-----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, DJm0LLRVM4X509L9OMtCLodp/hhWrGCqSPv1UAI3Dk0ZcI2v03n3tQn847QdNszy iIe0+vfkVE4sKGPnv6p2+g== 0000950129-96-003036.txt : 19961118 0000950129-96-003036.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950129-96-003036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARNET RESOURCES CORP /DE/ CENTRAL INDEX KEY: 0000820084 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 742421851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16621 FILM NUMBER: 96665582 BUSINESS ADDRESS: STREET 1: 333 CLAY ST STE 4500 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137591692 MAIL ADDRESS: STREET 2: 333 CLAY ST STE 4500 CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 GARNET RESOURCES CORPORATION - FORM 10-Q 09/30/96 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission file number 0-16621 GARNET RESOURCES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 74-2421851 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11011 RICHMOND, SUITE 650, HOUSTON, TEXAS 77042-6720 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 783-0010 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 14, 1996, 11,492,162 shares of Registrant's Common Stock, par value $.01 per share, were outstanding. 2 GARNET RESOURCES CORPORATION (THE "REGISTRANT" OR THE "COMPANY") I N D E X PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1996 (unaudited) and December 31, 1995 3-4 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 (unaudited) 6 Notes to Condensed Consolidated Financial Statements- September 30, 1996 (unaudited) 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15-16
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, ASSETS 1996 1995 ------ ------------- ------------ (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 4,938,794 $ 5,713,191 Accounts receivable 1,945,735 2,302,712 Inventories 1,060,160 986,532 Prepaid expenses 213,277 249,454 ------------ ------------ Total current assets 8,157,966 9,251,889 ------------ ------------ NET ASSETS HELD FOR DISPOSITION - 403,941 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full-cost method)- Proved 53,663,750 46,044,011 Unproved (excluded from amortization) 1,067,396 4,598,001 ------------ ------------ 54,731,146 50,642,012 Other equipment 144,331 137,343 ------------ ------------ 54,875,477 50,779,355 Less - Accumulated depreciation, depletion and amortization (16,009,191) (11,384,135) ------------ ------------ 38,866,286 39,395,220 ------------ ------------ OTHER ASSETS 736,721 907,978 ------------ ------------ $ 47,760,973 $ 49,959,028 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Continued
SEPTEMBER 30, DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ------------ ------------ (unaudited) CURRENT LIABILITIES: Current portion of long-term debt $ 3,348,228 $ 4,043,758 Accounts payable and accrued liabilities 1,903,706 2,418,270 ----------- ----------- Total current liabilities 5,251,934 6,462,028 ----------- ----------- LONG-TERM DEBT, net of current portion 20,269,992 20,151,120 ----------- ----------- DEFERRED INCOME TAXES 918,287 640,919 ----------- ----------- OTHER LONG-TERM LIABILITIES 375,482 438,156 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 20,000,000 shares authorized, 11,492,162 shares issued and outstanding as of September 30, 1996 and December 31, 1995 114,922 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (31,660,856) (30,339,329) ----------- ----------- Total stockholders' equity 20,945,278 22,266,805 ----------- ----------- $47,760,973 $49,959,028 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- REVENUES: Oil sales $ 2,495,050 $ 2,207,800 $ 8,680,427 $ 6,415,941 Interest 69,745 24,670 204,244 180,218 ----------- ----------- ----------- ----------- 2,564,795 2,232,470 8,884,671 6,596,159 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Production 778,223 1,000,342 2,610,638 2,698,769 Exploration - - 5,258 16,204 Loss on net assets held for disposition - - 46,777 - General and administrative 140,158 220,035 481,831 1,172,816 Interest 554,074 374,594 1,644,722 1,058,015 Depreciation, depletion and amortization 1,065,649 1,018,155 4,622,126 3,128,299 Foreign currency translation (gain) loss 39,514 (193,954) (85,919) (704,654) ----------- ----------- ----------- ----------- 2,577,618 2,419,172 9,325,433 7,369,449 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (12,823) (186,702) (440,762) (773,290) PROVISION FOR INCOME TAXES 240,054 212,466 880,765 621,844 ----------- ----------- ----------- ----------- NET LOSS $ (252,877) $ (399,168) $(1,321,527) $(1,395,134) =========== =========== =========== =========== NET LOSS PER SHARE $ (.02) $ (.03) $ (.11) $ (.12) =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 11,492,162 11,492,162 11,492,162 11,391,441 =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,321,527) $(1,395,134) Exploration costs 5,258 16,204 Loss on net assets held for disposition 46,777 - Depreciation, depletion and amortization 4,622,126 3,128,299 Deferred income taxes 277,368 354,635 Changes in components of working capital (105,241) (1,184,280) Other 173,768 264,613 ----------- ----------- Net cash provided by operating activities 3,698,529 1,184,337 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,247,864) (7,702,595) Proceeds from asset dispositions 287,395 - Decrease in joint venture and contractor advances 1,001 895,784 Acquisition of interests in Argosy Energy International, net of cash acquired - (92,621) Other 90,714 112,166 ----------- ----------- Net cash used for investing activities (3,868,754) (6,787,266) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt (576,658) (161,063) Costs of debt issuances (27,514) (57,285) ----------- ----------- Net cash used for financing activities (604,172) (218,348) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (774,397) (5,821,277) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,713,191 7,990,605 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,938,794 $ 2,169,328 =========== =========== Supplemental disclosures of cash flow information: Cash paid for - Interest, net of amounts capitalized $ 1,440,509 $ 998,801 Income taxes 237,283 370,241
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 GARNET RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (Unaudited) (1) FINANCIAL STATEMENT PRESENTATION- The condensed consolidated financial statements include the accounts of Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its wholly owned subsidiaries. Garnet and its wholly owned subsidiaries are collectively referred to as the "Company." These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and include all adjustments (which consist solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's prior audited consolidated financial statements and the notes thereto. (2) COLOMBIAN OPERATIONS- Through its ownership of interests in Argosy Energy International, a Utah limited partnership ("Argosy"), the Company has an indirect interest in a risk sharing contract in Colombia (the "Santana Contract") with Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Santana Contract currently entitles Argosy and its joint venture partner to explore for oil and gas on approximately 86,000 acres located in the Putumayo Region of Colombia (the "Santana Block"), and provides for a 10-year exploration period expiring in 1997, subject to a requirement for additional partial relinquishments in 1997, and for a production period expiring in 2015. Argosy and its joint venture partner also have two association contracts (the "Fragua Contract" and the "Yuruyaco Contract") with Ecopetrol. The Fragua Contract covers an area of approximately 32,000 acres contiguous to the northern boundary of the Santana Block (the "Fragua Block"), while the Yuruyaco Contract covers an area of approximately 39,000 acres contiguous to the eastern boundaries of the Santana Block and the Fragua Block (the "Yuruyaco Block"). The 10-year exploration periods provided by the Fragua Contract and the Yuruyaco Contract will expire in 2002 and 2005, respectively, and the 28-year contract terms will expire in 2020 and 2023, respectively. Argosy and its joint venture partner also have the right until 2003 to explore for and produce oil and gas from approximately 77,000 acres located in the Putumayo Region (the "Aporte Putumayo Block") pursuant to other agreements with Ecopetrol. Argosy and its joint venture partner have notified Ecopetrol that they intend to abandon the remaining wells and relinquish the Aporte Putumayo Block because declining production rates have made continued operation of the wells economically unattractive. Argosy serves as the operator of the Colombian properties under joint venture agreements. The Santana Contract, the Fragua Contract and the Yuruyaco Contract provide that Ecopetrol will receive a royalty equal to 20% of production on behalf of the Colombian government and, in the event a discovery is deemed commercially feasible, Ecopetrol will acquire a 50% interest in the 7 8 remaining production from the field, bear 50% of the development costs, and reimburse the joint venture, from Ecopetrol's share of future production from each well, for 50% of the joint venture's costs of successful exploratory wells in the field. After June 1996, when accumulated oil production from the Santana Contract exceeded seven million barrels, Ecopetrol continues to bear 50% of development costs, but its interest in production revenues and operating costs applicable to wells on the Santana Block increased to 65%. If a commercial field on the Fragua Block produces in excess of 60 million barrels, Ecopetrol's interest in production and costs will increase in 5% increments from 50% to 70% as accumulated production from the field increases in 30 million barrel increments from 60 million barrels to 150 million barrels. If a commercial field on the Yuruyaco Block produces in excess of 60 million barrels, Ecopetrol's interest in production and costs will range from 50% to 75%, based on annual measurements of profitability as defined in the Yuruyaco Contract. The joint venture paid all costs of the exploration program for the Santana Block during the first two years of the contract and thereafter the joint venture and Ecopetrol have been obligated to pay 70% and 30%, respectively, of such exploration costs. The joint venture bears all costs and risks of exploration activities on the Fragua Block and the Yuruyaco Block, subject to Ecopetrol's right to acquire a 50% interest in commercial discoveries. In the event a discovery is made and is not deemed by Ecopetrol to be commercially feasible, the joint venture may continue to develop the field at its own expense and will recover 200% of the costs thereof, at which time Ecopetrol will acquire a 50% interest therein at no cost to Ecopetrol or further reimbursement by Ecopetrol to Argosy. In March 1995 the Company increased its ownership in Argosy by exchanging 366,625 shares of Garnet's common stock with a value of $3.00 per share and cash totalling $142,703 for the partnership interests held by certain of Argosy's limited partners. The Company's resulting net participation in revenues and costs for the Santana Contract, the Fragua Contract and the Yuruyaco Contract are as follows:
PRODUCTION OPERATING EXPLORATION DEVELOPMENT REVENUES COSTS COSTS COSTS ---------- -------- ----------- ----------- Santana Contract: Before seven million barrels of accumulated production 21.8% 27.2% 38.1% 27.2% After seven million barrels of accumulated production 15.3% 19.1% 38.1% 27.2% Fragua Contract: Before 60 million barrels of accumulated production 21.8% 27.3% 54.6% 27.3% After 150 million barrels of accumulated production 13.1% 16.4% 54.6% 27.3% Yuruyaco Contract: Before 60 million barrels of accumulated production 22.0% 27.5% 55.0% 27.5% After 60 million barrels of accumulated production at maximum profitability 11.0% 13.8% 55.0% 27.5%
The joint venture has completed its seismic acquisition and drilling obligations for the first nine years of the Santana Contract, resulting in the discovery of four oil fields, all of which have 8 9 been declared commercial by Ecopetrol. The joint venture has the right to continue the exploration program through 1997 with an obligation to conduct exploration programs to be approved by Ecopetrol. The joint venture has also completed its seismic obligations for the first two years of the Fragua Contract, but no wells have yet been drilled on the Fragua Block. Under the terms of a contract with Ecopetrol, all oil produced from the Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the price paid is the export price received by Ecopetrol, adjusted for quality differences, less a handling and commercialization fee of $.465 per barrel. If Ecopetrol does not export the oil, the price paid is based on quoted prices for Colombia's Cano Limon crude oil, adjusted for quality differences, plus or minus a sales value differential to be determined by independent analysis, less Ecopetrol's cost to transport the crude to Cartagena and a handling and commercialization fee of $.365 per barrel. Under the terms of its contract with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, Argosy has experienced no difficulty in repatriating the remaining 75% of such payments which are payable in United States dollars. As general partner, the Company's subsidiary is contingently liable for any obligations of Argosy and may be contingently liable for claims generally related to the conduct of Argosy's business. (3) LONG-TERM DEBT- Long-term debt at September 30, 1996 and December 31, 1995 consisted of the following:
1996 1995 ----------- ----------- 9 1/2% convertible subordinated debentures $15,000,000 $15,000,000 Notes payable by Argosy to a U.S. bank 8,618,220 9,113,520 Note payable by Argosy to a Colombian bank - 81,359 ----------- ----------- 23,618,220 24,194,879 Less - Current portion (3,348,228) (4,043,758) ----------- ----------- $20,269,992 $20,151,120 =========== ===========
In 1993 Garnet issued $15,000,000 of convertible subordinated debentures (the "Debentures") due December 1998. The Debentures bear interest at 9 1/2% per annum payable quarterly and are convertible at the option of the holders into Garnet common stock at $5.50 per share. If the Company elects to prepay the Debentures under certain circumstances, it will issue warrants under the same economic terms as the Debentures. At the option of a holder, in the event of a change of control of the Company, the Company will be required to prepay such holder's Debenture at a 30% premium. The Debentures are secured by a pledge of all of the common stock of Garnet's wholly owned subsidiary which serves as the general partner of Argosy (see Note 2). Under the terms of an agreement with the holders of its Debentures, Garnet has agreed that it will not pay dividends or make distributions to the holders of its common stock. As of September 30, 1996, Garnet was not in compliance with the minimum net worth required by the Debentures. The Company has classified the Debentures as long-term debt in the accompanying consolidated balance sheets because the Debenture holders have waived compliance with this requirement through January 1,1998 subject to the termination of such waiver on April 30, 1997 if the ratio of the 9 10 aggregate principal amount of outstanding Debentures to the sum of (i) the number of net barrels of proved oil reserves as of March 31, 1997 plus (ii) the number of net barrels of oil produced during the period from April 1, 1996 through March 31, 1997 is greater than 4.5 to 1. Such ratio was 3.8 to 1 as of September 30, 1996. In 1994 Argosy entered into a finance agreement with Overseas Private Investment Corporation, an agency of the United States government ("OPIC"), pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to Argosy. The loans were funded in two stages of $4,400,000 in August 1994 and $4,800,000 in October 1995. The Company used these funds to drill development wells and construct production facilities in Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana Contract and related assets, as well as the pledge of Garnet's direct and indirect interests in Argosy. The terms of the guaranty agreement also restrict Argosy's ability to make distributions to its partners, including the Company, prior to the repayment of the guaranteed loans. The maximum term of the loans is not to exceed seven years, and the principal amortization schedule is based on projected cash flows from wells on the Santana Block. The loans bear interest at the lender's eurodollar deposit rate plus .25% per annum for periods of two, three or six months as selected by Argosy. The interest rate at September 30, 1996 was 5 13/16%. In consideration for OPIC's guaranty, Argosy pays OPIC a guaranty fee of 2.4% per annum on the outstanding balance of the loans guaranteed. In 1993 Argosy received a loan from a Colombian bank, which was secured by receivables from Ecopetrol for well costs allocable to Ecopetrol but paid by Argosy. The loan bore interest at U.S. prime plus 2%, and was repaid in varying amounts from Ecopetrol's share of production from the wells, with the final installment paid in the third quarter of 1996. (4) STOCK OPTION PLANS- Garnet and a predecessor entity have adopted stock option plans (the "Employees' Plans") pursuant to which an aggregate of 1,483,000 shares of Garnet's common stock is authorized to be issued upon exercise of options granted to officers, employees, and certain other persons or entities who perform substantial services for or on behalf of Garnet or its subsidiaries. The Stock Option and Compensation Committee of Garnet's Board of Directors (the "Committee") is vested with sole and exclusive authority to administer and interpret the Employees' Plans, to determine the terms upon which options may be granted, to prescribe, amend and rescind such interpretations and determinations and to grant options to directors. Current Committee members are not eligible to receive options under the Employees' Plans. In addition, Garnet has adopted the 1990 Directors' Stock Option Plan (the "Directors' Plan") pursuant to which an aggregate of 350,000 shares of Garnet's common stock were issuable as of September 30, 1996 upon exercise of options granted thereunder to directors who are not employees of the Company. As the Directors' Plan expired in accordance with its terms on March 8, 1996, no further options may be issued thereunder. Each option is exercisable for a period of 10 years and 30 days from the date of grant. The purchase price of shares issuable upon exercise of an option may be paid in cash or by delivery of shares with a value equal to the exercise price of the option. The Committee has determined that the right to exercise non-incentive options issued to employees vests over a period of four years, so that 20% of the option becomes exercisable on each anniversary of the date of grant. 10 11 Non-incentive options issued to directors and other eligible participants generally are fully exercisable on and after the date of grant. The following is a summary of stock option activity in connection with the Employees' Plans and the Directors' Plan:
Shares Price Range ------ ----------- Options outstanding at December 31, 1993 1,229,500 $2.50-$13.83 Options granted 140,000 4.05 --------- ------------ Options outstanding at December 31, 1994 1,369,500 2.50- 13.83 Options granted 618,000 2.50- 2.87 Options expired (658,398) 2.50- 13.83 --------- ------------ Options outstanding at December 31, 1995 1,329,102 2.50- 13.83 Options granted 480,000 1.19 Options cancelled (336,102) 4.00- 11.75 Options expired (45,000) 2.87- 4.05 --------- ------------ Options outstanding at September 30, 1996 1,428,000 $ 1.19-$13.83 ========= =============
As of September 30, 1996, options for 975,614 shares were exercisable. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, a new standard for accounting for stock-based compensation. This standard established a fair-value based method of accounting for stock options awarded after December 31, 1995 and encourages companies to adopt SFAS No. 123 in place of the existing accounting method, which requires expense recognition only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. Companies that do not follow SFAS No. 123 for accounting purposes must make annual pro forma disclosures of its effects. Adoption of the standard is required in 1996, although earlier implementation is permitted. The Company does not intend to adopt SFAS No. 123 for accounting purposes; however it will make annual pro forma disclosures of its effects commencing in 1996. (5) INCOME TAXES- The provisions for income taxes relate to the Colombian activities of Argosy. No United States deferred taxes were provided because the tax bases of the Company's assets exceed the financial statement bases, resulting in a deferred tax asset which the Company has determined is not presently realizable. As of December 31, 1995, the Company had a regular tax net operating loss carryforward and an alternative minimum tax loss carryforward of approximately $26,500,000 and $26,100,000 respectively. These loss carryforwards will expire beginning in 2001 if not utilized to reduce U.S. income taxes otherwise payable in future years, and are limited as to utilization because of the occurrences of "ownership changes" (as defined in Section 382 of the Internal Revenue Code of 11 12 1986, as amended) in 1991 and earlier years. Such loss carryforwards also exclude regular tax net operating loss carryforwards aggregating approximately $4,500,000 attributable to certain of Garnet's subsidiaries, which can be used in certain circumstances to offset taxable income generated by such subsidiaries. (6) ACQUISITION OF RGO ENERGY INC. AND RGO PARTNERS, LTD.- In 1991, in transactions accounted for as purchases, Garnet acquired RGO Energy Inc. and RGO Partners, Ltd., two privately-owned entities (referred to collectively herein as "the RGO Entities"). At the date of acquisition, approximately 60% of the assets of the RGO Entities was comprised of cash, with the balance being primarily working, royalty and mineral interests in producing and undeveloped oil and gas properties in the United States. All of the working, royalty and mineral interests acquired in the mergers were sold in 1993 and 1996. Because management intended to sell such assets when the market conditions were suitable, these assets are reflected as "Net assets held for disposition" in the accompanying consolidated balance sheet as of December 31, 1995. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES Since December 31, 1995, the Company has expended approximately $4,100,000 for the acquisition, exploration and development of its oil and gas properties. Such expenditures include approximately $3,900,000 for exploration and development activities on the Santana Block in Colombia, and approximately $200,000 for exploration and related costs in Papua New Guinea. Funding for these activities was provided primarily by cash flow from operations and by available cash balances. The Company has no significant lines of credit. Argosy and its joint venture partner have completed the seismic acquisition and drilling obligations for the first nine years of the Santana Contract, resulting in the discovery of four oil fields. The joint venture has the right to continue the exploration program through 1997 with an obligation to conduct exploration programs to be approved by Ecopetrol. The Company plans to perform additional seismic work on the Santana Block during 1996 and 1997, with estimated total costs to the Company of $700,000. The seismic programs required during the first two years of the Fragua Contract have also been completed. Additional seismic surveys may be conducted in 1997 on the Fragua Block and Yuruyaco Block, for which the Company's share of the costs is estimated to be $500,000. The Toroyaco and Linda fields, the first two fields discovered on the Santana Block, began producing in 1992. The Mary and Miraflor fields, the last two fields discovered, were declared commercial by Ecopetrol in 1993. Production from the four fields is presently approximately 10,000 barrels of oil per day. Through June 1996, the Company's share of such production was 21.8%; it also received an additional 21.8% of the production from certain wells until the drilling and completion costs for those wells allocable to Ecopetrol but paid by the Company have been recovered. After June 1996, when accumulated production from the Santana Block exceeded seven million barrels of oil, the Company's share of production decreased to 15.3% and the percentage of production applicable to the Ecopetrol recovery increased to 28.3%. The Company 12 13 plans to drill at least three additional development wells in the Toroyaco and Linda fields in 1996 and 1997, one of which was in progress as of September 30, 1996. The Company's share of the costs of drilling and completing each of the wells in these fields is expected to range from $950,000 to $1,100,000. As described herein, the Company's operations are primarily located outside the United States. Although certain of such operations are conducted in foreign currencies, the Company considers the U.S. dollar to be the functional currency in most of the countries in which it operates. In addition, the Company has no significant operations in countries with highly inflationary economies. As a result, the Company's foreign currency transaction gains and losses have not been significant. Exchange controls exist for the repatriation of funds from Colombia and Papua New Guinea. The Company believes that the continuing viability of its operations in these countries will not be affected by such restrictions. It is anticipated that the Company's foreign exploration and development activities will require substantial amounts of capital. To finance its planned exploration and development activities, the Company intends to utilize its existing working capital and cash flow from production in Colombia. In 1995 the Company also identified and implemented more than $1.5 million in annual reductions of U.S. and Colombian general and administrative expenses and production costs. The Company may also consider entering into arrangements whereby certain costs of exploration will be paid by others to earn an interest in the properties. The working capital of the Company was approximately $2,910,000 as of September 30, 1996. The Company's working capital has been reduced to reflect approximately $3,350,000 in principal payments presently due on the OPIC-guaranteed debt in 1996 and 1997. Because the principal amortization schedule is based on projected cash flows from developed oil reserves, the Company expects to reschedule a significant portion of such payments to later years as development activities are conducted on the Santana Block. However, if the Company is unable to reschedule such payments because of the timing of development drilling, changes in oil prices, or other reasons, it may be necessary for the Company to alter its planned exploration and development activities or take other measures to improve its liquidity. As of September 30, 1996, Garnet was not in compliance with the minimum net worth covenant required by the Debentures. The Debenture holders have waived compliance with this requirement through January 1, 1998 subject to the termination of such waiver on April 30, 1997 if the ratio of the aggregate principal amount of outstanding Debentures to the sum of (i) the number of net barrels of proved oil reserves as of March 31, 1997 plus (ii) the number of net barrels of oil produced during the period from April 1, 1996 through March 31, 1997 is greater than 4.5 to 1. Such ratio was 3.8 to 1 as of September 30, 1996. If Garnet is unable to increase its net worth to the minimum required by January 1, 1998 (or by April 30, 1997 if the waiver is terminated as a result of the failure to maintain the aforementioned ratio), it will be necessary to extend the waiver or renegotiate the terms of the debt. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of an oil and gas business is uncertain due, in part, to the substantial instability in oil and gas prices in recent years and to the volatility of financial markets. There can be no assurance that the additional financing which may be necessary to fund the Company's operations and obligations will be available on economically acceptable terms. In addition, the Company's ability to continue its exploration and development programs may be dependent upon its joint venture partners financing their portion of such costs and expenses. There can be no assurance that the Company's partners will contribute, or be in a position to contribute, their costs and 13 14 expenses of the joint venture programs. If the Company's partners cannot finance their obligations to the joint ventures, the Company may be required to accept an assignment of the partners' interests therein and assume their financing obligations. If sufficient funds cannot be raised to meet the Company's obligations in connection with its properties, the interests in such properties might be sold or forfeited. The foregoing discussion contains, in addition to historical information, forward-looking statements. The forward-looking statements were prepared on the basis of certain assumptions which relate, among other things, to costs expected to be incurred in the development of the Company's properties, the receipt of environmental and other necessary administrative permits required for such development, future oil prices, future production rates, the ability to reschedule principal payments on the Company's OPIC-guaranteed debt, and the ability to renegotiate the terms of the Company's outstanding Debentures if the Company is unsuccessful in increasing its net worth. Even if the assumptions on which the projections are based prove accurate and appropriate, the actual results of the Company's operations in the future may vary widely from the financial projections due to unforeseen engineering, mechanical or technological difficulties in drilling or working over wells, regional political issues, general economic conditions, increased competition, changes in government regulation or intervention in the oil and gas industry, and other risks described in the Company's filings with the Securities and Exchange Commission. Accordingly, the actual results of the Company's operations in the future may vary widely from the forward-looking statements included herein. RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE SAME PERIODS IN 1995 The Company reported net losses of $252,877 ($.02 per share) and $399,168 ($.03 per share) for the three months ended September 30, 1996 and 1995, respectively, and $1,321,527 ($.11 per share) and $1,395,134 ($.12 per share) for the nine months ended September 30, 1996 and 1995, respectively. Increases in 1996 in oil and gas revenues and depreciation, depletion and amortization primarily reflect higher oil prices and production from new wells and fracture stimulation treatments on existing wells in Colombia. The effect of these increases was partially offset in the third quarter of 1996 by the contractual reduction in the Company's percentage share of production. The Company's comparative average daily sales volumes in barrels of oil per day ("BOPD"), average sales prices and costs per barrel in Colombia for such periods were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ------ ------ ------ ------ Average oil sales (BOPD) 1,401 1,486 1,657 1,434 Average oil price per barrel $19.36 $16.15 $19.12 $16.38 Production costs per barrel $ 6.04 $ 7.32 $ 5.75 $ 6.89 Depreciation, depletion and amortization per barrel $ 8.24 $ 7.42 $10.16 $ 7.96
General and administrative expenses and production costs per barrel decreased as a result of the aforementioned cost reduction program, as well as charges incurred in 1995 in connection with management changes. The increase in 1996 in interest expense, net of amounts capitalized, is attributable primarily to the OPIC-guaranteed loan received in October 1995, and decreases in costs attributable to assets eligible for interest capitalization. The provision for income taxes, all of which relates to Colombian operations, was higher because of increases in the Colombian presumptive income tax resulting from a higher tax rate effective January 1, 1996 and ongoing capital expenditures related to productive assets. 14 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS
ITEM EXHIBIT NO. ITEM TITLE NO. ---- ---------------------------------------- ----- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Not Applicable (3) Articles of Incorporation and By-Laws: Not Applicable (4) Instruments defining the rights of security holders, including indentures: Not Applicable (10) Material contracts: Not Applicable (11) Statement regarding computation of per share earnings is not required because the relevant computations can be clearly determined from the material contained in the Financial Statements included herein. (15) Letter re unaudited interim financial information: Not Applicable (18) Letter re change in accounting principles: Not Applicable (19) Report furnished to security holders: Not Applicable (22) Published report regarding matters submitted to vote of security holders: Not Applicable (23) Consents of experts and counsel: Not Applicable (24) Power of attorney: Not Applicable (27) Financial Data Schedule. 27 (99) Additional Exhibits: Not Applicable
15 16 (B) REPORTS ON FORM 8-K No Reports on Form 8-K were filed by Registrant during the three months ended September 30, 1996. 16 17 SIGNATURES Pursuant to the requirements 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. GARNET RESOURCES CORPORATION Date: November 14, 1996 /s/ W. Kirk Bosche' ------------------------------------ W. Kirk Bosche', Vice President and Treasurer (As both a duly authorized officer of Registrant and as principal financial officer of Registrant) 17 18 INDEX TO EXHIBITS
ITEM EXHIBIT NO. ITEM TITLE NO. ---- ---------------------------------------- ----- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Not Applicable (3) Articles of Incorporation and By-Laws: Not Applicable (4) Instruments defining the rights of security holders, including indentures: Not Applicable (10) Material contracts: Not Applicable (11) Statement regarding computation of per share earnings is not required because the relevant computations can be clearly determined from the material contained in the Financial Statements included herein. (15) Letter re unaudited interim financial information: Not Applicable (18) Letter re change in accounting principles: Not Applicable (19) Report furnished to security holders: Not Applicable (22) Published report regarding matters submitted to vote of security holders: Not Applicable (23) Consents of experts and counsel: Not Applicable (24) Power of attorney: Not Applicable (27) Financial Data Schedule. 27 (99) Additional Exhibits: Not Applicable
18 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 4,938,794 0 1,670,558 0 1,060,160 8,157,966 54,875,477 (16,009,191) 47,760,973 5,251,934 20,269,992 114,922 0 0 20,830,356 47,760,973 8,680,427 8,884,671 2,610,638 2,610,638 4,627,384 0 1,644,722 (440,762) 880,765 (1,321,527) 0 0 0 (1,321,527) (0.11) (0.11)
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