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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2004 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the transition period from to
Commission File Number 001-32145
CANARGO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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91-0881481 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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P.O. Box 291, St Peter Port, Guernsey, British Isles GY1 3RR |
(Address of Principal Executive Offices) |
Registrants telephone number, including area code: (44) 1481 729 980
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
Common Stock, par value $0.10 per share
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American Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
YES o NO þ
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 þ NO o
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 registrants 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. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one)
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
The aggregate market value of the Registrants common stock held by-non-affiliates was approximately $334.6 million as of 11 March 2005, based
upon the last reported sales price of such stock on the American Stock Exchange on that date. For this purpose, the Registrant considers Dr.
David Robson, Vincent McDonnell, Michael Ayre, Russ Hammond and Nils Trulsvik to be its only affiliates.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date: Common
Stock, $0.10 par value, 197,766,338 shares outstanding as of 14 March, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement issued in connection with its 2004 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index.
CANARGO ENERGY CORPORATION
FORM 10-QKA
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
The United States Private Securities Litigation Reform Act of 1995 provides a safe harbour for
certain forward-looking statements. Such forward-looking statements are based upon the current
expectations of CanArgo and speak only as of the date made. These forward-looking statements
involve risks, uncertainties and other factors. The factors discussed elsewhere in this Quarterly
Report on Form 10-Q are among those factors that in some cases have affected CanArgos historic
results and could cause actual results in the future to differ significantly from the results
anticipated in forward-looking statements made in this Quarterly Report on Form 10-Q, future
filings by CanArgo with the Securities and Exchange Commission, in CanArgos press releases and in
oral statements made by authorized officers of CanArgo. When used in this Quarterly Report on Form
10-Q, the words estimate, project, anticipate, expect, intend, believe, hope, may
and similar expressions, as well as will, shall and other indications of future tense, are
intended to identify forward-looking statements. Few of the forward-looking statements in this
Report deal with matters that are within our unilateral control. Acquisition, financing and other
agreements and arrangements must be negotiated with independent third parties and, in some cases,
must be approved by governmental agencies. These third parties generally have interests that do not
coincide with ours and may conflict with our interests. Unless the third parties and we are able to
compromise their various objectives in a mutually acceptable manner, agreements and arrangements
will not be consummated.
EXPLANATORY NOTE
CanArgo Energy Corporation (the Company) is hereby amending this Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, as amended by Amendment No. 1 on Form 10-K/A filed on May
2, 2005 pursuant to SEC Release No. 50754 (the Report), solely to revise Item 9A Controls and
Procedures of Part II of the Report as hereinafter set forth. The revision is intended to respond
to the comments of the staff of the Securities and Exchange Commission resulting from their recent
review of the Companys Annual Report on Form 10-K, as amended. This Amendment No. 2 to the Report
continues to speak as of the date of the Report, and we have not updated the disclosures contained
in this Amendment No. 2 to the Report to reflect any events that occurred at a date subsequent to
the filing of the Report. The filing of this Amendment No. 2 to the Report is not a representation
that any statements contained in items of the Report other than that information being amended are
true or complete as of any date subsequent to the date of the Report. The revision does not affect
the remaining information set forth in the Report, the remaining portions of which have not been
amended.
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PART II
ITEM 9A. CONTROLS AND PROCEDURES
Managements Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in
this Annual Report. The consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America and include amounts based
on managements best estimates and judgments. Management believes the consolidated financial
statements fairly reflect the form and substance of transactions and that the financial statements
fairly represent the Companys financial position and results of operations. The Audit Committee of
the Board of Directors, which is composed solely of independent directors, meets regularly with the
independent auditors, L J Soldinger Associates LLC and representatives of management to review
accounting, financial reporting, internal control and audit matters, as well as the nature and
extent of the audit effort. The Audit Committee is responsible for the engagement of the
independent auditors. The independent auditors have free access to the Audit Committee.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in the rules promulgated under the Securities Exchange
Act of 1934. This system of internal controls is designed to provide reasonable assurance that
assets are safeguarded, transactions are properly recorded and executed in accordance with
managements authorization and financial statements are prepared in accordance with generally
accepted accounting principles. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our Company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Under the supervision and with the participation of our management, including our principal
executive, financial and accounting officers, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2004 based on the framework in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Since the Company only became an accelerated filer on June 30, 2004 this
evaluation started only during the fourth quarter of 2004. To facilitate the evaluation management
retained a major international accounting firm to assist it, with regard to its Georgian
subsidiaries and headquarters, in documenting, testing and revising its processes and controls.
This process involved testing the controls for effectiveness in the fourth quarter of 2004 and
continued into the first quarter of 2005. Because of the lack of time in combination with the lack
of resources to engage personnel management focused on the key control areas of our significant
processes. Management was unable, however, to complete its assessment of the effectiveness of
internal controls as of December 31, 2004 as required by Section 404 requirements. As a result of
the lack of accounting guidance as to methods and procedures to be followed under like
circumstances, the deadline for such assessment having passed, we do not intend to complete our
assessment of our internal controls as of December 31, 2004.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of our annual or interim financial
statements would not be prevented or detected. As of December 31, 2004, we did not maintain
effective controls over the processes and controls surrounding the financial statement closing
process performed on a quarterly and annual basis. These processes and controls are fundamental to
a companys internal controls over financial reporting being sufficient to reduce the level of
potential misstatement below the level of remote and the related misstatement below the level of
material. The most critical control weaknesses relating to
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the financial statement close process are a) the lack of adequate review and supervision primarily
related to the lack of segregation of duties and b) insufficient standard processes and policies to
ensure a consistent and accurate financial statement close process. Additionally, we do not have
sufficient controls in place to ensure adequate review of the application of generally accepted
accounting principles relating to non-routine transactions, estimates and financial statement
disclosures. We have concluded that each of these control deficiencies constitute a material
weakness.
As a result of our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the
rules issued thereunder, we reported in our Form 10-Q for the third fiscal quarter of 2004 the
following deficiencies that existed in the design and operation of our internal controls that our
independent auditors, L J Soldinger Associates, LLC, had identified as material weaknesses that
required either remediation or the identification of alternative controls, in various financial
areas of the Company:
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Maintaining a consolidation process which in certain cases makes it difficult to trace subsidiary company
balances and adjustments back to source data; |
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Recording various journal entries at the consolidation level but not recording them at the subsidiary level
during the course of the year, resulting in accumulated differences between the consolidated trial balances
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Maintaining accounting records for certain offices on spreadsheets outside of our standard accounting
software on a cash basis not in accordance with accounting principles generally accepted in the United
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Lacking a local responsible person with necessary experience to supervise accounting and reporting for our
Georgian operations; |
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Maintaining a capital assets continuity schedule without sufficient detail; |
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Failing to investigate all intercompany balance differences; |
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Lacking certain controls relating to monitoring and reconciliation of inventory; |
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Lacking certain controls relating to the proper presentation of accounts receivable and accounts payable; and |
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Lacking certain controls to facilitate recording of non-recurring transactions. |
All of the above deficiencies were symptomatic of and contributed to the overall material weakness
relating to the financial statement close process identified in our evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2004 except for the final
deficiency which contributed to our evaluation of material weakness relating to sufficient controls
being in place to ensure adequate review of the application of generally accepted accounting
principles relating to non-routine transactions, estimates and financial statement disclosures. We
have been actively remedying the deficiencies described above, and have taken appropriate
remediation actions. The remediation efforts to date have generally involved the improvement of the
accounting and reporting processes and related controls and the appointment and training of
dedicated controls personnel to remedy a number of the above deficiencies relating to the financial
statement close process. Our remediation efforts represent a long-term commitment to continually
evaluate and improve our financial statement closing process and our ability to properly apply
generally accepted accounting principles relating to non-routine transactions, estimates and
financial statement disclosures, in an effort to reduce to a minimal level the risk that a material
error in our financial statement could occur. As a result of the remediation and identification of
alternative controls that occurred during the fourth fiscal quarter of 2004, we believe that we
have eliminated six of the eight specific deficiencies which were symptomatic of our overall
material weakness relating to the financial statement close process identified in the third fiscal
quarter of 2004. Items (g) and (h) identified in the third fiscal quarter of 2004 are considered to
be deficiencies that are symptomatic of and contributed to the overall material weakness relating
to the financial statement close process as of December 31, 2004.
Management believes that through its planned remediation efforts, which will include the employment
of additional personnel, development of standardized financial statement closing policies and
procedures and the engagement of an independent accounting firm to review and advise on the
application of generally accepted accounting principles relating to non-routine transactions,
estimates and financial statement disclosures, it will correct the identified material weaknesses
in our internal controls described above, however the Company acknowledges that more deficiencies
and weaknesses may be identified resulting from our ongoing and full assessment of our internal
controls as of December 31, 2005.
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Changes in Internal Control over Financial Reporting
Other than the remediation and identification of alternative controls described above, during
our fourth fiscal quarter, there were no changes in our internal control over financial reporting
or in other factors that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Disclosure Controls and Procedures
As a result of recent publications and guidance from the Commission and our ongoing internal
control assessment process for 2005, we now believe the identified material weaknesses discussed
above mean that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) were ineffective as of December 31, 2004. Accordingly,
we now believe that the material weaknesses discussed above mean that as of December 31, 2004 we
could not ensure that the information required to be disclosed by us in the reports we filed or
submitted under the Exchange Act with the Commission (1) was recorded, processed, summarized and
processed within the time period specified in the Commissions rules and forms and (2) was
accumulated and communicated to the management, including principal executives and principal
financial officers, as appropriate to allow timely decisions regarding required disclosure.
CEO and CFO Certifications The Certifications of our CEO and CFO which are attached as Exhibits
31(1) and 31(2) to this Report include information about our disclosure controls and procedures and
internal control over financial reporting. These Certifications should be read in conjunction with
the information contained in this Item 9A for a more complete understanding of the matters covered
by the Certifications.
Our managements assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004 has been audited by L J Soldinger Associates LLC, an independent
registered public accounting firm, as stated in their report which is set forth below. L J
Soldinger Associates LLCs unqualified opinion dated March 15, 2005 on the Companys consolidated
balance sheets as of December 31, 2004 and 2003, and the related consolidated statements of
operations, comprehensive loss, stockholders equity, and cash flows for the years then ended is
set forth in this Report on page F-3.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of CanArgo Energy Corporation
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting that CanArgo Energy Corporation did not maintain
effective internal control over financial reporting as of December 31, 2004, based on control
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). CanArgo Energy Corporations management
is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based on our audit.
Except as described below, we conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating managements assessment,
testing and understanding the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
As part of managements assessment process, a number of steps are required to be completed by
management to form a reasonable basis, both in terms of scope and process, to provide management
with adequate supporting documentation upon which to form its assessment of the effectiveness of
internal control over financial reporting. Managements process was not comprehensive in
identifying and testing controls and risks. The lack of comprehensive identification and testing of
internal control over financial reporting limited managements ability to fully assess the
effectiveness of internal controls.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
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expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use or
disposition of the companys assets that could have material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weaknesses have been
identified and included in managements assessment.
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One critical entity level control relates to the processes and
controls surrounding the Companys accounting closing process which is
performed on a quarterly and annual basis whereby the Companys
financial information is accumulated, processed and used to prepare
financial statements for external purposes for the appropriate period.
These processes and controls are the foundation of the internal
controls over financial reporting which, when sufficient, are used to
reduce the level of potential misstatement below the level of remote
and the related misstatement below the level of material.
The Companys material weakness in its financial statement closing
process results from, among other things, the number of audit
adjustments required to be recorded, the lack of adequate review and
supervision over the financial statement close process (which is
primarily related to the lack of segregation of duties as a result of
the Companys limited number of personnel), the lack of standard
processes and policies to insure a consistent and accurate closing
process, and too much dependence on the use of spreadsheets that are
not properly protected from unauthorized access and/or errors in
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SEC regulations require companies to have internal controls to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
The Companys material weakness in this area results from the lack of
sufficient controls in place to insure the proper application of
generally accepted accounting principles relating to non-routine
transactions, estimates and financial statement disclosures. |
In our opinion, except for the effect of matters management might have discovered had a more
comprehensive identification and testing of controls been completed, managements assessment that
CanArgo Energy Corporation did not maintain effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects based on control criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations (COSO). Also, in our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the control criteria, CanArgo Energy
Corporation has not maintained effective internal control over financial reporting as of December
31, 2004 based on control criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on managements statements referring to
the effectiveness of the planned remediation efforts or the conditions that limited the
comprehensiveness of managements identification and testing of controls and risks.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of CanArgo Energy Corporation as of December
31, 2004 and 2003, and the related consolidated statements of operations, comprehensive loss,
stockholders equity, and cash flows for the years then ended and our report dated March 15, 2005
expressed an unqualified opinion.
L J SOLDINGER ASSOCIATES, LLC
Deer Park, Illinois USA
April 29, 2005
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b) Exhibits
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31(1)
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of CanArgo Energy Corporation. |
31(2)
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Rule 13a-14(c)/15d-14(a) Certification of Chief Financial Officer of CanArgo Energy Corporation. |
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Section 1350 Certifications. |
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.
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CanArgo Energy Corporation
(Registrant)
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By: |
/s/ Richard J. Battey
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Date: February 16, 2006 |
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Chief Financial Officer |
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