fondsmegling) ASA (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 9, 1999). 1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 9, 1999). 1(4) Selling Agent Agreement with National Securities Corporation (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). 1(5) Escrow Agreement with Continental Stock Transfer & Trust Company (Incorporated herein
53 by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). 1(6) Engagement Agreement with Sundal Collier & Co ASA dated August 13, 2001. (Incorporated herein by reference from Post-Effective Amendment No. 2 to Form S-1 Registration Statement, File No. 333-85116 filed on September 10, 2002). 2(1) Agreement Relating to the Sale and Purchase of All the Issued Share Capital of Gastron International Limited dated August 10, 1995 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor (Incorporated herein by reference from October 19, 1995 Form 8-K). 2(2) Supplemental Agreement Relating to the Sale and Purchase of All the Issued Share Capital of Gastron International Limited dated November 3, 1995 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor (Incorporated herein by reference from October 19, 1995 Form 8-K). 2(3) Supplemental Deed Relating to the Sale and Purchase of All the Issued Share Capital of Gastron International Limited dated May 29, 1996 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor (Incorporated herein by reference from September 30, 1997 Form 10-Q). 2(4) Memorandum of Agreement between Fielden Management Services Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated dated May 16, 1995 (Incorporated herein by reference from December 31, 1997 Form 10-K/A). 2(5) Amended and Restated Combination Agreement between Fountain Oil Incorporated and CanArgo Energy Inc. dated as of February 2, 1998 (Incorporated herein by reference from Form S-3 Registration Statement, File No. 333-48287 filed on September 9, 1998). 2(6) Voting, Support and Exchange Trust Agreement (Incorporated herein by reference as Annex G from Form S-3 Registration Statement, File No. 333-48287 filed on September 9, 1998). 3(1) Registrant's Certificate of Incorporation and amendments thereto (Incorporated herein by reference from July 15, 1998 Form 8-K). 3(2) Registrant's Bylaws (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). 4(1) Registration Rights Agreement between Registrant and JKX Nederland B.V. dated September 28, 2000, relating to purchase of 21.2% interest in Ninotsminda Oil Company (Incorporated herein by reference from July 20, 2000 Form 8-K). *10(1) Form of Option Agreement for options granted to certain persons, including Directors (Incorporated herein by reference from August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil Recovery, Inc., the Company's predecessor). *10(2) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). *10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan (Incorporated herein by reference from September 30, 1998 Form 10-Q).
54 10(4) Agreement between Georgian American Oil Refinery Company and CanArgo Petroleum Products Ltd. dated September 26, 1998 (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on February 12, 1999). 10(5) Terrenex Acquisition Corporation Option regarding CanArgo (Nazvrevi) Limited (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on February 12, 1999). 10(6) Production Sharing Contract between (1) Georgia and (2) Georgian Oil and JKX Navtobi Ltd. dated February 12, 1996 (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 7, 1999). 10(7) Agreement on Financial Advisory Services between CanArgo Energy Corporation, Orkla Finans (Fondsmegling) A.S and Sundal Collier & Co. ASA dated December 8, 1999 (Incorporated herein by reference from December 28, 1999 Form 8-K). 10(8) Form of Subscription Agreement (Incorporated herein by reference from December 28, 1999 Form 8-K). 10(9) Agreement between CanArgo Energy Corporation and JKX Nederland BV dated January 19, 2000 (Incorporated herein by reference from December 31, 1999 Form 10-K). 10(10) Agreement between Ninotsminda Oil Company and AES Gardabani dated March 10, 2000 (Incorporated herein by reference from December 31, 1999 Form 10-K). 10(11) Term Sheet dated September 27, 2000 relating to sale of 15,660,916 shares of Registrant's common stock (Incorporated herein by reference from July 20, 2000 Form 8-K). 10(12) Form of Subscription Agreement relating to sale of 15,660,916 shares of the Registrant's common stock (Incorporated herein by reference from July 20, 2000 Form 8-K). 10(13) Subscription Agreement between Registrant and JKX Nederland B.V. dated September 15, 2000 relating to purchase of 21.2% interest in Ninotsminda Oil Company (Incorporated herein by reference from July 20, 2000 Form 8-K). *10(14) Employment Agreement between CanArgo Energy Corporation and Dr. David Robson dated June 29, 2000 (Incorporated herein by reference from September 30, 2000 Form 10-Q). 10(15) Tenancy Agreement between CanArgo Energy Corporation and Grosvenor West End Properties dated September 8, 2000 (Incorporated herein by reference from September 30, 2000 Form 10-Q). 10(16) Agreement between CanArgo Energy Corporation and Roger Brittain dated August 18, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). *10(17) Employment Agreements between CanArgo Energy Corporation and Murray Chancellor dated September 22, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). *10(18) Employment Agreements between CanArgo Energy Corporation and Anthony Potter dated October 1, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K).
55 10(19) Production Sharing Contract between (1) Georgia and (2) Georgian Oil and CanArgo Norio Limited dated December 12, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). 10(20) Agreement between CanArgo Energy Corporation and Georgian British Oil Services Company dated November 10, 2000 relating to the purchase of 9.35% interest in Georgian American Oil Refinery (Incorporated herein by reference from December 31, 2000 Form 10-K). 10(21) Share Exchange Agreement between CanArgo Energy Corporation and Argonaut Oil and Gas Limited dated November 10, 2000, related to the purchase of 28.7% interest in Georgian American Oil Refinery (Incorporated herein by reference from December 31, 2000 Form 10-K). *10(22) Employment Agreements between CanArgo Energy Corporation and Vincent McDonnell dated December 1, 2000 (Incorporated herein by reference from December 31, 2001 Form 10-K). 10(23) Agreement Number 1 dated March 20, 1998 on Joint Investment Production Activity for further development and further exploration of Bugruvativske Field (Incorporated herein by reference from June 30, 2001 Form 10-Q). 10(24) Crude Oil Sales Agreement dated August 13, 2002 (Incorporated herein by reference from June 30, 2002 Form 10-Q) 10(25) Covenant on terms and conditions of participation in investment activity under the Joint Investment Production Activity agreement dated of March 20, 1998, dated July 23, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(26) Stock sale purchase contract of IPEC between Lateral Vector Resources and Northern Industrial Development dated July 25, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(27) Amendments of and Additions to Joint Investment Production Activity agreement of March 20, 1998, dated August 8, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(28) Amendment of Clause 9.3.1 of Amendments of and Additions to the Joint Investment Production Activity agreement of March 20, 1998, dated September 17, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(29) Stock sale purchase contract of IPEC between Lateral Vector Resources Inc. and Lystopad dated September 24, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(30) Stock sale purchase contract of IPEC between Lateral Vector Resources Inc. and Lyutyi dated September 24, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(31) Sale agreement of CanArgo Petroleum Products Limited between CanArgo Limited and Westrade Alliance LLC dated October 14, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 21 List of Subsidiaries (Incorporated herein by reference from June 30, 2001 Form 10-Q) 25(1) Power of attorney of certain signatories (Incorporated herein by reference from December
56 17, 2002 Form S1/A) +23 Consent of PricewaterhouseCoopers LLP +99(1) Certification of Chief Executive Officer pursuant to 18.U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. +99(2) Certification of Chief Financial Officer pursuant to 18.U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K: The following current reports on form 8-K were filed during the quarter ended December 31, 2002. On October 17 2002, CanArgo announced that it agreed binding terms for the sale of its interest in its Georgian gasoline station business, CanArgo Standard Oil Products, for a cash consideration of US$4 million. On November 12 2002 CanArgo announced that its subsidiary, CanArgo Norio Limited, has won the tender for the oil and gas exploration and production rights to Block XI(G) (Tbilisi) and Block XI(H) (Rustavi) in Eastern Georgia ("the Blocks"). CanArgo also announced that it has reached agreement with the other shareholders in CanArgo Norio on increasing CanArgo's interest in CanArgo Norio. On November 12 2002 CanArgo announced the resignation of Roger Brittain, non-executive Chairman of the Board. On November 27 2002 CanArgo announced that that Dr David Robson has been appointed to the position of Chairman of the Board of CanArgo Energy Corporation in addition to his current duties as Chief Executive Officer. 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANARGO ENERGY CORPORATION (Registrant) By: /s/Vincent McDonnell Date: March 24, 2003 -------------------------------------------------------- Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/David Robson Date: March 24, 2003 -------------------------------------------------------- David Robson, Chairman of the Board and Chief Executive Officer and Director Principal Executive Officer By: /s/Russell Hammond Date: March 24, 2003 -------------------------------------------------------- Russell Hammond, Director By: /s/Nils N. Trulsvik Date: March 24, 2003 -------------------------------------------------------- Nils N. Trulsvik, Director By: /s/Vincent McDonnell Date: March 24, 2003 -------------------------------------------------------- Vincent McDonnell, Chief Financial Officer Principal Accounting Officer
58 REPORT ON MANAGEMENT'S RESPONSIBILITIES To the Stockholders of CanArgo Energy Corporation: CanArgo's management is responsible for the integrity and objectivity of the financial information contained in this Annual Report. The financial statements included in this report have been prepared in accordance with generally accepted accounting principles in the United States and, where necessary, reflect the informed judgements and estimates of management. Management maintains and is responsible for systems of internal accounting control designed to provide reasonable assurance that all transactions are properly recorded in the Company's books and records, that procedures and policies are adhered to, and that assets are safeguarded from unauthorized use. The financial statements have been audited by the independent accounting firm of PricewaterhouseCoopers LLP, as indicated in their report. Management has made available to PricewaterhouseCoopers LLP all the Company's financial records and related data and minutes of directors' and audit committee meetings. CanArgo's audit committee, consisting solely of directors who are not employees of CanArgo, is responsible for: reviewing the Company's financial reporting; reviewing accounting and internal control practices; recommending to the Board of Directors and shareholders the selection of independent accountants; and monitoring compliance with applicable laws and company policies. The independent accountants have full and free access to the audit committee and meet with it, with and without the presence of management, to discuss all appropriate matters. On the recommendation of the audit committee, the consolidated financial statements have been approved by the Board of Directors. /s/Dr. David Robson /s/Vincent McDonnell Chief Executive Officer Chief Financial Officer March 24, 2003 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Shareholders of CanArgo Energy Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of CanArgo Energy Corporation and its subsidiaries at 31 December 2002 and 2001, and the results of their operations and their cash flows for the each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming the Group will continue as a going concern. As discussed in Note 1, Basis of Presentation, to the consolidated financial statements, the Group is reliant on raising additional significant financing from external sources in order to recover the carrying value of its undeveloped and unproved properties and without additional financing there is substantial doubt about the Group's long term ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1, Basis of Presentation. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP March 24, 2003 London, England F-2 CANARGO ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, 2002 2001 ------------ ------------ ASSETS Cash and cash equivalents $ 1,598,304 $ 5,891,038 Accounts receivable 306,336 2,007,112 Inventory 185,924 405,918 Prepayments 211,623 2,235,712 Assets held for sale 8,095,947 6,355,036 Other current assets 175,951 162,373 ------------ ------------ Total current assets $ 10,574,085 $ 17,057,189 Capital assets, net (including unevaluated amounts of $36,843,425 and $24,570,886, respectively) 59,702,525 52,535,420 Investments in and advances to oil and gas and other ventures - net 459,308 719,308 ------------ ------------ TOTAL ASSETS $ 70,735,918 $ 70,311,917 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 871,996 $ 828,461 Deferred revenue 1,500,000 - Income taxes payable 61,000 61,000 Accrued liabilities 204,045 400,221 Liabilities held for sale 2,351,965 1,177,174 ------------ ------------ Total current liabilities $ 4,989,006 $ 2,466,856 Provision for future site restoration 122,290 64,290 Minority shareholder advances - 450,000 Minority interest in subsidiaries 3,519,342 1,531,191 Commitments and contingencies (Note 12) Stockholders' equity: Common stock, par value $0.10 per share 9,735,620 9,200,845 Capital in excess of par value 145,151,475 144,057,517 Foreign currency translation adjustment 4,668 - Accumulated deficit (92,786,483) (87,458,782) ------------ ------------ Total stockholders' equity $ 62,105,280 $ 65,799,580 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,735,918 $ 70,311,917 ============ ============
F-3 CANARGO ENERGY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31, 2002 2001 2000 ----------- ----------- ----------- Operating Revenues from Continuing Operations: Oil and gas sales $ 4,163,201 $ 3,967,078 $ 6,108,779 Refining - 2,595,763 535,865 Other 1,412,741 608,032 364,900 ----------- ----------- ----------- 5,575,942 7,170,873 7,009,544 ----------- ----------- ----------- Operating Expenses: Field operating expenses 1,537,917 1,568,011 1,287,035 Purchases of crude oil and products - 1,451,083 20,520 Refinery operating expenses - 791,139 439,037 Direct project costs 1,428,638 1,300,423 737,731 Selling, general and administrative 3,652,262 3,741,826 3,050,383 Depreciation, depletion and amortization 2,316,921 3,249,962 3,875,988 Impairment of oil and gas properties 1,600,000 7,300,000 - Impairment of other assets - 3,859,795 - Loss on disposition of assets 10,725 16,130 - ----------- ----------- ----------- 10,546,463 23,278,369 9,410,694 ----------- ----------- ----------- OPERATING LOSS FROM CONTINUING OPERATIONS (4,970,521) (16,107,496) (2,401,150) ----------- ----------- ----------- Other Income (Expense): Interest, net 32,413 642,216 549,749 Other (654,850) (74,796) (78,774) Equity income (loss) from investments 86,059 (160,000) (240,070) ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) (536,378) 407,420 230,905 ----------- ----------- ----------- NET LOSS BEFORE MINORITY INTEREST (5,506,899) (15,700,076) (2,170,245) Minority interest in income (loss) of consolidated subsidiaries 7,986 2,138,163 26,939 ----------- ----------- ----------- NET LOSS FROM CONTINUING OPERATIONS $(5,498,913) $(13,561,912) $(2,143,306) =========== ============ =========== NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES AND MINORITY INTEREST 171,212 343,566 (8,298) ---------- ---------- ---------- NET LOSS (5,327,701) (13,218,346) (2,151,604) ========== =========== ========== OTHER COMPREHENSIVE INCOME: Foreign currency translation 4,668 - - ----------- ----------- ----------- COMPREHENSIVE LOSS $(5,323,033) $(13,218,346) $(2,151,604) =========== ============ =========== Weighted average number of common shares outstanding 96,643,744 83,869,579 54,950,630 ----------- ----------- ----------- NET LOSS PER COMMON SHARE - BASIC AND DILUTED - from continuing operations $ (0.06) $ (0.16) $ (0.04) - from discontinued operations $ 0.00 0.00 $ (0.00) ----------- ----------- ----------- NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.06) $ (0.16) $ (0.04) ----------- ------------ -----------
The accompanying notes are an integral part of the consolidated financial statements F-4 CANARGO ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ Operating activities: Net income (loss) from continued operations (5,498,913) (13,561,912) (2,143,306) Depreciation, depletion and amortization 2,316,921 3,249,962 3,875,988 Impairment of oil and gas properties 1,600,000 7,300,000 - Impairment of other assets - 3,859,795 - Issuance of common stock for services - - 112,700 Equity income from investments (86,059) 160,000 240,070 Loss (gain) on disposition of assets 10,725 16,130 - Allowance for doubtful accounts 275,000 200,000 100,000 Minority interest in income (loss) of consolidated subsidiaries (7,986) (2,138,163) (26,939) Changes in assets and liabilities: Accounts receivable 1,425,776 (1,623,866) 300,405 Inventory 219,994 262,419 46,828 Prepayments 29,713 (130,300) (628,853) Other current assets (13,578) 38,690 (144,222) Accounts payable 43,535 (3,352,399) 197,889 Deferred revenue 1,500,000 - - Income taxes payable - 61,000 - Accrued liabilities (196,176) (281,318) 62,225 Advances from joint venture partner - (5,888,573) 5,888,573 ------------ ------------ ------------ NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES 1,618,952 (11,828,535) 7,881,358 ------------ ------------ ------------ Investing activities: Capital expenditures (10,995,518) (11,116,538) (11,857,279) Proceeds from disposition of assets - 19,383 13,408 Acquisitions, net of cash acquired (50,000) (4,044,973) - Proceeds from disposition of investment 13,435 125,000 - Investments in and advances to oil and gas and other ventures 346,059 (831,403) (236,074) Change in non cash working capital items 1,994,376 (1,340,359) (150,000) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (8,691,648) (17,188,890) (12,229,945) ------------ ------------ ------------ Financing Activities: Proceeds from sale of common stock 1,790,948 7,235,337 33,283,873 Share issue costs (162,215) (643,075) (2,848,505) Minority shareholder advances - 450,000 - Advances from minority interest 1,546,137 1,931,874 500,000 Cash acquired - - 207,470 ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 3,174,870 8,974,136 31,142,838 NET CASH FLOWS FROM ASSETS AND LIABILITIES HELD FOR SALE (394,908) (3,762,327) (744,999) NET DECREASE IN CASH AND CASH EQUIVALENTS (4,292,734) (23,805,616) 26,049,251 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,891,038 29,696,654 3,647,403 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,598,304 $ 5,891,038 $ 29,696,654 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements F-5 CANARGO ENERGY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AN 1999 (EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK -------------------------- NUMBER OF SHARES ADDITIONAL FOREIGN TOTAL ISSUED AND PAID-IN CURRENCY ACCUMULATED STOCKHOLDERS' ISSUABLE PAR VALUE CAPITAL TRANSLATION DEFICIT EQUITY ----------- ---------- ------------ ----------- ------------ ------------- ---------- ---------- ------------ ------ ------------ ------------ BALANCE, DECEMBER 31, 2000 75,526,890 $7,552,690 $138,275,319 $ - (74,240,436) $ 71,587,573 ---------- ---------- ------------ ------ ------------ ------------ Shares issuable upon exchange of CanArgo Oil & Gas Inc. Exchangeable Shares without receipt of further consideration 423,791 42,379 795,712 - 838,091 ---------- ---------- ------------ ------ ------------ ------------ TOTAL, DECEMBER 31, 2000 75,950,681 $7,595,069 $139,071,031 $ - (74,240,436) $ 72,425,664 ========== ========== ============ ====== ============ ============ Less shares issuable at beginning of year (423,791) (42,379) (795,712) -- (838,091) Issuance of common stock pursuant to July private placement 16,057,765 1,605,776 5,629,561 -- 7,235,337 Issuance of common stock upon exchange of CanArgo Oil & Gas Inc. Exchangeable Shares 274,965 27,497 516,276 543,772 Shares issue costs (643,075) (643,075) Net loss (13,218,346) (13,218,346) ---------- ---------- ------------ ------ ------------ ------------ Balance, December 31, 2001 91,859,620 9,185,962 143,778,081 - $(87,458,782) 65,505,260 ---------- ---------- ------------ ------ ------------ ------------ Shares issuable upon exchange of CanArgo Oil & Gas Inc. Exchangeable Shares without receipt of further consideration 148,826 14,883 279,436 294,319 ---------- ---------- ------------ ------ ------------ ------------ TOTAL, DECEMBER 31, 2001 92,008,446 $9,200,845 $144,057,517 $ - (87,458,782) $ 65,799,580 ========== ========== ============ ====== ============ ============ Less shares issuable at beginning of year (148,826) # (14,883) # (79,436) - (294,319) Issuance of common stock upon exchange of CanArgo Oil & Gas Inc. Exchangeable Shares 148,826 14,883 279,436 294,319 Shares issued pursuant to private placement February 2002 5,210,000 521,000 1,241,433 1,762,433 Shares issued pursuant to private placement May 2002 137,760 13,775 14,740 28,515 Share issue costs (162,215) (162,215) Current year adjustment 4,668 4,668 Net loss (5,327,701) (5,327,701) ---------- ---------- ------------ ------ ------------ ------------ TOTAL, DECEMBER 31, 2002 97,356,206 $9,735,620 $145,151,475 $4,668 $(92,786,483) $ 62,105,280 ========== ========== ============ ====== ============ ============
The accompanying notes are an integral part of the consolidated financial statements F-6 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements and notes thereto are prepared in accordance with U.S. generally accepted accounting principles. All amounts are in U.S. dollars. GOING CONCERN ASSUMPTION - CanArgo has incurred recurring operating losses, and its current operations are not generating positive cash flows. The ability of CanArgo to continue as a going concern and to pursue its principal activities of acquiring interests in and developing oil and gas fields is dependent upon CanArgo reducing costs, generating funds from internal sources including the sale of certain non-core assets, external sources and, ultimately, achieving sufficient positive cash flows from operating activities. In order to preserve available cash resources while still maintaining essential field operations and development activities in Georgia, a significant cost reduction plan was implemented with both direct project and general and administrative costs being reduced. These reductions and the receipt of the final $3 million payment from the agreed sale of CanArgo's interest in its retail operation CanArgo Standard Oil Products (CSOP) (explained below), the planned selective sale of certain non-core assets including CanArgo's generator, and a portion or all of CanArgo's drilling equipment should provide CanArgo the working capital necessary to cover CanArgo's immediate and near term funding requirements with respect to its activities in the Republic of Georgia. Should such funding not be forthcoming and CanArgo be unable to sell some or all of its non-core assets, further cost reductions will be required in order for CanArgo to remain a going concern. The financial statements have been prepared on a going concern basis, which assumes the additional funding and/or proceeds from the sale of non-core assets is received. If this additional finance is not received, in particular the receipt of the final $3 million payment from the sale of CSOP, or receipt of an equivalent amount, adjustments may have to be made to reduce the balance sheet values of assets to their recoverable amounts, to provide for further liabilities that might arise and to reclassify fixed assets and long term liabilities as current assets and liabilities. In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding for $4 million of which $1 million has been received to date as a non-refundable deposit. Legal ownership will transfer upon receipt of the final payment of $3 million due in August 2003. Whilst the directors presently cannot be certain as to the outcome of the matters mentioned above, they believe that it is appropriate for the financial statements to be prepared on a going concern basis. Development of the oil and gas properties and ventures in which CanArgo has interests involves multi-year efforts and substantial cash expenditures. Full development of these properties will require the availability of substantial funds from internal and/or external sources. CanArgo believes that it will be able to generate funds from quasi-governmental financing agencies, conventional lenders, equity investors and other oil and gas companies that may desire to participate in CanArgo's oil and gas projects, although no firm funding commitments have been received. The agreed consideration to be exchanged does not result in an impairment of the carrying value of assets held for sale. The assets and liabilities of CanArgo Standard Oil Products have been classified as "Assets of held for sale" and "Liabilities of held for sale" for all periods presented. The results of operations of CanArgo Standard Oil Products have been classified as discontinued for all periods presented. The minority interest related to CanArgo Standard Oil Products has not been reclassified for any of the periods presented, however net income from discontinued operations is disclosed net of taxes and minority interest. During 2002, the Company adopted the self-sustaining method of accounting for CanArgo Standard Oil Products. The adoption of the self-sustaining method was necessitated by the fact that CanArgo Standard Oil Products was no longer financially and operationally dependant upon its parent company. Under the F-7 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS self-sustaining method of foreign currency translation, assets and liabilities are translated into US dollars at period end exchange rates and income and expenses are translated into US dollars at average rates in effect during the period. Exchange gains and losses on translation are reflected as a separate component of shareholders' equity. The consolidated financial statements do not give effect to any additional impairment of its investments in oil and gas properties and ventures or other adjustments which would be necessary should the Company be unable to obtain sufficient funds from external sources or continue as a going concern. CONSOLIDATION - The consolidated financial statements include the accounts of CanArgo Energy Corporation and its majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Investments in less than majority owned corporations and corporate like entities in which the Company exercises significant influence are accounted for using the equity method. Entities in which the Company does not have significant influence are accounted for using the cost method. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes term-deposits with original maturity terms not exceeding 90 days. FAIR VALUE OF FINANCIAL INSTRUMENTS - CanArgo considers all liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount of cash and other current assets and liabilities approximates fair value because of the short term maturity of these items. CanArgo does not hold or issue financial instruments for trading purposes. RECLASSIFICATION - Certain items in the consolidated financial statements have been reclassified to conform to the current year presentation. There was no effect on net loss as a result of these reclassifications. INVENTORIES - Inventories of crude oil, refined products and supplies are valued at the lower of average cost and net realizable value. CAPITAL ASSETS - Capital assets are recorded at cost less accumulated provisions for depreciation, depletion and amortization unless the carrying amount is viewed as not recoverable in which case the carrying value of the assets is reduced to the estimated recoverable amount. See "Impairment of Long-Lived Assets" below. Expenditures for major renewals and betterments, which extend the original estimated economic useful lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon is reflected in operations. Unproved properties are not deemed to be impaired until the right to drill on those properties is lost and planned development has ceased. Oil And Gas Properties - CanArgo and the unconsolidated entities for which it accounts using the equity method account for oil and gas properties and interests under the full cost method. Under this accounting method, costs, including a portion of internal costs associated with property acquisition and exploration for and development of oil and gas reserves, are capitalized within cost centers established on a country-by-country basis. Capitalized costs within a cost center, as well as the estimated future expenditures to develop proved reserves and estimated net costs of dismantlement and abandonment, are amortized using the unit-of-production method based on estimated proved oil and gas reserves. All costs relating to production F-8 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS activities are charged to expense as incurred. All other costs directly attributable to a project are expensed as incurred as direct project costs when such costs are considered recurring in nature. Capitalized oil and gas property costs, less accumulated depreciation, depletion and amortization and related deferred income taxes, are limited to an amount (the ceiling limitation) equal to (a) the present value (discounted at 10%) of estimated future net revenues from the projected production of proved oil and gas reserves, calculated at prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by fixed and determinable contractual arrangements), plus (b) the lower of cost or estimated fair value of unproved and unevaluated properties, less (c) income tax effects related to differences in the book and tax basis of the oil and gas properties. Estimated undiscounted future site restoration, dismantlement and abandonment costs of $820,000 at December 31, 2002 are being charged to the Statement of Operations on a unit of production basis and reflected within depreciation, depletion and amortization. CanArgo identifies and estimates such costs based upon its assessment of applicable regulatory requirements, its operating experience and oil and gas industry practice in the areas in which its properties are located. To date CanArgo has not been required to expend any material amounts to satisfy such obligations. Property and Equipment - Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets ranging from three to five years for office furniture and equipment to three to fifteen years for oil and gas related equipment. Discontinued Operations - CanArgo Standard Oil Products petrol stations and additions thereto were depreciated over the estimated useful lives of the assets ranging from ten to fifteen years until operations were reclassified as discontinued. REVENUE RECOGNITION - CanArgo recognizes revenues when goods have been delivered, when services have been performed, or when hydrocarbons have been produced and delivered and payment is reasonably assured. Where crude oil or natural gas production is sold to or used for internal consumption by the refinery, on consolidation revenues from these sales are eliminated from sales and other operating revenues and operating expenses. ADVANCES - Advances received by CanArgo from joint venture partners, which are to be spent by CanArgo on behalf of the joint venture partners, are classified within operating inflows on the basis they do not meet the definition of finance or investing activities. When the cash advances are spent, the payable is reduced accordingly. These advances do not contribute to CanArgo's operating profits and are accounted for/disclosed as balance sheet entries only ie. within cash and payable to joint venture partner. FOREIGN OPERATIONS - CanArgo's future operations and earnings will depend upon the results of CanArgo's operations in the Republic of Georgia. There can be no assurance that CanArgo will be able to successfully conduct such operations, and a failure to do so would have a material adverse effect on the CanArgo's financial position, results of operations and cash flows. Also, the success of CanArgo's operations will be subject to numerous contingencies, some of which are beyond management control. These contingencies include general and regional economic conditions, prices for crude oil and natural gas, competition and changes in regulation. Since CanArgo is dependent on international operations, specifically those in the Republic of Georgia, CanArgo will be subject to various additional political, economic and other uncertainties. Among other risks, CanArgo's operations may be subject to the risks and restrictions on transfer of funds, import and export duties, quotas and embargoes, domestic and international customs and tariffs, and changing taxation policies, foreign exchange restrictions, political conditions and regulations. FOREIGN CURRENCY TRANSLATION - The U.S. dollar is the functional currency for CanArgo's upstream and refining operations and the Lari is the functional currency for marketing operations. All monetary assets and liabilities denominated in foreign currency are translated into U.S. dollars at the rate of F-9 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS exchange in effect at the balance sheet date and the resulting unrealized translation gains or losses are reflected in operations. Non-monetary assets are translated at historical exchange rates. Revenue and expense items (excluding depreciation and amortization which are translated at the same rates as the related assets) are translated at the average rate of exchange for the year. Foreign currency translation amounts recorded in operations for years ended December 31, 2002, 2001 and 2000 were not material. INCOME TAXES - CanArgo recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established, when appropriate, to reduce deferred tax assets to the amount expected to be realized. IMPAIRMENT OF LONG-LIVED ASSETS - In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002. There was no impact on the Company's financial position or results of operations upon adoption of SFAS No. 144. STOCK-BASED COMPENSATION PLANS - CanArgo has adopted only the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, and has elected to continue to record stock-based compensation expense using the intrinsic-value approach prescribed by Accounting Principles Board ("APB") Opinion 25. The application of APB Opinion 25 has further been clarified by Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation". Accordingly, CanArgo computes compensation cost for each employee stock option granted as the amount by which the quoted market price of the CanArgo's Common Stock on the date of grant exceeds the amount the employee must pay to acquire the stock. The amount of compensation costs, if any, is charged to operations over the vesting period. F-10 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the income statement had compensation cost for stock options been determined consistent with SFAS No. 123 for the years ended December 31, 2002, 2001 and 2000:
Income statement had compensation cost for stock options been determined DECEMBER 31, DECEMBER 31, DECEMBER 31, consistent with SFAS No. 123 2002 2001 2000 ------------ ------------ ------------ Net Loss as reported $(5,327,701) (13,218,346) (2,151,604) Net Loss per common share - Basic and Diluted as reported (0.06) (0.16) (0.04) Stock-based compensation cost, net of related tax effects, included in the determination of net income reported -- -- -- Stock-based compensation cost, net of related tax effects, that would have been included in the determination of 925,339 1,334,339 925,446 net income reported if the fair value based method had been applied to all awards Net Loss as if the fair value based method had been applied to all awards (6,253,040) (3,077,050) (14,552,685) Net Loss per common share - Basic and Diluted as if the fair value based (0.06) (0.17) (0.04) method had been applied to all awards
RECENTLY ISSUED PRONOUNCEMENTS - In August 2001, FASB issued Statement No. 143 Accounting for Asset Retirement Obligations. Statement 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred concurrent with an increase in the long-lived assets carrying value. The increase and subsequent adjustments in the related long-lived assets carrying value is amortised over its useful life. Upon settlement of the liability, a gain or loss is recorded for the difference between the settled liability and the recorded amount. This standard will be effective for CanArgo on January 1, 2003. We are in the process of assessing the impact that the adoption of this standard will have on our financial position and results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). This standard will require companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The standard replaces the existing guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The statement is effective for fiscal years beginning after December 31, 2002. CanArgo does not expect the adoption of this standard to have a material effect on its financial statements. F-11 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We have applied the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123," for the years ended December 31, 2002, 2001, and 2000. SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS No. 148, we continue to account for stock options under APB Opinion No. 25. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. To date we have not entered into or modified any such guarantees. 2. NATURE OF OPERATIONS CanArgo Energy Corporation and its consolidated subsidiaries (collectively "CanArgo"), is an integrated oil and gas company operating predominately within the Republic of Georgia. Historically the principal activity of CanArgo has been the acquisition of interests in and development of crude oil and natural gas fields with a productive history that indicate the potential for increased production through rehabilitation and utilization of modern production techniques and enhanced oil recovery processes. In 2000, this activity was expanded to include the refining and marketing of crude oil and crude oil products. In 2002, the refining and marketing business segment in continuing operations was redefined as only refining of crude oil following the approval of a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects. The assets and liabilities of CanArgo Standard Oil Products have been classified as "Assets held for sale" and "Liabilities held for sale" for all periods presented. The results of operations of CanArgo Standard Oil Products have been classified as discontinued for all periods presented. The minority interest related to CanArgo Standard Oil Products has not been reclassified for any of the periods presented, however net income from discontinued operations is disclosed net of taxes and minority interest. Certain activities in which CanArgo has interests are conducted through unconsolidated entities. CanArgo owns majority and less than majority interests in entities developing or seeking to develop oil and gas properties in Eastern Europe including the Russian Federation. 3. BUSINESS COMBINATION AND BUSINESS DISPOSAL In July 2002, CanArgo acquired the remaining 15% interest it did not own in IPEC for cash consideration of $50,000. Total cash consideration was allocated to capital assets and on completion of the acquisition, IPEC became a wholly owned subsidiary of CanArgo. There were no material assets or liabilities within IPEC at the acquisition date requiring fair valuing. Prior to acquisition, the historical cost of the 85% interest that CanArgo owned in IPEC was $33,369. In July 2002, CanArgo signed a covenant with a local Ukrainian oil and gas company, on their participation in the Joint Investment Production Activity agreement (JIPA) for the development of the Bugruvativske field in Ukraine. IPEC was to provide the vehicle by which they would become party, through their F-12 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS subsidiary or nominee, to the JIPA and in September 2002, CanArgo disposed of its entire interest (100%) in IPEC for $13,435 to their nominees. 4. ACCOUNTS RECEIVABLE Accounts receivable as at December 31, 2002 and 2001 consisted of the following:
DECEMBER 31, December 31, 2000 2001 ----------- ------------ Accounts Receivable before allowance for doubtful debts 958,257 2,384,033 Allowance for doubtful debts (651,921) (376,921) -------- ---------- $306,336 $2,007,112 ======== ==========
5. INVENTORY Inventory at December 31, 2002 and 2001 consisted of the following:
DECEMBER 31, December 31, 2002 2001 ------------ ----------- Crude oil $158,896 $373,818 Refined products 27,028 32,100 -------- -------- $185,924 $405,918 ======== ========
F-13 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. CAPITAL ASSETS Capital assets, net of accumulated depreciation and impairment, at December 31, 2002 include the following:
ACCUMULATED DEPRECIATION NET COST AND IMPAIRMENT CAPITAL ASSETS ----------- -------------- -------------- OIL AND GAS PROPERTIES Proved properties $32,443,742 $(18,422,771) $14,020,971 Unproved properties 36,843,425 - 36,843,425 ----------- ------------ ----------- 69,287,167 (18,422,771) 50,864,396 PROPERTY AND EQUIPMENT Oil and gas related equipment 11,991,991 (3,788,028) 8,203,963 Office furniture, fixtures and equipment and other 1,187,526 (653,360) 534,166 ----------- ------------ ----------- 13,179,517 (4,441,388) 8,738,129 REFINING 4,154,216 (4,054,216) 100,000 ----------- ------------ ----------- $86,620,900 $(26,918,375) $59,702,525 =========== ============ ===========
Capital assets, net of accumulated depreciation and impairment, at December 31, 2001 include the following:
ACCUMULATED DEPRECIATION NET COST AND IMPAIRMENT CAPITAL ASSETS ----------- -------------- -------------- OIL AND GAS PROPERTIES Proved properties $31,900,462 $(15,230,771) $16,669,691 Unproved properties 24,570,886 - 24,570,886 ----------- ------------ ----------- 56,471,348 (15,230,771) 41,240,577 PROPERTY AND EQUIPMENT Oil and gas related equipment 13,928,639 (3,306,868) 10,621,771 Office furniture, fixtures and equipment and other 1,038,451 (476,230) 562,221 ----------- ------------ ----------- 14,967,090 (3,783,098) 11,183,992 REFINING 4,165,067 (4,054,216) 100,851 ----------- ------------ ----------- $75,603,505 $(23,068,085) $52,535,420 =========== ============ ===========
OIL AND GAS PROPERTIES Ultimate realization of the carrying value of CanArgo's oil and gas properties will require production of oil and gas in sufficient quantities and marketing such oil and gas at sufficient prices to provide positive cash F-14 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS flow to CanArgo, which is dependent upon, among other factors, achieving significant production at costs that provide acceptable margins, reasonable levels of taxation from local authorities, and the ability to market the oil and gas produced at or near world prices. In addition, CanArgo must mobilize drilling equipment and personnel to initiate drilling, completion and production activities. If one or more of the above factors, or other factors, are different than anticipated, CanArgo may not recover its carrying value. As a result of application of the ceiling test limitation, CanArgo recorded a write-down in 2002 of oil and gas properties of $1,600,000 and a write-down in 2001 of oil and gas properties of $7,300,000. In 2001, refining assets were written-down to their estimated net realizable value by $3,359,795. CanArgo generally has the principal responsibility for arranging financing for the oil and gas properties and ventures in which it has an interest, including the Bugruvativske field. There can be no assurance, however, that CanArgo or the entities that are developing the oil and gas properties and ventures will be able to arrange the financing necessary to develop the projects being undertaken or to support the corporate and other activities of CanArgo or that such financing as is available will be on terms that are attractive or acceptable to or are deemed to be in the best interests of CanArgo, such entities or their respective stockholders or participants. The consolidated financial statements of CanArgo do not give effect to any additional impairment in the value of CanArgo's investment in oil and gas properties and ventures or other adjustments that would be necessary if financing cannot be arranged for the development of such properties and ventures or if they are unable to achieve profitable operations. Failure to arrange such financing on reasonable terms or failure of such properties and ventures to achieve profitability would have a material adverse effect on the financial position, including realization of assets, results of operations, cash flows and prospects of CanArgo. Unproved property additions relate to CanArgo's exploration activity in the period. Oil and gas related equipment includes new or refurbished drilling rigs and related equipment, all of which are in the Republic of Georgia. In 2002, CanArgo acquired the remaining 15% interest it did not own in IPEC, whose sole operations were the ownership of a 0.1% working interest in the Bugruvativske field for cash consideration of $50,000. Total cash consideration was allocated to capital assets and on completion of the acquisition IPEC became a wholly owned subsidiary of CanArgo. Subsequent to the purchase, in July 2002, CanArgo disposed of its entire interest (100%) in IPEC to the nominees of a local Ukrainian oil and gas company for $13,435 and recorded $35,742 in unproved properties related to CanArgo's investment in the Bugruvativske field. Initial costs in respect of CanArgo's investment in the Bugruvativske field, through its direct investment in LVR, are included in "capital assets - unproved properties". These costs will continue to be disclosed as unproved properties until CanArgo participates in the JIPA by investing an amount up to the cash contribution made by its JIPA partner, IPEC. Any contribution must be made prior to 31 December 2003 in order for CanArgo to participate in the existing JIPA. PROPERTY AND EQUIPMENT Oil and gas related equipment includes drilling rigs and related equipment currently in use by CanArgo in the development of the Ninotsminda field. F-15 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INVESTMENT IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES CanArgo has acquired interests in oil and gas and other ventures through less than majority interests in corporate and corporate-like entities. A summary of CanArgo's net investment in and advances to oil and gas and other ventures at December 31, 2002 and 2001 is set out below:
DECEMBER 31, December 31, INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES 2002 2001 ------------ ------------ Ukraine - Stynawske Field, Boryslaw Through 45% ownership of Boryslaw Oil Company $6,524,121 $6,698,062 Republic of Georgia - Ninotsminda Through an effective 50% ownership of East Georgian Pipeline Co. - 192,500 Other Investments 75,000 75,000 ---------- ---------- TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES $6,599,121 $6,965,562 ========== ========== EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES Ukraine - Stynawske Field, Boryslaw (680,020) (593,961) Republic of Georgia - East Georgian Pipeline Co. - (192,500) CUMULATIVE EQUITY IN PROFIT (LOSS) OF OIL AND GAS AND OTHER VENTURES $ (680,020) $ (786,461) IMPAIRMENT - STYNAWSKE FIELD, BORYSLAW (5,459,793) (5,459,793) ---------- ---------- TOTAL INVESTMENTS IN AND ADVANCES TO OIL AND GAS AND OTHER VENTURES, NET OF EQUITY LOSS AND IMPAIRMENT $ 459,308 $ 719,308 ========== ==========
Under the terms of the license Boryslaw Oil Company holds in the Stynawske field, field operations were to be transferred to Boryslaw Oil Company effective January 1, 1999. As a result of prolonged negotiations, which created significant uncertainty as to CanArgo's ability to raise funds for the project or enter into a satisfactory farm-out agreement on a timely basis, CanArgo recorded in the third quarter of 1999 an impairment charge of $5,459,793 against its entire investment in and advances to Boryslaw Oil Company. In 2001 an agreement was reached to undertake a limited investment and development program by June 2002 in respect of Boryslaw Oil Company to increase production and to meet certain work commitments under the Stynawske field licence. These obligations have not been fully met, however, Boryslaw Oil Company is seeking modifications to the licence to allow a proper assessment of the workovers and development plans completed to date. A repayment schedule of CanArgo's advances to Boryslaw Oil Company has also been agreed of which $360,000 was repaid at December 31, 2002. Boryslaw Oil Company has not been given notice by the Ukrainian licensing body of early termination of the license. CanArgo is actively seeking to farm-out part of its interest in Boryslaw Oil Company in return for financing to carry out the work programme. If Boryslaw Oil Company does not proceed with the Stynawske field development programme or if modifications to the current licence agreement cannot be obtained, it may be in breach of obligations it has with regard to the field license and an impairment charge against CanArgo's investment in and advances to Boryslaw Oil Company may be required. F-16 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CanArgo's venture in Boryslaw Oil Company is in the development stage and accordingly, realization of this investment is dependent upon successful development of and ultimately cash flows from operations of the venture. Other investments represent CanArgo's 10% interest in a Caspian Sea exploration project. 8. ACCOUNTS PAYABLE Accounts payable as at December 31, 2002 and 2001 consisted of the following:
DECEMBER 31, December 31, 2002 2001 ------------ ------------ Trade creditors 871,996 828,461 -------- -------- $871,996 $828,461 ======== ========
9. DEFERRED REVENUE AND ACCRUED LIABILITIES Deferred revenue at December 31, 2002 and 2001 include the following:
December 31, December 31, 2002 2001 ------------ ------------ Prepaid sales $1,000,000 $ -- Advanced proceeds from the sale of subsidiary 500,000 -- ---------- ------------ $1,500,000 $ -- ========== ============
See note 17 for details of the sale of the subsidiary classified as discontinued operation. Accrued liabilities at December 31, 2002 and 2001 include the following:
DECEMBER 31, December 31, 2002 2001 ------------ ------------ Professional fees 105,000 150,000 Operating costs - 90,000 Other 99,045 160,221 -------- -------- $204,045 $400,221 ======== ========
As at December 31, 2001 $90,000 represented liabilities relating to the winding up of East Georgian Pipeline Company. 10. MINORITY SHAREHOLDER ADVANCES In 2001 CanArgo received $731,000 and in 2002, $476,000 on issuance of convertible loans from new minority shareholders of CanArgo's subsidiary, CanArgo Norio Limited (Norio). The cash amount received represented the new minority shareholders share of the cost of drilling an exploration well under the Norio and North Kumisi production sharing agreement. In November 2002, CanArgo reached agreement with the other shareholders in Norio on increasing CanArgo's interest in Norio. Under the agreement CanArgo's interest increased from 50% to 64.2% in Norio and its existing Norio and North Kumisi production sharing agreement. On finalisation of respective equity interest, the convertible loans, previously classified as minority shareholder advances, have been reclassified to minority interest. 11. MINORITY INTEREST In November 2002, CanArgo reached agreement with the other shareholders in CanArgo's subsidiary, CanArgo Norio Limited (Norio), on increasing CanArgo's interest in Norio. Under the agreement CanArgo's interest increased from 50% to 64.2% in Norio and its existing Norio and North Kumisi production sharing agreement. As a result of the finalisation of respective equity interest, CanArgo's interest was adjusted to reflect its share of $6,031,070, the carrying net asset value of Norio, and in accordance with the application of SAB 51, this gave rise to a non-operating loss of $443,564, classified as other expenses. The nominal value of the final shares issued in Norio were $1,250 per share which gives a nominal value F-17 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for Norio of $11,328,928 of which CanArgo share is $7,269,023 and the minority shareholders share is $4,059,876. CanArgo Norio Limited (Norio) is consolidated in the accounts of CanArgo. J.F. Russell Hammond, a non-executive director of CanArgo, is also an investment advisor to Provincial Securities who became a minority shareholder in the Norio and North Kumisi Production Sharing Agreement through a farm-in agreement to the Norio MK72 well. 12. COMMITMENTS AND CONTINGENCIES OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES Current drilling obligations with respect to CanArgo's oil and gas properties include, under the second phase of the preliminary work programme for the Norio and Nazvrevi/Block XIII production sharing contracts, the drilling of one well, unless CanArgo decides to terminate the contracts. CanArgo has contingent obligations and may incur additional obligations, absolute and contingent, with respect to acquiring and developing oil and gas properties and ventures. At December 31, 2002, CanArgo had the contingent obligation to issue an aggregate of 187,500 shares of its common stock, subject to the satisfaction of conditions related to the achievement of specified performance standards by the Stynawske field project. The shareholders Agreement with the other shareholder of Norio calls for a bonus payment of $800,000 to be paid by CanArgo should commercial production be obtained from the Middle Eocene or older strata and a second bonus payment of $800,000 should production from the Block from the Middle Eocene or older strata exceed 250 tonnes of oil per day over any 90 day period. In 2002 the Participation Agreement for the three well exploration programme on the Ninotsminda field with AES was terminated without AES earning any rights to any of the Ninotsminda field reservoirs. The Company therefore has no present obligations in respect of AES. However, under a separate Letter of Agreement, if gas from the Sub Middle Eocene is discovered and produced, AES will be entitled to recover at the rate of 15% of future gas sales from the Sub Middle Eocene, net of operating costs, approximately $7.5 million, representing their prior funding under the Participation Agreement. In January 2003, CanArgo won exclusive rights to negotiate a Production Sharing Contract (PSC) for Block XIX in southern Syria. CanArgo has the contingent obligation to issue an aggregate of 333,000 stock options at a proposed exercise price of $0.17 per share, subject to the successful award of the PSC for Block XIX in southern Syria. LEASE COMMITMENTS - CanArgo leases office space under non-cancellable operating lease agreements. Rental expense for the years ended December 31, 2002, 2001 and 2000 was $327,254, $353,594 and $178,745 respectively. Future minimum rental payments over the next five years for the Company's lease obligations as of December 31, 2002, are as follows: 2003 $250,000 2004 $250,000 2005 $220,000 2006 $220,000 2007 $220,000 Thereafter $660,000*
* This represents aggregate payments for 3 years. No parent company guarantees have been provided by CanArgo with respect to its contingent obligations and commitments. 13. CONCENTRATIONS OF CREDIT RISK CanArgo's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and advances to oil and gas and other ventures. CanArgo places F-18 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS its temporary cash investments with high credit quality financial institutions. Accounts receivable relates primarily to entities active in the energy and manufacturing sectors. The concentration of credit risk associated with accounts receivable is reduced as CanArgo's debtors are spread across several countries and industries. 14. STOCKHOLDERS' EQUITY On July 8, 1998, at a Special Meeting of Stockholders, the stockholders of CanArgo approved the acquisition of all of the common stock of CAOG for Common Stock of the Company pursuant to the terms of an Amended and Restated Combination Agreement between those two companies (the "Combination Agreement"). Upon completion of the acquisition on July 15, 1998, CAOG became a subsidiary of CanArgo, and each previously outstanding share of CAOG common stock was converted into the right to receive 0.8 shares (the "Exchangeable Shares") of CAOG which are exchangeable generally at the option of the holders for shares of CanArgo's Common Stock on a share-for-share basis. On January 24, 2002 CanArgo announced that it had established May 24, 2002 as the redemption date for all of the Exchangeable Shares of CAOG since the number of outstanding Exchangeable Shares had fallen below the minimum 853,071 share threshold. Each Exchangeable Share was purchased by CanArgo for shares of CanArgo Common Stock on a share-for-share basis resulting in the issuance of an aggregate of 148,826 shares of Common Stock. No cash consideration was issued by CanArgo and the purchase did not increase the total number of shares of Common Stock of CanArgo deemed issued and issuable. As of December 31, 2002, 97,356,206 shares of Common Stock and 100 shares of Voting Preferred Shares were issued and outstanding. No other shares of the Company's preferred stock have been issued. During the years ended December 31, 2002, 2001 and 2000, the following transactions regarding CanArgo's Common Stock were consummated pursuant to authorization by CanArgo's Board of Directors or duly constituted committees thereof. YEAR ENDED DECEMBER 31, 2002 o In February 2002, CanArgo issued 5,210,000 shares at $0.34 per share upon completion of a private placement. o In May 2002, CanArgo issued 137,760 shares at $0.21 to David Robson, CanArgo's Chief Executive Officer, for gross proceeds of approximately $29,000 upon completion of a private placement. o In May, 2002 CanArgo redeemed all of the Exchangeable Shares of CAOG since the number of outstanding Exchangeable Shares had fallen below the minimum 853,071 share threshold. Each Exchangeable Share was purchased by CanArgo for shares of CanArgo Common Stock on a share-for-share basis resulting in the issuance of an aggregate of 148,826 shares of Common Stock. No cash consideration was issued by CanArgo and the purchase did not increase the total number of shares of Common Stock of CanArgo deemed issued and issuable. YEAR ENDED DECEMBER 31, 2001 o In 2001, CanArgo issued 274,965 shares upon exchange by holders of Exchangeable Shares. o In July 2001, CanArgo issued 16,057,765 shares at $0.41 per share upon completion of a private placement. F-19 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 o In 2000, CanArgo issued 105,968 shares upon exchange by holders of Exchangeable Shares. o In February and March 2000, CanArgo issued 140,000 shares at $0.805 per share in connection with services performed by third parties. o In April 2000, CanArgo issued 3,695,000 shares at $0.862 per share for gross proceeds of $3,184,166 upon completion of a private placement. o In June 2000, CanArgo issued 4,054,054 shares at $1.11 per share for gross proceeds of $4,500,000 to acquire the minority interest shareholders interest in Ninotsminda Oil Company. o In 2000, CanArgo issued 1,504,664 shares at $0.387 per share pursuant to exercised stock options. o In June 2000, CanArgo issued 15,550,916 shares at $0.98 per share upon completion of a private placement. o In August 2000, CanArgo issued 12,000,000 shares at $1.18 per share upon completion of a private placement. o In November 2000, CanArgo issued 1,543,125 shares at $1.08 per share to acquire controlling interest in a refinery. 15. NET LOSS PER COMMON SHARE Basic and diluted net loss per common share for the years ended December 31, 2002, 2001 and 2000 were based on the weighted average number of common shares outstanding during those periods. The weighted average number of shares used was 96,643,744, 83,869,579 and 54,950,630 respectively. Options to purchase CanArgo's Common Stock were outstanding during the years ended December 31, 2002, 2001 and 2000 but were not included in the computation of diluted net loss per common share because the effect of such inclusion would have been anti-dilutive. F-20 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. INCOME TAXES CanArgo and its domestic subsidiaries file U.S. consolidated income tax returns. No benefit for U.S. income taxes has been recorded in these consolidated financial statements because of CanArgo's inability to recognize deferred tax assets under provisions of SFAS 109. Due to the implementation of the quasi-reorganization as of October 31, 1988, future reductions of the valuation allowance relating to those deferred tax assets existing at the date of the quasi-reorganization, if any, will be allocated to capital in excess of par value. A reconciliation of the differences between income taxes computed at the U.S. federal statutory rate (34%) and CanArgo's reported provision for income taxes is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- ----------------- Income tax benefit at statutory rate $(1,811,418) $(4,494,238) $(731,545) Benefit of losses not recognized 1,811,418 4,494,238 731,545 Other, net -- -- -- ----------- ----------- --------- Provision for income taxes $ -- $ -- $ -- =========== =========== ========= Effective tax rate 0% 0% 0% =========== =========== =========
The components of deferred tax assets as of December 31, 2002 and 2001 were as follows:
DECEMBER 31, DECEMBER 31, ------------- ------------ 2002 2001 ------------- ------------ Net operating loss carryforwards $ 9,512,000 $ 11,256,000 Foreign net operating loss carryforwards 5,142,000 4,844,000 Net timing differences on impairments and accelerated capital allowances 8,981,000 8,981,000 ------------ ------------ 23,635,000 25,081,000 Valuation allowance (23,635,000) (25,081,000) ------------ ------------ Net deferred tax asset recognized in balance sheet $ -- $ -- ============ ============
On August 1, 1991, August 17, 1994, July 15, 1998 and June 28, 2000 CanArgo experienced changes in the CanArgo's ownership as defined in Section 382 of the Internal Revenue Code ("IRC"). The effect of these changes in ownership is to limit the utilization of certain existing net operating loss carryforwards for income tax purposes to approximately $413,000 per year on a cumulative basis. As of December 31, 2002, total U.S. net operating loss carryforwards were approximately $27,977,000. Of that amount, approximately $1,551,000 was incurred subsequent to the ownership change in 2000, $26,426,000 was incurred prior to 2000 and therefore is subject to the IRC Section 382 limitation. See Note 1 of Notes to Consolidated Financial Statements. The net operating loss carryforwards expire from 2003 to 2021 The net operating loss carryforwards limited under the separate return limitation rules may only be offset against the separate income of the respective subsidiaries. CanArgo has also generated approximately $15,123,000 of foreign net operating loss carryforwards. A significant portion of the foreign net operating loss carryforwards are subject to limitations similar to IRC Section 382. F-21 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CanArgo's available net operating loss carryforwards may be used to offset future taxable income, if any, prior to their expiration. CanArgo may experience further limitations on the utilization of net operating loss carryforwards and other tax benefits as a result of additional changes in ownership. 17. DISCONTINUED OPERATIONS In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products to finance Georgian and Ukrainian development projects and in October 2002, CanArgo agreed to sell its 50% holding to an unaffiliated company for $4 million in an arms-length transaction, with legal ownership being transferred upon receipt of final payment due in August 2003. The agreed consideration to be exchanged does not result in an impairment of the carrying value of assets held for sale. The assets and liabilities of CanArgo Standard Oil Products have been classified as "Assets held for sale" and "Liabilities held for sale" for all periods presented. The results of operations of CanArgo Standard Oil Products have been classified as discontinued for all periods presented. The minority interest related to CanArgo Standard Oil Products has not been reclassified for any of the periods presented, however net income from discontinued operations is disclosed net of taxes and minority interest. The results of discontinued operations at December 31, 2002, December 31, 2001 and December 31, 2000 consisted of the following:
DECEMBER 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ Operating Revenues 7,390,138 7,607,489 126,014 Income (Loss) Before Income taxes and Minority Interest 366,556 733,335 (16,596) Income Taxes 24,132 46,203 -- Minority Interest in Income (171,212) (343,566) 8,298 ----------- ---------- -------- Net Income (Loss) from Discontinued Operation $ 171,212 $ 343,566 $ (8,298) ========== ========== ========
Gross consolidated assets and liabilities of subsidiary held for sale that are included in "assets and liabilities held for sale" at December 31, 2001 and December 31, 2000 consisted of the following:
DECEMBER 31, December 31, 2002 2001 ---------- ------------ Assets held for sale: Cash and cash equivalents 37,948 254 Accounts receivable 243,529 90,108 Inventory 224,733 177,931 Other current assets 155,079 35,384 Capital assets, net 6,326,478 5,149,291 Investment in other ventures, net 548,910 366,614 ---------- ---------- $7,536,677 $5,819,582 ========== ========== Liabilities held for sale: Accounts payable 143,296 240,958 Current portion of long term debt 1,268,422 392,408 Income taxes payable 48,880 29,456 Long term debt 891,367 514,352 ---------- ---------- $2,351,965 $1,177,174 ========== ==========
F-22 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other investments include three petrol station sites in Tbilisi, Georgia in which CanArgo has a 50% non-controlling interest. CanArgo accounts for its interest in the three petrol station sites using the equity method and consolidates the remaining sites in which it has controlling interest. In 2002, CanArgo purchased the remaining 50% of Petro-Invest, a petrol station site in which CanArgo previously held a 50% non-controlling interest. This site is now consolidated in the results of CanArgo Standard Oil Products, above. Cash consideration received at December 31, 2002 in respect of this transaction was $500,000 and has been recorded in deferred revenue (see Note 9). The second tranche of $500,000 was received in February 2003. The sale will be reflected on receipt of the final $3 million in August 2003, in accordance with the Sale and Purchase Agreement. In 2002, the three petrol station sites that CanArgo has a 50% non-controlling interest entered into credit facility agreements of $550,000 with a commercial lender in Georgia. As at September, 2002 $350,000 of these facilities were drawn and as at December 31, 2002, $299,377 under the facilities were outstanding. The loans bear interest at 18% per annum and are secured by the assets of the petrol stations. The full amount of the loans are to be repaid by June 2005. No company guarantees have been provided by CanArgo with respect to these loans. In November 2001, CanArgo Standard Oil Products Limited entered into a $1,000,000 credit facility agreement, in May 2002 a further $240,000 credit facility agreement, and in September 2002 a further $1,900,000 credit facility agreement with commercial lenders in Georgia and Greece to fund further expansion of its petrol station network. In 2001, the full amount of the first facility was drawn, in 2002 $180,000 of the second facility was drawn, in September 2002 the full amount of the third facility was drawn. As at December 31, 2002, $2,084,709 of the total facility was outstanding. The loans bear interest between 13% and 18% per annum and are secured by the assets of petrol stations. The full amount of the first loan is to be repaid by December 2003, the second loan by November 2004, the third loan by July 2005. No parent company guarantees have been provided by CanArgo with respect to these loans. The remaining 50% interest in CanArgo Standard Oil Products is held by Standard Oil Products of Georgia and an individual, Mr. Levan Pkhakazde, who is one of the founders of Standard Oil Products and the General Director of CanArgo Standard Oil Products. 18. SEGMENT AND GEOGRAPHICAL DATA During the year ended December 31, 2002 CanArgo's continuing operations operated through two business segments, oil and gas exploration and refining of crude oil. F-23 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating revenues from continuing operations for the years ended December 31, 2002, 2001 and 2000 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31, OPERATING REVENUES FROM ------------ ------------ ------------ CONTINUING OPERATIONS: 2002 2001 2000 ------------ ------------ ------------ OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION Eastern Europe $4,179,208 $4,873,623 $6,108,779 REFINING Eastern Europe -- 2,595,763 535,865 OTHER Eastern Europe 1,412,741 608,032 364,900 INTERSEGMENT ELIMINATIONS (16,007) (906,545) -- ---------- ---------- ---------- TOTAL $5,575,942 $7,170,873 $7,009,544 ========== ========== ==========
In 2002, the Company sold its oil and gas production in Eastern Europe to twenty two (2001 - five, 2000 - five) customers. In 2002 sales to four third party customers represented 27%, 25%, 19% and 19% of oil and gas revenue respectively. In 2001 sales to three customers represented 67%, 12% and 12% of oil and gas revenue respectively. In 2000 sales to three customers represented 43%, 25% and 14% of oil and gas revenue respectively. Operating profit (loss) from continuing operations for the years ended December 31, 2002, 2001 and 2000 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31, OPERATING PROFIT (LOSS) FROM ------------ ------------ ------------ CONTINUING OPERATIONS: 2002 2001 2000 ------------ ------------ ------------ OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION Eastern Europe $ 581,934 $ (6,630,886) $ 871,896 REFINING Eastern Europe (68,247) (4,683,563) (298,255) CORPORATE AND OTHER EXPENSES (5,484,208) (4,793,047) (2,974,791) ----------- ------------ ----------- TOTAL $(4,970,521) $(16,107,496) $(2,401,150) =========== ============ ===========
As a result of application of the ceiling test limitation, CanArgo recorded a write-down in 2002 of oil and gas properties of $1,600,000 and a write-down in 2001 of oil and gas properties of $7,300,000. In 2001, refining assets and generating equipment were written-down to their estimated net realizable value by $3,359,795 and $500,000 respectively. The write-down of oil and gas properties and generating equipment was recorded in operating profit (loss) for oil and gas, exploration and production. The write-down of refining assets was recorded in profit (loss) for refining. F-24 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Identifiable assets as of December 31, 2002 and 2001 by business segment and geographical area were as follows:
DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ CORPORATE Eastern Europe $ 203,291 $ 3,926,930 Western Europe (principally cash) 2,274,847 6,775,224 ----------- ----------- TOTAL CORPORATE 2,478,138 10,702,154 ----------- ----------- OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION Eastern Europe 59,602,525 52,424,569 REFINING Eastern Europe 100,000 110,850 ASSETS HELD FOR SALE Eastern Europe 7,536,677 5,819,582 Western Europe 559,270 535,454 ----------- ----------- TOTAL ASSETS HELD FOR SALE 8,095,947 6,355,036 ----------- ----------- OTHER ENERGY PROJECTS Eastern Europe 459,308 719,308 ----------- ----------- TOTAL IDENTIFIABLE ASSETS $70,735,918 $70,311,917 =========== ===========
19. SUPPLEMENTAL CASH FLOW INFORMATION AND NONMONETARY TRANSACTIONS The following represents supplemental cash flow information for the years ended December 31, 2002, 2001 and 2000:
Supplemental schedule of non-cash DECEMBER 31, DECEMBER 31, DECEMBER 31, activities: 2002 2001 2000 ------------ ------------ ------------ Issuance of Common Stock in connection with acquisition of minority interest shareholders interest in subsidiary $ -- -- $4,500,000 Issuance of Common Stock in connection with acquisition of controlling interest in refinery -- -- 1,666,576 Issuance of Common Stock in connection with compensation earned and third party services provided -- -- 112,700 Issuance of Common Stock in connection with compensation earned 29,000 -- -- ------- --- ---------- $29,000 $-- $6,279,276 ======= === ==========
F-25 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. STOCK-BASED COMPENSATION PLANS On August 17, 1994, options to purchase 200,000 shares of CanArgo's Common Stock were issued to various individuals who were serving or were expected in the future to serve CanArgo as officers, directors, employees, consultants and advisors (the "1994 Plan"). The options were exercisable at an exercise price of $3.00 and were only exercisable at the time or within six months after services are rendered by such individuals. In 1999 all of the options issued under the 1994 Plan expired. Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan") adopted by CanArgo in February 1996, 7,500,000 shares of the CanArgo's Common Stock have been authorized for possible issuance under the 1995 Plan. Stock options granted under the 1995 Plan may be either incentive stock options or non-qualified stock options. Options expire on such date as is determined by the committee administering the 1995 Plan, except that incentive stock options may expire no later than 10 years from the date of grant. Pursuant to the 1995 Plan, a specified number of stock options exercisable at the then market price are granted annually to non-employee directors of CanArgo, which become 100% vested six months from the date of grant. Stock appreciation rights entitle the holder to receive payment in cash or Common Stock equal in value to the excess of the fair market value of a specified number of shares of Common Stock on the date of exercise over the exercise price of the stock appreciation right. No stock appreciation rights have been granted through December 31, 2001. The exercise price and vesting schedule of stock appreciation rights are determined at the date of grant. Under the 1995 Plan, 3,887,384 options were outstanding at December 31, 2002. Pursuant to the terms of the Combination Agreement ("CAOG"), on July 15, 1998 each stock option granted under CAOG's existing Stock Option Plan (the "CAOG Plan") to purchase a CAOG common share was converted into an option to purchase 0.8 shares of the CanArgo's Common Stock. Pursuant to the CAOG Plan, which has been adopted by CanArgo, a total of 988,000 shares of CanArgo's Common Stock have been authorized for issuance. Stock options granted under the CAOG Plan expire on such date as is determined by the committee administering the CAOG Plan, except that the term of stock options may not exceed 10 years from the date of grant. Under the CAOG Plan, 626,667 options were outstanding at December 31, 2002. In 2000, special stock options and warrants to purchase 2,220,000 shares of CanArgo's Common Stock were issued to various individuals who were serving or were expected in the future to serve CanArgo as officers, directors and employees. The special stock options are exercisable at an exercise price of $1.437 per common share. The warrants are exercisable at an exercise price of $1.27 per common share. At December 31, 2002, all 2,220,000 special stock options and warrants remained outstanding. The purpose of the Company's stock option plans is to further the interest of the Company by enabling officers, directors, employees, consultants and advisors of the Company to acquire an interest in the Company by ownership of its stock through the exercise of stock options and stock appreciation rights granted under its various stock option plans. F-26 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of stock options granted under the 1994 Plan, the 1995 Plan, CAOG Plan and special stock options and warrants is as follows:
---------------- SHARES ISSUABLE WEIGHTED SHARES AVAILABLE UNDER OUTSTANDING AVERAGE EXERCISE FOR ISSUE OPTIONS PRICE ---------------- ----------------- ---------------- BALANCE, DECEMBER 31, 1999 866,250 4,121,750 0.72 Options (1994 & 1995 Plan): Granted at market (1,087,000) 1,087,000 1.06 Exercised -- (1,441,331) 0.39 Expired 436,250 (436,250) 0.89 CAOG Plan Authorization: Granted at market (485,000) 485,000 1.10 Exercised -- (63,333) 0.46 Expired 737,500 (737,500) 1.69 Special Stock Options and Warrants: Granted at market -- 2,220,000 1.40 ---------- ---------- ---- BALANCE, DECEMBER 31, 2000 468,000 5,235,336 1.02 Options (1995 Plan): Increase in shares available for issue 3,500,000 -- Granted at market (1,795,000) 1,795,000 0.68 Exercised -- -- Expired 123,335 (123,335) 1.44 CAOG Plan Authorization: Granted at market (185,000) 185,000 1.02 Exercised -- -- Expired -- -- ---------- ---------- ---- BALANCE, DECEMBER 31, 2001 2,111,335 7,092,001 0.92 Options (1995 Plan): Increase in shares available for issue Granted at market (130,000) 130,000 0.14 Exercised -- -- Expired 307,500 (307,500) 0.25 CAOG Plan Authorization: Granted at market -- -- Exercised -- -- Expired 180,000 (180,000) 1.11 ---------- ---------- ---- BALANCE, DECEMBER 31, 2002 2,468,835 6,734,501 0.93
F-27 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shares issuable upon exercise of vested options and the corresponding weighted average exercise price are as follows:
SHARES ISSUABLE WEIGHTED UNDER EXERCISABLE AVERAGE EXERCISE OPTIONS PRICE ----------------- ---------------- December 31, 2000 725,329 $0.99 December 31, 2001 3,452,831 $0.91 December 31, 2002 5,114,834 $0.93
The weighted average fair value of options granted during the year was $0.14, $0.71 and $1.26 for the years ended December 31, 2002, 2001 and 2000 respectively. The following table summarizes information about stock options outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------------- --------------------------------- NUMBER NUMBER OF SHARES WEIGHTED WEIGHTED OF SHARES WEIGHTED OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE Range of Exercise Prices 2002 TERM PRICE 2002 PRICE - ------------------------ -------------- --------- -------- -------------- -------- $0.14 to $0.69 3,197,501 3.02 0.54 2,272,834 0.51 $0.70 to $0.99 175,000 2.96 0.88 120,000 0.88 $1.00 to $1.85 3,362,000 1.98 1.30 2,722,000 1.28 --------- ---- ---- --------- ---- $0.14 to $1.85 6,734,501 2.50 0.93 5,114,834 0.93 ========= ==== ==== ========= ====
As discussed in Note1, Summary of Significant Accounting Policies, "Stock-Based Compensation Plans", CanArgo accounts for its stock-based compensation plans under APB Opinion 25. Accordingly, no compensation cost has been recognized for those stock options with exercise prices equal to or greater than the market price of the stock on the date of grant. Under SFAS No. 123, compensation cost is measured at the grant date based on the fair value of the awards and is recognized over the service period, which is usually the vesting period. Had compensation cost for those stock options been determined consistent with SFAS No. 123, CanArgo's net loss and net loss per common share after plan forfeitures would have been approximately $6,253,000 and $0.06 respectively for the year ended December 31, 2002, $14,553,000 and $0.17 for the year ended December 31, 2001, and $3,077,000 and $0.04 respectively for the year ended December 31, 2000. The fair value of each stock option granted by CanArgo was calculated using the Black-Scholes option-pricing model applying the following weighted-average assumptions for the years ended December 31, 2002, 2001 and 2000: dividend yield of 0.00%, risk-free interest rate of 2.91% for the year ended December 31, 2002, dividend yield of 0.00%, risk-free interest rate of 4.61% for the year ended December 31, 2001, and dividend yield of 0.00%; risk-free interest rate of 5.98% for the year ended December 31, 2000, the average expected lives of options of 5.0 years, 3.37 years and 3.51 years respectively; and volatility of 80.47% for the year ended December 31, 2002, 75.15% for the year ended December 31, 2001, and 75.07% for the year ended December 31, 2000. See note 22 for changes made to stock options disclosed above since December 31, 2002. 21. RELATED PARTY TRANSACTIONS Of the 50% of CanArgo Standard Oil Products not held by CanArgo, 41.65% is held by Standard Oil Products, an unrelated third party entity, and 8.35% is held by an individual, Mr Levan Pkhakadze, who is F-28 CANARGO ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS one of the founders of Standard Oil Products and is an officer and director of CanArgo Standard Oil Products. The majority of refined product purchased by CanArgo Standard Oil Products for resale at its petrol stations is purchased from a company controlled by Standard Oil Products who together with and an individual shareholder, own the 50% interest in CanArgo Standard Oil Products not held by CanArgo. Total product purchases from the related company in 2002 were $5,263,000. Certain equipment is provided to Georgian British Oil Company Ninotsminda by a company owned by significant employees of Georgian British Oil Company Ninotsminda. Total rental payments for this equipment in 2002 were $125,729. In April 2001, CanArgo acquired from a wholly owned subsidiary of Terrenex Acquisition Corporation the remaining 50% interest it did not own in CanArgo Power for cash consideration of $425,000. In a related but separate transaction, CanArgo sold in April 2001 all of its voting and non-voting shares of Uentech International Corporation to a wholly owned subsidiary of Terrenex Acquisition Corporation. Proceeds from the sale of Uentech International Corporation were $125,000. On completion of the acquisition, CanArgo Power became a wholly owned subsidiary of CanArgo. The transactions were approved by an independent committee of the Board of Directors. Two members of the Board of Directors of CanArgo who were also members of the Board of Directors of Terrenex Acquisition Corporation, Messrs. Hammond and Paus, abstained from voting on the transactions. Dr. David Robson, Chief Executive Officer, provides all of his services to CanArgo through Vazon Energy Limited of which he is the Managing Director. J.F. Russell Hammond, a non-executive director of CanArgo, is also an investment advisor to Provincial Securities who became a minority shareholder in the Norio and North Kumisi Production Sharing Agreement through a farm-in agreement to the Norio MK72 well. Transactions with affiliates or other related parties including management of affiliates are to be undertaken on the same basis as third party arms-length transactions. Transactions with affiliates are reviewed and voted on solely by non-interested directors. 22. SUBSEQUENT EVENTS As a result of ongoing cost reduction plans, CanArgo's principal executive offices based in London will close at the end of March, 2003 and will be relocated to Guernsey in the Channel Islands. CanArgo intends to sublet the remaining space that it is vacating and does not expect to make a material loss on subletting. CanArgo Energy Corporation has resolved to issue 1,589,166 new options and amend the terms and conditions attaching to 5,117,501 of existing options. The exercise price for all these options is US $0.10 (approximately NOK 0.71) approximately 2.5 times the current share price. All these options vest immediately and expire on March 4, 2008. With regard to individual officers and directors, details of existing and new options are as follows:
Amended Terms New Options Total ------------- ----------- --------- David Robson 2,666,667 333,333 3,000,000 Vincent McDonnell 300,000 300,000 600,000 Russ Hammond 346,250 153,750 500,000 Nils Trulsvik 346,250 153,750 500,000 Liz Landles 172,000 28,000 200,000
F-29 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2002 ---------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ---------- ----------- ----------- ----------- ----------- Operating Revenue from Continuing Operations $2,881,434 $ 980,163 $ 696,406 $ 1,017,939 $ 5,575,942 Operating Income (Loss) from Continuing Operations 135,062 (1,719,662) (462,237) (2,923,684) (4,970,521) Net Loss from Continuing Operations (18,976) (1,321,902) (1,264,453) (2,893,582) (5,498,913) Net Income (Loss) from Discontinued Operations, net of Taxes and Minority Interest 106,019 30,763 36,608 (2,178) 171,212 Net Income (Loss) 87,043 (1,291,139) (1,227,845) (2,895,760) (5,327,701) Comprehensive Income (Loss) 87,043 (1,342,396) (1,078,650) (2,989,030) (5,323,033) Net Loss per Common Share - basic and diluted from Continuing Operations 0.00 (0.01) (0.01) (0.03) (0.06) Net Loss per Common Share - basic and diluted from Discontinued Operations 0.00 0.00 0.00 0.00 0.00 Net Loss per Common Share - basic and diluted 0.00 (0.01) (0.01) (0.03) (0.06)
2001 ----------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ---------- ------------ ----------- ------------ ------------ Operating Revenue from Continuing Operations $2,154,378 $ 1,551,524 $2,095,429 $ 1,369,542 $ 7,170,873 Operating Loss from Continuing Operations (619,150) (1,294,077) (877,314) (13,316,955) (16,107,496) Net Loss from Continuing Operations (364,852) (1,214,048) (566,994) (11,416,018) (13,561,912) Net Income from Discontinued Operations, net of Taxes and Minority Interest 38,771 10,608 79,630 214,557 343,566 Net Loss (326,081) (1,203,440) (487,364) (11,201,461) (13,218,346) Comprehensive Loss (326,081) (1,203,440) (487,364) (11,201,461) (13,218,346) Net Loss per Common Share - basic and diluted from Continuing Operations 0.00 (0.02) (0.01) (0.12) (0.16) Net Loss per Common Share - basic and diluted from Discontinued Operations 0.00 0.00 0.00 0.00 0.00 Net Loss per Common Share - basic and diluted 0.00 (0.02) (0.01) (0.12) (0.16)
F-30 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES Users of this information should be aware that the process of estimating quantities of "proved" and "proved developed" natural gas and crude oil reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. Proved reserves are estimated quantities of natural gas, crude oil and condensate that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs with existing equipment under existing economic and operating conditions. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and under existing economic and operating conditions. No major discovery or other favorable or adverse event subsequent to December 31, 2002 is believed to have caused a material change in the estimates of proved or proved developed reserves as of that date. The following tables sets forth the Company's net proved oil and gas reserves, including the changes therein, and net proved developed reserves at December 31, 2002, as estimated by the independent petroleum engineering firm, Ashton Jenkins Mann:
NET PROVED RESERVES - OIL REPUBLIC OF (In Thousands of Barrels) GEORGIA ----------- DECEMBER 31, 1999 7,718 Purchase of properties 1,610 Revisions of previous estimates -- Extension, discoveries, other additions 583 Production (246) Disposition of properties -- ------ DECEMBER 31, 2000 9,665 Purchase of properties -- Revisions of previous estimates (5,689) Extension, discoveries, other additions -- Production (247) Disposition of properties -- ------ DECEMBER 31, 2001 3,729 Purchase of properties -- Revisions of previous estimates (630) Extension, discoveries, other additions -- Production (198) Disposition of properties -- ------ DECEMBER 31, 2002 2,901 NET PROVED DEVELOPED OIL RESERVES ------ December 31, 2002 2,811 ======
F-31 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
NET PROVED RESERVES - GAS REPUBLIC OF (In Million Cubic Feet) GEORGIA ----------- DECEMBER 31, 1999 8,334 Purchase of properties 1,658 Revisions of previous estimates -- Extension, discoveries, other additions 4,654 Production (1,146) Disposition of properties -- ------ DECEMBER 31, 2000 13,500 Purchase of properties -- Revisions of previous estimates (7,365) Extension, discoveries, other additions -- Production (1,110) Disposition of properties -- ------ DECEMBER 31, 2001 5,025 Purchase of properties -- Revisions of previous estimates (2,265) Extension, discoveries, other additions -- Production (346) Disposition of properties -- ------ DECEMBER 31, 2002 2,414 NET PROVED DEVELOPED GAS RESERVES ------ December 31, 2002 2,385 ======
Net proved oil reserves in the Republic of Georgia as at December 31, 2002 and 2001 were as follows:
DECEMBER 31, DECEMBER 31, 2002 2001 ------------------------------ ------------------------------ PSC PSC ENTITLEMENT OIL RESERVES ENTITLEMENT OIL RESERVES VOLUMES - GROSS VOLUMES - GROSS ----------- (MSTB) (MSTB)(1) (MSTB) (MSTB) (1) ------------ ----------- ------------ ----------- Proved Developed Producing 4,016 2,811 3,985 2,928 Proved Undeveloped 134 90 1,076 801 ----- ----- ----- ----- TOTAL PROVEN 4,150 2,901 5,061 3,729 ===== ===== ===== =====
Net proved gas reserves in the Republic of Georgia as at December 31, 2002 and 2001 were as follows:
DECEMBER 31, DECEMBER 31, 2002 2001 ------------------------------ ------------------------------ PSC PSC ENTITLEMENT GAS RESERVES ENTITLEMENT GAS RESERVES VOLUMES - GROSS VOLUMES - GROSS ----------- (MMCF) (MMCF)(1) (MMCF) (MMCF)(1) ------------ ----------- ------------ ----------- Proved Developed Producing 7,952 2,385 12,878 3,963 Proved Undeveloped 96 29 3,873 1,162 ----- ----- ------ ----- TOTAL PROVEN 8,048 2,414 16,751 5,025 ===== ===== ====== =====
F-32 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED - ------------ (1) PSC Entitlement Volumes attributed to CanArgo are calculated using the "economic interest method" applied to the terms of the production sharing contract. PSC Entitlement Volumes are those produced volumes which, through the production sharing contract, accrue to the benefit of Ninotsminda Oil Company after deduction of Georgian Oil's share which includes all Georgian taxes, levies and duties. As a result of CanArgo's interest in Ninotsminda Oil Company, these volumes accrue to the benefit of CanArgo for the recovery of capital, repayment of operating costs and share of profit. Results of operations for oil and gas producing activities for the years ended December 31, 2002, 2001 and 2000 are as follows:
REPUBLIC OF YEAR ENDED DECEMBER 31, 2002 GEORGIA ----------- Revenues $4,179,208 Operating expenses 1,537,917 Depreciation, depletion and amortization 3,353,266 ---------- Operating Income/(Loss) (711,975) Income tax provision -- ---------- RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES $ (711,975) ==========
REPUBLIC OF YEAR ENDED DECEMBER 31, 2001 GEORGIA ----------- Revenues $ 4,873,623 Operating expenses 1,568,011 Depreciation, depletion and amortization 10,167,368 ----------- Operating Income/(Loss) (6,861,756) Income tax provision -- ----------- RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES $(6,861,756) ===========
REPUBLIC OF YEAR ENDED DECEMBER 31, 2000 GEORGIA ----------- Revenues $6,108,779 Operating expenses 1,287,035 Depreciation, depletion and amortization 3,099,000 ---------- Operating Income 1,722,744 Income tax provision -- ---------- RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES $1,722,744 ==========
F-33 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED Costs incurred for oil and gas property acquisition, exploration and development activities for the years ended December 31, 2002, 2001 and 2000 are as follows:
EASTERN EUROPE ----------- DECEMBER 31, 2002 Property Acquisition Unproved* $ -- Proved -- Exploration 12,167,238 Development 543,280 ----------- Total costs incurred $12,710,518 =========== DECEMBER 31, 2001 Property Acquisition $ 5,186,002 Unproved* -- Proved 5,851,306 Exploration 2,054,989 Development ----------- Total costs incurred $13,092,297 =========== DECEMBER 31, 2000 Property Acquisition Unproved* $ 1,365,783 Proved -- Exploration -- Development 9,261,624 ----------- Total costs incurred $10,627,407 ===========
* These amounts represent costs incurred by CanArgo and excluded from the amortization base until proved reserves are established or impairment is determined. F-34 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES The following information has been developed utilizing procedures prescribed by SFAS No. 69 Disclosure about Oil and Gas Producing Activities ("SFAS 69") and based on crude oil reserve and production volumes estimated by the Company's engineering staff. It may be useful for certain comparative purposes, but should not be solely relied upon in evaluating the Company or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of the Company. CanArgo believes that the following factors should be taken into account in reviewing the following information: (1) future costs and selling prices will probably differ from those required to be used in these calculations; (2) actual rates of production achieved in future years may vary significantly from the rate of production assumed in the calculations; (3) selection of a 10% discount rate is arbitrary and may not be reasonable as a measure of the relative risk inherent in realizing future net oil and gas revenues; and (4) future net revenues may be subject to different rates of income taxation. Under the Standardized Measure, future cash inflows were estimated by applying period-end oil prices adjusted for fixed and determinable escalations to the estimated future production of period-end proven reserves. Future cash inflows were reduced by estimated future development, abandonment and production costs based on period-end costs in order to arrive at net cash flow before tax. Future income tax expenses has been computed by applying period-end statutory tax rates to aggregate future pre-tax net cash flows, reduced by the tax basis of the properties involved and tax carryforwards. Use of a 10% discount rate is required by SFAS No. 69. Management does not rely solely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable as well as proven reserves and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated. The standardized measure of discounted future net cash flows relating to proved oil and gas reserves is as follows:
REPUBLIC OF DECEMBER 31, 2002 (IN THOUSANDS) GEORGIA ----------- Future cash inflows $54,761 Less related future: Production costs 17,959 Development and abandonment costs 7,500 ------- Future net cash flows before income taxes 29,302 Future income taxes(1) (600) ------- Future net cash flows 28,702 10% annual discount for estimating timing of cash flows 14,595 ------- Standardized measure of discounted future net cash flows $14,107 =======
F-35 CANARGO ENERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATION SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
REPUBLIC OF DECEMBER 31, 2001 (IN THOUSANDS) GEORGIA ----------- Future cash inflows $61,922 Less related future: Production costs 26,177 Development and abandonment costs 6,284 ------- Future net cash flows before income taxes 29,461 Future income taxes(1) (740) ------- Future net cash flows 28,721 10% annual discount for estimating timing of cash flows 12,026 ------- Standardized measure of discounted future net cash flows $16,695 =======
- ------------- (1) Future cash flows are based on PSC Entitlement Volumes attributed to CanArgo using the "economic interest method" applied to the terms of the production sharing contract. PSC Entitlement Volumes are those produced volumes which, through the production sharing contract, accrue to the benefit of Ninotsminda Oil Company after deduction of Georgian Oil's share which includes all Georgian taxes, levies and duties. As a result of CanArgo's interest in Ninotsminda Oil Company, these volumes accrue to the benefit of CanArgo for the recovery of capital, repayment of operating costs and share of profit. A summary of the changes in the standardized measure of discounted future net cash flows applicable to proved oil and gas reserves is as follows:
DECEMBER 31, December 31, December 31, IN THOUSANDS 2002 2001 2000 ------------- ------------ ------------ Beginning of year $16,695 $ 62,966 $40,168 Purchase (sale) of reserves in place -- -- 11,316 Revisions of previous estimates (6,978) (36,196) (409) Development costs incurred during the period 543 2,055 9,262 Additions to proved reserves resulting from extensions, discoveries and improved recovery -- -- -- Accretion of discount -- -- -- Sales of oil and gas, net of production costs (2,625) (2,327) (4,822) Net change in sales prices, net of production costs 4,990 (12,865) 4,393 Changes in production rates (timing) and other 1,482 3,062 3,058 ------- -------- ------- Net increase (decrease) (2,588) (46,271) 22,798 ------- -------- ------- End of year $14,107 $ 16,695 $62,966 ======= ======== =======
F-36 EXHIBIT INDEX Management Contracts, Compensation Plans and Arrangements are identified by an asterisk (*) Documents filed herewith are identified by a cross (+). 1(1) Escrow Agreement with Signature Stock Transfer, Inc. (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 9, 1999). 1(2) Selling Agent Agreement with each of Credifinance Securities Limited, David Williamson Associates Limited, and Orkla Finans (Fondsmegling) ASA (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 9, 1999). 1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 9, 1999). 1(4) Selling Agent Agreement with National Securities Corporation (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). 1(5) Escrow Agreement with Continental Stock Transfer & Trust Company (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). 1(6) Engagement Agreement with Sundal Collier & Co ASA dated August 13, 2001. (Incorporated herein by reference from Post-Effective Amendment No. 2 to Form S-1 Registration Statement, File No. 333-85116 filed on September 10, 2002). 2(1) Agreement Relating to the Sale and Purchase of All the Issued Share Capital of Gastron International Limited dated August 10, 1995 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor (Incorporated herein by reference from October 19, 1995 Form 8-K). 2(2) Supplemental Agreement Relating to the Sale and Purchase of All the Issued Share Capital of Gastron International Limited dated November 3, 1995 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor (Incorporated herein by reference from October 19, 1995 Form 8-K). 2(3) Supplemental Deed Relating to the Sale and Purchase of All the Issued Share Capital of Gastron International Limited dated May 29, 1996 by and among Ribalta Holdings, Inc. as Vendor and Fountain Oil Incorporated as Purchaser, and John Richard Tate as Warrantor (Incorporated herein by reference from September 30, 1997 Form 10-Q). 2(4) Memorandum of Agreement between Fielden Management Services Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated dated May 16, 1995 (Incorporated herein by reference from December 31, 1997 Form 10-K/A). 2(5) Amended and Restated Combination Agreement between Fountain Oil Incorporated and CanArgo Energy Inc. dated as of February 2, 1998 (Incorporated herein by reference from Form S-3 Registration Statement, File No. 333-48287 filed on September 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated herein by reference as Annex G from Form S-3 Registration Statement, File No. 333-48287 filed on September 9, 1998). 3(1) Registrant's Certificate of Incorporation and amendments thereto (Incorporated herein by reference from July 15, 1998 Form 8-K). 3(2) Registrant's Bylaws (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). 4(1) Registration Rights Agreement between Registrant and JKX Nederland B.V. dated September 28, 2000, relating to purchase of 21.2% interest in Ninotsminda Oil Company (Incorporated herein by reference from July 20, 2000 Form 8-K). *10(1) Form of Option Agreement for options granted to certain persons, including Directors (Incorporated herein by reference from August 31, 1994 Form 10-KSB, filed by Electromagnetic Oil Recovery, Inc., the Company's predecessor). *10(2) Amended and Restated 1995 Long-Term Incentive Plan (Incorporated herein by reference from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). *10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan (Incorporated herein by reference from September 30, 1998 Form 10-Q). 10(4) Agreement between Georgian American Oil Refinery Company and CanArgo Petroleum Products Ltd. dated September 26, 1998 (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on February 12, 1999). 10(5) Terrenex Acquisition Corporation Option regarding CanArgo (Nazvrevi) Limited (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on February 12, 1999). 10(6) Production Sharing Contract between (1) Georgia and (2) Georgian Oil and JKX Navtobi Ltd. dated February 12, 1996 (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 7, 1999). 10(7) Agreement on Financial Advisory Services between CanArgo Energy Corporation, Orkla Finans (Fondsmegling) A.S and Sundal Collier & Co. ASA dated December 8, 1999 (Incorporated herein by reference from December 28, 1999 Form 8-K). 10(8) Form of Subscription Agreement (Incorporated herein by reference from December 28, 1999 Form 8-K). 10(9) Agreement between CanArgo Energy Corporation and JKX Nederland BV dated January 19, 2000 (Incorporated herein by reference from December 31, 1999 Form 10-K). 10(10) Agreement between Ninotsminda Oil Company and AES Gardabani dated March 10, 2000 (Incorporated herein by reference from December 31, 1999 Form 10-K).
10(11) Term Sheet dated September 27, 2000 relating to sale of 15,660,916 shares of Registrant's common stock (Incorporated herein by reference from July 20, 2000 Form 8-K). 10(12) Form of Subscription Agreement relating to sale of 15,660,916 shares of the Registrant's common stock (Incorporated herein by reference from July 20, 2000 Form 8-K). 10(13) Subscription Agreement between Registrant and JKX Nederland B.V. dated September 15, 2000 relating to purchase of 21.2% interest in Ninotsminda Oil Company (Incorporated herein by reference from July 20, 2000 Form 8-K). *10(14) Employment Agreement between CanArgo Energy Corporation and Dr. David Robson dated June 29, 2000 (Incorporated herein by reference from September 30, 2000 Form 10-Q). 10(15) Tenancy Agreement between CanArgo Energy Corporation and Grosvenor West End Properties dated September 8, 2000 (Incorporated herein by reference from September 30, 2000 Form 10-Q). 10(16) Agreement between CanArgo Energy Corporation and Roger Brittain dated August 18, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). *10(17) Employment Agreements between CanArgo Energy Corporation and Murray Chancellor dated September 22, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). *10(18) Employment Agreements between CanArgo Energy Corporation and Anthony Potter dated October 1, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). 10(19) Production Sharing Contract between (1) Georgia and (2) Georgian Oil and CanArgo Norio Limited dated December 12, 2000 (Incorporated herein by reference from December 31, 2000 Form 10-K). 10(20) Agreement between CanArgo Energy Corporation and Georgian British Oil Services Company dated November 10, 2000 relating to the purchase of 9.35% interest in Georgian American Oil Refinery (Incorporated herein by reference from December 31, 2000 Form 10-K). 10(21) Share Exchange Agreement between CanArgo Energy Corporation and Argonaut Oil and Gas Limited dated November 10, 2000, related to the purchase of 28.7% interest in Georgian American Oil Refinery (Incorporated herein by reference from December 31, 2000 Form 10-K). *10(22) Employment Agreements between CanArgo Energy Corporation and Vincent McDonnell dated December 1, 2000 (Incorporated herein by reference from December 31, 2001 Form 10-K). 10(23) Agreement Number 1 dated March 20, 1998 on Joint Investment Production Activity for further development and further exploration of Bugruvativske Field (Incorporated herein by reference from June 30, 2001 Form 10-Q). 10(24) Crude Oil Sales Agreement dated August 13, 2002 (Incorporated herein by reference from June 30, 2002 Form 10-Q) 10(25) Covenant on terms and conditions of participation in investment activity under the Joint Investment Production Activity agreement dated of March 20, 1998, dated July 23, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q)
10(26) Stock sale purchase contract of IPEC between Lateral Vector Resources and Northern Industrial Development dated July 25, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(27) Amendments of and Additions to Joint Investment Production Activity agreement of March 20, 1998, dated August 8, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(28) Amendment of Clause 9.3.1 of Amendments of and Additions to the Joint Investment Production Activity agreement of March 20, 1998, dated September 17, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(29) Stock sale purchase contract of IPEC between Lateral Vector Resources Inc. and Lystopad dated September 24, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(30) Stock sale purchase contract of IPEC between Lateral Vector Resources Inc. and Lyutyi dated September 24, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 10(31) Sale agreement of CanArgo Petroleum Products Limited between CanArgo Limited and Westrade Alliance LLC dated October 14, 2002. (Incorporated herein by reference from September 30, 2002 Form 10-Q) 21 List of Subsidiaries (Incorporated herein by reference from June 30, 2001 Form 10-Q) 25(1) Power of attorney of certain signatories (Incorporated herein by reference from December 17, 2002 Form S1/A) +23 Consent of PricewaterhouseCoopers LLP +99(1) Certification of Chief Executive Officer pursuant to 18.U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. +99(2) Certification of Chief Financial Officer pursuant to 18.U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EX-23 3 u46006exv23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23. REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Shareholders of CanArgo Energy Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of CanArgo Energy Corporation and its subsidiaries at 31 December 2002 and 2001, and the results of their operations and their cash flows for the each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming the Group will continue as a going concern. As discussed in Note 1, Basis of Presentation, to the consolidated financial statements, the Group is reliant on raising additional significant financing from external sources in order to recover the carrying value of its undeveloped and unproved properties and without additional financing there is substantial doubt about the Group's long term ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1, Basis of Presentation. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP March 24, 2003 London, England EX-99.1 4 u46006exv99w1.txt CERTIFICATION OF CEO EXHIBIT 99(1) CERTIFICATIONS I, David Robson, Chairman of the Board and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of CanArgo Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 24, 2003 /s/ DAVID ROBSON ------------------------------------- DAVID ROBSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER EX-99.2 5 u46006exv99w2.txt CERTIFICATION OF CFO EXHIBIT 99(2) CERTIFICATIONS I, Vincent McDonnell, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of CanArgo Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 24, 2003 /s/ VINCENT McDONNELL ----------------------------------- VINCENT MCDONNELL CHIEF FINANCIAL OFFICER -----END PRIVACY-ENHANCED MESSAGE-----