-----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, Ukm2tQTgRM8QShqqPODjtORcErz2ryu287LRSJLXFyQWEyWJ/Vv5okBkwOIDT7tO RB5wulSQKMMmNJl28hbGuA== 0000950129-97-001367.txt : 19970401 0000950129-97-001367.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950129-97-001367 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16621 FILM NUMBER: 97569581 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-K405 1 GARNET RESOURCES CORPORATION - 12/31/96 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 (IRS Employer of incorporation or organization) Identification No.) 11011 RICHMOND AVENUE, SUITE 650, HOUSTON, TEXAS 77042 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 783-0010 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 $.01 per share (Title of class) 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 ----- ----- 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 by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant on February 28, 1997 was approximately $7,100,000. On such date, the last sale price of Registrant's Common Stock was $.63 per share. As of February 28, 1997 11,492,162 shares of Registrant's Common Stock, par value $.01 per share, were outstanding. Documents Incorporated by Reference: Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 22, 1997. Certain information therein is incorporated into Part III hereof. 2 TABLE OF CONTENTS TO FORM 10-K PAGE ---- PART I Item 1. Business .................................................. 3 General Development of Business ........................ 3 Financial Information about Industry Segments .......... 4 Narrative Description of Business ...................... 4 Financial Information about Foreign and Domestic Operations and Export Sales ............................ 6 Item 2. Properties ................................................ 6 Colombia ............................................... 6 Papua New Guinea ....................................... 9 Supplementary Information in Respect of Oil and Gas Properties ................................. 10 Item 3. Legal Proceedings ......................................... 11 Item 4. Submission of Matters to a Vote of Security Holders ....... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................ 12 Market Information...................................... 12 Holders ................................................ 12 Dividends .............................................. 12 Item 6. Selected Financial Data .................................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 13 Liquidity and Capital Resources ........................ 13 Results of Operations .................................. 15 Item 8. Financial Statements and Supplementary Data .............. 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................. 16 PART III Item 10. Directors and Executive Officers of the Registrant ...... 17 Item 11. Executive Compensation .................................. 17 Item 12. Security Ownership of Certain Beneficial Owners and Management ......................................... 18 Item 13. Certain Relationships and Related Transactions .......... 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................................ 19 Signatures ............................................................... 20 3 PART I ITEM 1. BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS. Garnet Resources Corporation, a Delaware corporation ("Garnet"), is engaged primarily in the exploration, development and production of oil and gas properties located outside the United States. As used herein, the "Company" shall mean Garnet and its subsidiaries. Since inception, the Company has conducted exploration activities in seven countries, and also owned a small number of working interests in producing oil and gas properties in the United States, which were sold in 1992. During 1996 the Company conducted exploration activities on its properties in the Republic of Colombia ("Colombia") and the Independent State of Papua New Guinea ("Papua New Guinea"), and continued development and production activities in Colombia. The Company has concluded its exploration activities and is no longer active in the remaining five countries. The Company's activities in Colombia are conducted through Argosy Energy International, a Utah limited partnership ("Argosy") in which Garnet is a limited partner and in which a wholly owned subsidiary of Garnet is the general partner. Argosy has interests in four contracts with Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"), involving exploration, development and production activities in the Putumayo Basin of southwestern Colombia. Argosy participates in these contracts through a 55% interest in a joint venture with Neo Energy, Inc., a subsidiary of Aviva Petroleum Inc. ("Neo"). The four contracts with Ecopetrol include (i) a risk sharing contract signed in 1987 (the "Santana Contract") currently covering approximately 86,000 acres (the "Santana Block"), (ii) an association contract signed in 1992 (the "Fragua Contract") covering approximately 32,000 acres contiguous to the northern boundary of the Santana Block (the "Fragua Block"), (iii) an association contract signed in 1995 (the "Yuruyaco Contract") covering approximately 39,000 acres contiguous to the eastern boundaries of the Santana Block and the Fragua Block (the "Yuruyaco Block"), and (iv) Association Agreements signed in 1972, as amended (the "Aporte Putumayo Contracts"), covering approximately 77,000 acres 20 miles south of the Santana Block (the "Aporte Putumayo Block"). The Aporte Putumayo Contracts will expire in 2003, but Argosy and Neo notified Ecopetrol in 1994 that they intend to abandon the remaining wells and relinquish the Aporte Putumayo Block because declining production rates have made continued operation economically unattractive. The abandonment of the wells and associated facilities, which has been delayed because of permitting and equipment problems, is now scheduled for 1997. The Santana Block has been the focus of the Company's exploration and development activities in Colombia in recent years. The Company has discovered four oil fields on the Santana Block, which produced a total of approximately 8,800,000 barrels of oil during the period from commencement of production in April 1992 through December 1996. The Company's share of this production was approximately 1,800,000 barrels. During 1996 one gross (.4 net) dry exploratory well and two gross (.5 net) productive development wells were drilled on the Santana Block. The Company also commenced a 3-D seismic survey over its Mary and Miraflor fields in 1996 to define the limits of the fields, identify possible locations for additional development wells, and ascertain the exploration potential of areas west of the Mary field. To increase production from existing wells, the Company performed fracture stimulation procedures on a total of seven wells in the four fields in late 1995 and early 1996. See "Properties - Colombia." 3 4 In Papua New Guinea, Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet, owns a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting License No. 181 ("PPL-181"), a license to explore for oil and gas on approximately 952,000 acres (the "PPL-181 Area"). Garnet PNG also held a 7.73% interest in an adjoining license, Petroleum Prospecting License No. 174 ("PPL-174"), on which an exploratory dry hole was drilled in the first quarter of 1996. For more information regarding PPL-181 and PPL-174, see "Properties - Papua New Guinea". Garnet was incorporated in the state of Delaware in June 1986. Garnet's principal executive office is located at 11011 Richmond Avenue, Suite 650, Houston, Texas 77042 and its telephone number is (713) 783-0010. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company operates in one industry segment. (c) NARRATIVE DESCRIPTION OF BUSINESS. General. The Company is currently engaged in the exploration of oil and gas properties located in Colombia and Papua New Guinea, and is engaged in the production and development of oil from its properties in Colombia. The Company may continue to apply for and to acquire additional oil and gas exploration permits if suitable prospects are available on advantageous terms. The Company may also acquire interests in corporations or other entities which either hold or intend to acquire interests in oil and gas properties. Risks Associated with the Company's Business. The Company has expended significant amounts of capital on the acquisition, exploration and development of its properties and plans to expend additional capital on such activities. Even if the results of such activities are favorable, as in Colombia where the Company has made four oil discoveries, subsequent drilling at significant costs must be conducted on certain of the properties to determine whether further commercial development of the properties is feasible. To finance its planned exploration and development activities, the Company intends to utilize its existing working capital and cash flow from production in Colombia (see "Properties - Colombia"). The Company may also consider entering into additional arrangements whereby certain costs of exploration will be paid by others to earn an interest in the properties. 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. For additional information on the Company's cash requirements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." In addition, the Company's ability to continue its exploration and development programs may be dependent upon the ability of its joint venture partners to finance 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 expenses of the joint venture programs. If the Company's partners do not 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 the affected properties might be sold or forfeited. In addition, if sufficient funds are raised, there can be no assurance that the Company will be able to discover, 4 5 develop and produce sufficient reserves in Colombia, Papua New Guinea or elsewhere to recover the costs and expenses incurred in connection with the acquisition, exploration and development thereof and achieve profitability. The Company has invested and may continue to invest primarily in properties located outside the United States, in certain countries which may be considered politically and economically unstable. Accordingly, the Company is subject to risks inherent in the ownership and development of foreign properties including, without limitation, cancellation or renegotiation of contracts, royalty and tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls, and other laws, regulations or international developments which may adversely affect the Company's properties. In addition, there are usually significant logistical problems, costs and risks in conducting oil and gas activities in remote, rugged and primitive regions such as Papua New Guinea, or in Colombia where Argosy's operations are exposed to potentially detrimental activities by the leftist guerrillas that have operated there for many years. Argosy's assets have been damaged in the past as a result of guerrilla activities, although the losses have been substantially recovered through insurance. There can be no assurance that Argosy's operations in Colombia will not be the target of similar attacks in the future, or that Argosy will be able to continue to insure its assets against similar losses. The Company is subject to all the risks normally incident to drilling for and producing oil and gas, including blowouts, cratering and fires, any of which could result in damage to or loss of life or property. In accordance with industry practice, the Company is not fully insured against these risks, nor are all such risks insurable. Competition. The oil and gas business is extremely competitive in all of its phases and particularly in exploration for and development of new sources of crude oil and natural gas. The Company must compete with other companies that are larger and financially stronger in acquiring properties suitable for exploration, in contracting for drilling equipment, and in securing trained personnel. The Company is not a significant participant in the oil and gas industry. Markets. There is substantial uncertainty as to the prices which the Company may receive for production from its existing oil reserves or from oil and gas reserves, if any, which the Company may discover. The availability of a ready market and the prices received for oil and gas produced depend upon numerous factors beyond the control of the Company including, but not limited to, adequate transportation facilities (such as pipelines), the marketing of competitive fuels, fluctuating market demand, governmental regulation and world political and economic developments. World oil and gas markets are highly volatile and shortage or surplus conditions substantially affect prices. As a result, there have been dramatic swings in both oil and gas prices in recent years. The sale of oil from the Santana Block in Colombia is governed by contracts with Ecopetrol. There is no market for natural gas from the Putumayo Region of Colombia. See "Properties - Colombia." It is possible that, under market conditions prevailing in the future, the production and sale of oil or gas, if any, from the Company's properties in Papua New Guinea may not be commercially feasible. Regulation. The Company's foreign operations are subject to regulations imposed by the local regulatory authorities including, without limitation, currency regulation, import and export regulation, taxation and environmental controls. The regulations also generally specify, among other things, the extent to which acreage may be acquired or relinquished, permits necessary for 5 6 drilling of wells, spacing of wells, measures required for preventing waste of oil and gas resources and, in some cases, rates of production and sales prices to be charged to purchasers. Specifically, Colombian operations are governed by a number of ministries and agencies including Ecopetrol, the Ministry of Mines and Energy, and the Ministry of the Environment. In 1993 Instituto de Recursos Naturales y Ambiente ("Inderena"), a federal environmental agency in Colombia, began reviewing the environmental standards and permitting processes for the oil industry and in 1994 the Ministry of the Environment was organized. Accordingly, it is possible that the review of current environmental laws, regulations and the administration and enforcement thereof, or the passage of new environmental laws or regulations in Colombia, could result in substantial costs and liabilities in the future or in delays in obtaining the necessary permits to conduct the Company's operations in that country. The Company's operations in Papua New Guinea are currently governed by the Department of Mining and Petroleum, which has jurisdiction over all petroleum exploration in that country. In the event the Company develops and operates a petroleum business in Papua New Guinea, the Company will be subject to regulation by the Investment Promotion Authority, which regulates almost all business operations with significant foreign equity or with foreign management control. Employees. The Company's operations are managed from its Houston, Texas office, which consists of a staff of five employees, using professional consulting services as needed. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Financial information about foreign and domestic operations may be found in Note 9 of the Notes to Consolidated Financial Statements contained in Item 8 of Part II. ITEM 2.PROPERTIES. COLOMBIA. Through its interests in Argosy, the Company presently has a 54.6% indirect interest in the Santana Contract, a 54.6% indirect interest in the Fragua Contract, and a 55% indirect interest in the Yuruyaco Contract. Argosy has 100 employees in Colombia and serves as the operator of the Santana Block, the Fragua Block and the Yuruyaco Block under operating agreements with Ecopetrol and with Neo. The Colombian properties are located in the Putumayo Region of southern Colombia which is bounded by the Andes mountains on the west and northwest and the Upper Amazon Platform on the east and which lies within the northern portion of a larger regional basin extending nearly 800 miles southward through Ecuador into eastern Peru and western Brazil. Argosy's responsibilities as operator of the joint venture with Neo are governed by the terms of operating agreements by and between Argosy and Neo, which provide for the establishment of operating committees which consist of two representatives from each of Argosy and Neo. Argosy has exclusive charge of carrying out the program of operations within the budgets 6 7 approved by the operating committees and may demand payment in advance from each party of its respective share of estimated monthly expenditures. The Santana Contract, the Fragua Contract and the Yuruyaco Contract have a term of 28 years, including an exploration period of 10 years, with partial relinquishments of acreage required at the end of years six and eight. At the end of the 10th year, which will occur in July 1997 for the Santana Contract, the oldest of the three contracts, all acreage must be relinquished except acreage contained within productive fields plus a three-mile reserve zone around each such field. Under the terms of the contracts, 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 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 certain exploration activities. After June 1996, when accumulated oil production from the Santana Contract exceeded seven million barrels, Ecopetrol continued 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 increases 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 ranges 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. If 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 or Neo. The Company's resulting net participation in revenues and costs for the Santana Contract, the Fragua Contract and the Yuruyaco Contract is as follows: 7 8
PRODUCTION OPERATING EXPLORATION DEVELOPMENT REVENUES COSTS COSTS COSTS -------- ----- ----- ----- Santana Contract: Before seven million barrels of accumulated production 21.8% 27.3% 38.2% 27.3% After seven million barrels of accumulated production 15.3% 19.1% 38.2% 27.3% 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 been declared commercial by Ecopetrol. The joint venture has also completed its seismic obligations for the first two years of the Fragua Contract and the Yuruyaco Contract. Oil production from the Santana Block moves through the 25-mile Uchupayaco-Santana pipeline built and completed by the joint venture in 1994 to Ecopetrol's Trans-Andean pipeline, where it then is transported an additional 230 miles to the Pacific coast export terminal at Tumaco. 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 $.465 per barrel ($.515 per barrel, effective February 1, 1997). If Ecopetrol does not export the oil, the price paid is based on the price received from Ecopetrol's Cartagena refinery, adjusted for quality differences, less Ecopetrol's cost to transport the crude to Cartagena and a handling and commercialization fee of $.365 per barrel ($.415 per barrel effective February 1, 1997). The average sales price per barrel of oil produced from the Santana Block during 1996 was $19.82. The contract also requires Argosy to pay a tariff to transport its oil through the Trans-Andean pipeline, the amount of which is presently $1.23 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. 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 pipelines and 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 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. 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. 8 9 Argosy's net income, as defined under Colombian law, from Colombian sources is subject to Colombian taxation at a rate of 35%, although a "presumptive" minimum income tax based on net assets may apply under certain circumstances. Unless Argosy transfers such net income to its assigned capital account, an additional remittance tax will accrue at the rate of 12% in 1996, 10% in 1997 and 7% after 1997. Payment of the additional remittance tax, if any, may be deferred under certain circumstances if Argosy has reinvested such income in Colombia. For oil fields discovered before 1995, the Colombian Government also imposes a production tax equal to 7% of the crude oil price through 1997 if the field began producing before 1995, or 5.5%, 4% and 2.5%, respectively, of the crude oil prices in 1998, 1999 and 2000 if the field began producing after 1994. PAPUA NEW GUINEA. The PPL-181 Area is located in the Western, Gulf and Southern Highland Provinces of Papua New Guinea. The northern section of the PPL-181 Area is in a mountainous tropical rain forest while the southern section of PPL-181 is predominantly lowlands jungle and coastal swamps. In 1986 oil was discovered approximately 10 miles from the northern border of PPL-181 in an adjoining license area. Under the terms of an agreement pertaining to PPL-181, Occidental International Exploration and Production Company ("Occidental") has agreed to drill and complete at its cost a test well on the PPL-181 Area by September 1997. The well was commenced in March 1997. PPL-181 is owned by Occidental (88%), Garnet PNG (6%) and Niugini Energy Pty. Limited (6%). In the first quarter of 1996, an exploratory dry hole was drilled on the PPL-174 area. Garnet PNG contributed approximately $238,000 to the costs of the well. Under the provisions of PPL-181, the terms of any oil and gas development are set forth in a Petroleum Agreement with the Government of Papua New Guinea. The Petroleum Agreement provides that the operator must carry out an appraisal program after a discovery to determine whether the discovery is of commercial interest. If the appraisal is not carried out or the discovery is not of commercial interest, the license may be forfeited. If the discovery is of commercial interest, the operator must apply for a Petroleum Development License. The Government retains a royalty on production equal to 1.25% of the wellhead value of the petroleum and, at its election, may acquire up to a 22.5% interest in the petroleum development after recoupment by the operator of the project costs attributable thereto out of production. In addition, income from petroleum operations is subject to a Petroleum Income Tax at the rate of 50% of net income, which is defined as gross revenue less royalties, allowances for depreciation, interest deductions, operating costs and previous tax losses carried forward. An Additional Profits Tax of 50% of cash flow (after deducting ordinary income tax payments) is also payable when the accumulated value of net cash flows becomes positive. For annual periods in which net cash flows are negative, the cumulative amount is carried forward and increased at an annual accumulation rate of 27%. The Additional Profits Tax is calculated separately for each Petroleum Development License. In calculating the applicable tax, interest expenses paid by Garnet PNG prior to the issuance of a Petroleum Development License and, thereafter, to the extent that Garnet PNG's debt to equity ratio exceeds two-to-one, are not deductible. 9 10 SUPPLEMENTARY INFORMATION IN RESPECT OF OIL AND GAS PROPERTIES. Reserves Reported to Other Agencies. No estimates of the Company's total proved net oil and gas reserves have been filed with or included in reports to any federal authority or agency other than the Securities and Exchange Commission and OPIC. Productive Wells and Acreage. As of December 31, 1996, the Company owned 12 gross (1.8 net) productive oil wells and 3,706 gross (923 net) developed acres in Colombia. Undeveloped Acreage. The following table sets forth estimates of the undeveloped acreage for which oil and gas leases or concessions were held by the Company as of December 31, 1996:
GROSS ACRES NET ACRES ----------- --------- Colombia 230,614 126,080 Papua New Guinea 1,078,000 66,860 Turkey 243,648 121,824 --------- ------- Total 1,552,262 314,764 ========= =======
Drilling Activity. The following table sets forth the number of wells drilled by the Company during the three years ended December 31, 1996.
EXPLORATORY DEVELOPMENT ----------- ----------- PRODUCTIVE DRY PRODUCTIVE DRY ---------- --- ---------- --- GROSS NET GROSS NET GROSS NET GROSS NET ----- --- ----- --- ----- --- ----- --- Year ended December 31, 1996: Colombia - - 1 .4 2 .5 - - === === === === === === === === Year ended December 31, 1995: Colombia - - 1 .4 1 .3 1 .3 Turkey - - 1 .3 - - - - --- --- --- --- --- --- --- --- - - 2 .7 1 .3 1 .3 === === === === === === === === Year ended December 31, 1994: Colombia - - 1 .4 1 .3 - - === === === === === === === ===
Present Activities. As of December 31, 1996, no wells were in progress. Additional Information. Reference is made to the Supplemental Oil and Gas Information included in the consolidated financial statements contained in Item 8 of Part II for additional information regarding the Company's oil and gas producing activities prepared in accordance with the requirements of Statement of Financial Accounting Standards No. 69 "Disclosures About Oil and Gas Producing Activities." 10 11 ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Company is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET INFORMATION. Shares of Garnet's Common Stock are traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "GARN". The range of reported high and low sales prices for shares of Garnet's Common Stock as supplied by Nasdaq was as follows:
CALENDAR PERIOD HIGH LOW --------------- ---- --- 1996 Fourth Quarter $ .53 $ .25 Third Quarter .63 .25 Second Quarter 1.00 .44 First Quarter 2.00 .94 1995 Fourth Quarter 2.38 1.00 Third Quarter 2.38 1.63 Second Quarter 3.13 2.75 First Quarter 3.50 2.13
(b) HOLDERS. As of February 28, 1997, shares of Garnet's Common Stock were held of record by approximately 1,600 persons, including several holders who are nominees for an undetermined number of beneficial owners. (c) DIVIDENDS. Garnet has neither declared nor paid any cash dividends on its Common Stock. Under the terms of an agreement with the holders of its 9 1/2% convertible subordinated debentures (the "Debentures"), Garnet has agreed that it will not pay dividends or make distributions to the holders of its Common Stock while the Debentures are outstanding. Any future determination as to declaration and payment of dividends, if permitted, will be made at the discretion of the Board of Directors. The ability to pay dividends may be further restricted by the agreements and regulations described below. The terms of the guaranty agreement between Argosy and OPIC restrict Argosy's ability to make distributions to its partners prior to the repayment of the guaranteed loans. Also, under the terms of its contracts 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 12 13 difficulty in repatriating the remaining 75% of such payments which are payable in United States dollars. Upon presentation of a tax clearance certificate evidencing Garnet PNG's compliance with the relevant provisions of Papua New Guinea's income tax laws, profits, dividends and certain other payments, if any, up to an amount of 500,000 kina (approximately $US360,000) per year may be fully remitted out of Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted, subject to clearance from the Bank of Papua New Guinea. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- Revenues $11,709,227 $ 8,881,133 $ 4,355,365 $ 4,596,766 $ 3,383,477 Net loss (2,059,897) (4,623,322) (7,425,527) (3,447,093) (11,078,080) Net loss per share (.18) (.40) (.67) (.31) (1.01) Weighted average shares outstanding 11,492,162 11,416,828 11,125,537 11,124,929 11,004,786 Cash dividends per share -- -- -- -- -- DECEMBER 31, --------------------------------------------------------------------------------------------- BALANCE SHEET DATA: 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- Total assets $ 48,521,555 $ 49,959,028 $ 49,300,037 $ 52,151,499 $ 38,345,246 Long-term debt 21,629,232 20,151,120 17,506,105 15,227,999 -- Stockholders' equity 20,206,908 22,266,805 25,790,252 33,215,779 36,655,372
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (a) LIQUIDITY AND CAPITAL RESOURCES. For the three years ended December 31, 1996, the Company expended approximately $21,300,000 for the acquisition, exploration and development of its oil and gas properties. Such expenditures include approximately $19,000,000 for exploration and development activities in Colombia, approximately $550,000 for exploration and related costs in Papua New Guinea, and approximately $1,750,000 for acquisition and exploration activities in Turkey, France, Canada and other countries. These activities have been financed primarily by proceeds from (i) the issuance of the Debentures in 1993, the net proceeds of which totalled $14,231,000, and (ii) loans guaranteed by OPIC, the net proceeds of which amounted to approximately $8,425,000. 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 13 14 fields. The Company is completing the interpretation of additional seismic work performed on the Santana Block in 1996 and, depending upon the results of the seismic interpretation, may drilll an additional exploratory well in 1997 or 1998 on the Santana Block, with estimated total costs to the Company of approximately $1,700,000. The Company also plans to drill up to three additional development wells on the Santana Block in 1997 and 1998. The Company's share of the costs of drilling and completing each of the wells in these fields is expected to range from $1,000,000 to $1,200,000. The seismic programs required during the first two years of the Fragua Contract have also been completed. In early 1997 the Company conducted a seismic program on the Yuruyaco Block, for which its share of the costs was approximately $275,000. 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 11,000 barrels of oil per day. The Company's share of such production is 15.3%; it also receives an additional 28.4% of the production from one well until it recovers the drilling and completion costs for that well allocable to Ecopetrol but paid by the Company. 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. See "Market for Registrant's Common Equity and Related Stockholder Matters - Dividends." 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. The Company may also consider entering into additional arrangements whereby certain costs of exploration will be paid by others to earn an interest in the properties. As of December 31, 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 3.9 to 1 as of December 31, 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, which will otherwise mature in December 1998. In February 1997, Garnet retained Rauscher Pierce Refsnes, Inc. to assist Garnet in negotiating a transaction intended to maximize shareholder value such as a debt restructuring, recapitalization and/or sale of assets. If the Company does not consummate any such transaction prior to the maturity date of the Debentures, the Company will be required to renegotiate the terms of the Debentures or repay the Debentures out of cash flow from operations. If the Company is required to repay the Debentures out of cash flow, in the absence of significant increases in reserves, production or oil prices, it may be necessary for the Company to alter its planned exploration and development activities or take other measures to improve is liquidity. 14 15 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 substantal 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 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, 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 herein. Accordingly, the actual results of the Company's operations in the future may vary widely from the forward-looking statements included herein. (b) RESULTS OF OPERATIONS. The Company incurred net losses of $2,059,897 ($.18 per share), $4,623,322 ($.40 per share) and $7,425,527 ($.67 per share) for the years ended December 31, 1996, 1995 and 1994, respectively. Increases in 1996 in oil and gas revenues, production costs and depreciation, depletion and amortization reflect higher oil prices, and production from new wells and fracture stimulation treatments on existing wells in Colombia. Production costs per barrel decreased because of a cost reduction program implemented in the third quarter of 1995. The effect of these increases was partially offset in 1996 by the contractual reduction in the Company's percentage share of production in the second quarter of 1996. The Company's comparative average daily sales volumes, average sales prices and costs per barrel in Colombia for such periods were as follows, expressed in barrels of oil per day ("BOPD"): 15 16
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ---- ---- ---- Average oil sales (BOPD) 1,578 1,443 806 Average oil price per barrel $ 19.82 $ 16.39 $ 13.44 Production costs per barrel $ 5.91 $ 6.71 $ 8.52 Depreciation, depletion and amortization per barrel $ 10.94 $ 9.37 $ 6.67
During 1994 the Company recorded as expense the costs of a dry hole drilled in Turkey ($576,250), investments in leases, license blocks or permit applications in Canada ($583,500), Turkey ($1,174,080) and France ($186,000), costs pertaining to oil and gas exploration activities in other countries ($74,532), and interest previously capitalized in connection with these activities ($220,448). Based on declining market conditions for sales of oil and gas properties and management's expectations of the amounts to be realized from disposition of the remaining royalty and mineral interests acquired in mergers in 1991, the Company further reduced the carrying value of such assets by $1,900,000 in 1994. During 1995 the Company charged to expense its remaining investments in Papua New Guinea ($609,700) and France ($672,592), costs pertaining to oil and gas exploration in other countries ($74,461), and interest previously capitalized in connection with these activities ($190,525). During 1996 the Company recorded a loss of $42,748 on the final disposition of the royalty and mineral assets, and charged to expense $40,112 pertaining to ongoing costs in countries other than Colombia. Interest income in 1996 and 1995 declined from 1994 as a consequence of the expenditure of cash balances. General and administrative expenses decreased in 1996 as a result of the absence of nonrecurring severance costs incurred in connection with management changes, and legal and professional fees in 1995 relating to the consideration of a business combination, as well as a cost reduction program implemented in the third quarter of 1995. The increases in interest expense, net of amounts capitalized, resulted from the receipt of the OPIC-guaranteed loans in 1994 and 1995, and decreases in costs attributable to assets eligible for interest capitalization. The provision for current income taxes, all of which relates to Colombian operations, was higher each year because of increases in the Colombian presumptive income tax attributable to ongoing capital expenditures related to productive assets. These increases were partially offset by the effects of a deferred tax benefit recorded in 1994. The foreign currency translation gain recorded in 1995 resulted from an approximate 19% devaluation in the Colombian peso during 1995 and the settlement of a liability. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Financial Statements and Financial Statement Schedules included separately herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 16 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required with respect to directors is set forth under the caption "Election of Directors" in Garnet's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. The following table lists the names, ages, and principal occupations of each of the executive officers of Garnet. Each executive officer serves at the discretion of the Board of Directors.
NAME AGE POSITION ---- --- -------- Montague H. Hackett, Jr ... 64 Chairman of the Board and Director Douglas W. Fry ............ 54 President, Chief Executive Officer and Director W. Kirk Bosche' ........... 46 Vice President, Treasurer and Secretary Edgar L. Dyes ............. 51 Vice President - Finance
Montague H. Hackett, Jr. Mr. Hackett has been employed as Chairman of the Board of Garnet since January 1995 and has served as a director of Garnet since April 1987. Since January 1996, Mr. Hackett has been employed by Victory Ventures LLC, a privately held limited liability company ("Victory") that conducts its operations through small and medium-sized companies in which Victory holds controlling or other significant equity interests. From October 1989 through June 1994, Mr. Hackett served as President and as a director of Wood River Capital Corporation, a Small Business Investment Company. From October 1991 through December 1995, Mr. Hackett was also employed by Noel Group, Inc., a publicly traded company which also conducts its operations through small and medium-sized companies Douglas W. Fry. Mr. Fry has been employed as President of Garnet and has served as a director of Garnet since September 1995, and has been Chief Executive Officer of Garnet since February 1996. Since 1980 he has also been President of Argosy Energy Incorporated, a wholly owned subsidiary of Garnet, or of the subsidiary's predecessor. W. Kirk Bosche'. Mr. Bosche' has served as Vice President and Treasurer of Garnet since its inception, and as Secretary of Garnet since February 1996. Edgar L. Dyes. Mr. Dyes has served as Vice President - Finance of Garnet since February 1997. From February 1991 through February 1997, he was employed by Argosy in Colombia, most recently as Vice President - Finance and Administration. ITEM 11. EXECUTIVE COMPENSATION. The information required is set forth under the captions "Executive Compensation" and "Certain Relationships and Related Transactions" in Garnet's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. 17 18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required is set forth under the caption "Security Ownership of Certain Beneficial Owners" in Garnet's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required is set forth under the caption "Certain Relationships and Related Transactions" in Garnet's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. 18 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a. The following documents are filed as part of this report: (1)-(2) Financial statements and financial statement schedules - see the accompanying Index to Financial Statements and Financial Statement Schedule. (3) Exhibits - see the accompanying Index of Exhibits. b. No Reports on Form 8-K were filed by Registrant during the three months ended December 31, 1996. 19 20 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. GARNET RESOURCES CORPORATION (Registrant) By: /s/ Douglas W. Fry ------------------------------ Douglas W. Fry President, Chief Executive Officer and Director 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Douglas W, Fry President, Chief Executive March 27, 1997 - ------------------------------- Officer and Director Douglas W. Fry (principal executive officer) /s/ Montague H. Hackett, Jr. Chairman of the Board March 27, 1997 - ------------------------------- and Director Montague H. Hackett, Jr. /s/ Wendell W. Robinson Chairman of the March 27, 1997 - ------------------------------- Executive Committee Wendell W. Robinson and Director /s/ Robert J. Cresci Director March 27, 1997 - ------------------------------- Robert J. Cresci /s/ Alastair Manson Director March 27, 1997 - ------------------------------- Alastair Manson /s/ W. Kirk Bosche' Vice President, March 27, 1997 - ------------------------------- Treasurer and Secretary W. Kirk Bosche' (principal financial officer and principal accounting officer)
20 21 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PAGE ---- GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants F-2 Consolidated Balance Sheets, December 31, 1996 and 1995 F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-9 Supplemental Oil and Gas Information F-20 GARNET RESOURCES CORPORATION FINANCIAL STATEMENT SCHEDULE Schedule I - Condensed Financial Information of Registrant Balance Sheets, December 31, 1996 and 1995 F-25 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-27 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-28 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Garnet Resources Corporation: We have audited the accompanying consolidated balance sheets of Garnet Resources Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Garnet Resources Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in the index to financial statements and financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas March 20, 1997 F-2 23 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ ------------ ASSETS 1996 1995 ------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 4,107,364 $ 5,713,191 Accounts receivable 3,541,223 2,302,712 Inventories 901,216 986,532 Prepaid expenses 132,199 249,454 ------------ ------------ Total current assets 8,682,002 9,251,889 ------------ ------------ NET ASSETS HELD FOR DISPOSITION -- 403,941 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full-cost method)- Proved 56,500,390 46,044,011 Unproved (excluded from amortization) 227,846 4,598,001 ------------ ------------ 56,728,236 50,642,012 Other equipment 132,083 137,343 ------------ ------------ 56,860,319 50,779,355 Less - Accumulated depreciation, depletion and amortization (17,698,898) (11,384,135) ------------ ------------ 39,161,421 39,395,220 ------------ ------------ OTHER ASSETS 678,132 907,978 ------------ ------------ $ 48,521,555 $ 49,959,028 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 24 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS CONTINUED
DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 - ------------------------------------ ------------ ------------ CURRENT LIABILITIES: Current portion of long-term debt $ 2,004,648 $ 4,043,758 Accounts payable and accrued liabilities 3,323,214 2,418,270 ------------ ------------ Total current liabilities 5,327,862 6,462,028 ------------ ------------ LONG-TERM DEBT, net of current portion 21,629,232 20,151,120 ------------ ------------ DEFERRED INCOME TAXES 979,499 640,919 ------------ ------------ OTHER LONG-TERM LIABILITIES 378,054 438,156 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 20,000,000 shares authorized, 11,492,162 shares issued and outstanding as of December 31, 1996 and 1995 114,922 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (32,399,226) (30,339,329) ------------ ------------ Total stockholders' equity 20,206,908 22,266,805 ------------ ------------ $ 48,521,555 $ 49,959,028 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 25 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ REVENUES: Oil sales $ 11,446,587 $ 8,635,570 $ 3,952,351 Interest 262,640 245,563 403,014 ------------ ------------ ------------ 11,709,227 8,881,133 4,355,365 ------------ ------------ ------------ 4,355,365 4,596,766 3,383,477 ------------ ------------ ------------ COSTS AND EXPENSES: 3,410,162 3,533,572 2,506,049 Exploration 40,112 1,547,278 2,814,809 Loss on net assets held for disposition 42,748 -- 1,900,000 General and administrative 652,746 1,672,501 1,515,553 Interest 2,108,346 1,491,131 967,473 Depreciation, depletion and amortization 6,334,748 4,949,682 1,971,328 Foreign currency translation (gain) loss (25,498) (741,557) 19,698 ------------ ------------ ------------ 12,563,364 12,452,607 11,694,910 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (854,137) (3,571,474) (7,339,545) PROVISION FOR INCOME TAXES 1,205,760 1,051,848 85,982 ------------ ------------ ------------ NET LOSS $ (2,059,897) $ (4,623,322) $ (7,425,527) ============ ============ ============ NET LOSS PER SHARE $ (.18) $ (.40) $ (.67) ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 11,492,162 11,416,828 11,125,537 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 26 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------ CAPITAL IN RETAINED TOTAL NUMBER EXCESS OF EARNINGS STOCKHOLDERS' OF SHARES AMOUNT PAR VALUE (DEFICIT) EQUITY --------- ------ --------- --------- ------ BALANCE AT DECEMBER 31, 1993 11,125,537 $ 111,255 $ 51,395,004 $(18,290,480) $ 33,215,779 Net loss -- -- -- (7,425,527) (7,425,527) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1994 11,125,537 111,255 51,395,004 (25,716,007) 25,790,252 Acquisition of partnership interests in Argosy Energy International 366,625 3,667 1,096,208 -- 1,099,875 Net loss -- -- -- (4,623,322) (4,623,322) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 11,492,162 114,922 52,491,212 (30,339,329) 22,266,805 Net loss -- -- -- (2,059,897) (2,059,897) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 11,492,162 $ 114,922 $ 52,491,212 $(32,399,226) $ 20,206,908 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 27 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,059,897) $(4,623,322) $(7,425,527) Adjustments to reconcile net loss to net cash provided by (used for) operating activities - Exploration costs 40,112 1,547,278 2,814,809 Loss on net assets held for disposition 42,748 -- 1,900,000 (Gain) loss on sale of other equipment 1,918 (4,970) 11,683 Depreciation, depletion and amortization 6,334,748 4,949,682 1,971,328 Amortization of other assets 232,148 224,276 193,065 Deferred income taxes 338,580 640,919 (226,639) Change in assets and liabilities - Increase in accounts receivable (144,757) (673,808) (222,291) Decrease in inventories 70,020 24,525 209,610 Decrease in prepaid expenses 1,975 36,162 38,678 Increase (decrease) in accounts payable and accrued liabilities (751,538) (586,645) 330,705 Increase (decrease) in other long-term liabilities (64,049) 134,013 -- ----------- ----------- ----------- Net cash provided by (used for) operating activities 4,042,008 1,668,110 (404,579) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to oil and gas properties (4,145,538) (9,331,942) (7,825,163) Additions to other equipment (21,492) (6,880) (7,977) Proceeds from asset dispositions 292,244 5,000 88,131 (Increase) decrease in joint venture and contractor advances (1,298,843) 621,225 1,550,501 Decrease in inventories 15,296 300,256 23,199 Decrease in net assets held for disposition 73,798 110,683 31,686 Decrease in other assets 25,277 24,170 10,025 Acquisition of partnership interests in Argosy Energy International, net of cash acquired -- (92,621) -- ----------- ----------- ----------- Net cash used for investing activities (5,059,258) (8,370,109) (6,129,598) ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-7 28 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
YEAR ENDED DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of debt $ -- $ 4,754,880 $ 4,161,080 Repayments of debt (560,998) (208,983) (629,176) Costs of debt issuances (27,579) (121,312) (339,266) ------------ ------------ ------------ Net cash provided by (used for) financing activities (588,577) 4,424,585 3,192,638 ------------ ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (1,605,827) (2,277,414) (3,341,539) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,713,191 7,990,605 11,332,144 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,107,364 $ 5,713,191 $ 7,990,605 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for - Interest, net of amounts capitalized $ 1,983,043 $ 1,334,676 $ 906,344 Income taxes 582,047 490,624 357,515
The accompanying notes are an integral part of these consolidated financial statements. F-8 29 GARNET RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES- Nature of operations- Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its subsidiaries (collectively referred to as the "Company") are engaged in the exploration, development and production of oil and gas properties located outside the United States. The Company operates primarily in Colombia and Papua New Guinea. Principles of consolidation- The consolidated financial statements include the accounts of Garnet and its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated. The Company accounts for its investment in Argosy Energy International, a limited partnership ("Argosy") in which Garnet is a limited partner and a wholly owned subsidiary of Garnet is the general partner (see Note 2), using the proportionate consolidation method. Cash equivalents- Cash equivalents include highly liquid debt instruments with an initial maturity of three months or less at the date of purchase. The Company had no cash equivalents at December 31, 1996 and 1995. Inventories- Inventories consist of oilfield equipment, materials and supplies, and crude oil. For presentation in the accompanying consolidated statements of cash flows, changes in oilfield equipment inventory are included as investing activities because they relate to the Company's exploration and development activities, while changes in other types of inventories are included as operating activities. Oil and gas properties- The Company follows the full-cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration and development of oil and gas reserves are capitalized in separate cost centers for each country. Such capitalized costs include contract and concession acquisition, geological, geophysical and other exploration work, drilling, completing and equipping oil and gas wells, constructing production facilities and pipelines, and other related costs. The Company also capitalizes interest costs related to unevaluated oil and gas properties. The Company incurred total interest costs of $2,410,958, $2,252,483 and $1,831,803 in 1996, 1995 and 1994, respectively, of which $302,612, $761,352 and $831,677 were capitalized as additional costs of oil and gas properties. The capitalized costs of oil and gas properties in each cost center are amortized on a composite unit-of-production method based on future gross revenues from proved reserves. Sales F-9 30 or other dispositions of oil and gas properties are normally accounted for as adjustments of capitalized costs. Gain or loss is not recognized in income unless a significant portion of a cost center's reserves is involved. Capitalized costs associated with the acquisition and evaluation of unproved properties are excluded from amortization until it is determined whether proved reserves can be assigned to such properties or until the value of the properties is impaired. Unproved properties are assessed at least annually to determine whether any impairment has occurred. If the net capitalized costs of oil and gas properties in a cost center exceed an amount equal to the sum of the present value of estimated future net revenues from proved oil and gas reserves in the cost center and the costs of properties not being amortized, both adjusted for income tax effects, such excess is charged to expense. Revenue recognition- Oil and gas revenues from producing wells are recognized when the oil or gas is sold. Stock-based compensation- Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages but does not require companies to record compensation costs for stock-based employee plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of Garnet's common stock at the date of grant over the amount an employee must pay to acquire the stock. Net loss per share- Net loss per share is computed using the weighted average number of shares of common stock outstanding. No effect was given to common stock equivalents as the effect would be antidilutive. Use of estimates- The preparation of these financial statements requires the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of oil and gas reserves. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Reference is made to the Supplemental Oil and Gas Information for additional information regarding the process of estimating proved reserve quantities and related cash flows. (2) COLOMBIAN OPERATIONS- Through its ownership of interests in 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 ten-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 F-10 31 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 notified Ecopetrol in 1994 that they intend to abandon the remaining wells and relinquish the Aporte Putumayo Block because declining production rates have made continued operation 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 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 continued 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 ranges 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. If 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 is as follows: F-11 32
PRODUCTION OPERATING EXPLORATION DEVELOPMENT REVENUES COSTS COSTS COSTS -------- ----- ----- ----- Santana Contract: Before seven million barrels of accumulated production 21.8% 27.3% 38.2% 27.3% After seven million barrels of accumulated production 15.3% 19.1% 38.2% 27.3% 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 been declared commercial by Ecopetrol. The joint venture has the right to continue the exploration program through 1997. The joint venture has also completed its seismic obligations for the first two years of the Fragua Contract and the Yuruyaco Contract. 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 $.465 per barrel ($.515 per barrel, effective February 1, 1997). If Ecopetrol does not export the oil, the price paid is based on the price received from Ecopetrol's Cartagena refinery, 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 $.365 per barrel ($.415 per barrel, effective February 1, 1997) 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) EXPLORATION LICENSES IN PAPUA NEW GUINEA- Garnet PNG Corporation, a wholly owned subsidiary of Garnet ("Garnet PNG"), owns a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting License No. 181 ("PPL-181") which covers 952,000 acres (the "PPL-181 Area"). Garnet PNG also held a 7.73% interest in an adjoining license, Petroleum Prospecting License No. 174, on which an exploratory dry hole was drilled in the first quarter of 1996. In 1986, oil was discovered approximately 10 miles from the northern border of the PPL-181 Area in an adjoining license area. Under the terms of an agreement pertaining to PPL-181, Occidental International Exploration and Production Company ("Occidental") agreed to drill and complete at its cost a test well on the PPL-181 Area by September 1997. PPL-181 is owned by Occidental (88%), Garnet PNG (6%) and Niugini Energy Pty. Limited (6%). F-12 33 Upon presentation of a tax clearance certificate evidencing Garnet PNG's compliance with the relevant provisions of Papua New Guinea's income tax laws, profits, dividends and certain other payments, if any, up to an amount of 500,000 kina (approximately $US360,000) per year may be fully remitted out of Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted, subject to clearance from the Bank of Papua New Guinea. (4) LONG-TERM DEBT- Long-term debt at December 31, 1996 and 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 8,633,880 9,113,520 Note payable by Argosy to a Colombian bank -- 81,358 ------------ ------------ 23,633,880 24,194,878 Less - Current portion (2,004,648) (4,043,758) ------------ ------------ $ 21,629,232 $ 20,151,120 ============ ============
In December 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 December 31, 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 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 3.9 to 1 as of December 31, 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 pipelines and production facilities in Colombia. OPIC's F-13 34 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 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 December 31, 1996 was 5.78%. 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 . As of December 31, 1996, Argosy was not in compliance with the debt service coverage ratios required under the finance agreement. OPIC has waived compliance with this requirement through January 1, 1998. 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. (5) STOCK OPTION PLANS- Garnet and a predecessor entity have adopted stock option plans (the "Employee Plans") pursuant to which an aggregate of 1,478,000 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 performing 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 Employee 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 Employee Plans. In addition, Garnet has adopted the 1990 Directors' Stock Option Plan (the "1990 Directors' Plan") pursuant to which an aggregate of 265,000 shares of Garnet's common stock was issuable as of December 31, 1996 upon exercise of options granted thereunder to directors who are not employees of the Company. As the 1990 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 is exercisable on the date of grant and 20% becomes exercisable on each anniversary of the date of grant. Non-incentive options issued to directors and other eligible participants generally are fully exercisable on and after the date of grant. Company has adopted the disclosure-only provisions of SFAS 123. Accordingly no compensation cost has been recognized for the Employee Plans and the Directors' Plan. Had compensation cost for these plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below. F-14 35
1996 1995 ---------- ------------- Pro forma net loss $2,101,716 $ 5,102,286 Pro forma net loss per share $ (.18) $ (.45)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1996 1995 ------- ------- Expected life (years) 5.0 4.3 Risk-free interest rate 6.17% 6.62% Volatility 57.00% 44.40% Dividend yield 0.00% 0.00%
The following is a summary of stock option activity and related information for 1996, 1995 and 1994.
1996 1995 1994 ----------------------------- --------- ---------- WEIGHTED AVERAGE ---------------- SHARES EXERCISE PRICE SHARES SHARES ------ -------------- ------ ------ Options outstanding, beginning of year 1,329,102 $ 4.72 1,369,500 1,229,500 Options granted 480,000 1.19 618,000 140,000 Options forfeited (336,102) 7.44 -- -- Options expired (294,274) 3.31 (658,398) -- ---------- ----------- ---------- --------- Options outstanding, end of year 1,178,726 $ 2.86 1,329,102 1,369,500 ========== =========== ========== ========= Option price range $ 1.19 to $ 2.50 to $ 2.50 to at end of year $ 13.83 $ 13.83 $13.83 Options available for grant at end of year 410,774 470,398 140,000 =========== ========== ========= Weighted average fair value of options granted during the year $ .66 $ 1.19 ========== =========
The following table summarizes information about stock options outstanding at December 31, 1996: F-15 36
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- --------------------------------- NUMBER NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED RANGE OF AT DECEMBER REMAINING AVERAGE DECEMBER AVERAGE EXERCISE PRICES 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE 31, 1996 EXERCISE PRICE - --------------- ----------- ---------------- -------------- ------------- -------------- $1.19 383,226 9.3 years $1.19 76,640 $1.19 $2.50 to $2.87 605,500 4.6 years 2.61 474,700 2.59 Greater than $2.87 190,000 6.2 years 7.04 190,000 7.04 ---------- -------- $1.19 to $13.83 1,178,726 741,340 ========= =======
(6) INCOME TAXES- Income (loss) before income taxes and the provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ---- ---- ---- Income (loss) before income taxes - Domestic $(1,847,919) $(2,340,158) $(3,974,184) Foreign 993,782 (1,231,316) (3,365,361) ----------- ----------- ----------- $ (854,137) $(3,571,474) $(7,339,545) =========== =========== =========== Provision for income taxes - Foreign - Current 868,344 $ 410,929 $ 312,621 Deferred 337,416 640,919 (226,639) ----------- ----------- ----------- $ 1,205,760 $ 1,051,848 $ 85,982 =========== =========== ===========
The provisions for income taxes and deferred income taxes payable 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. The Company's net deferred income tax liabilities as of December 31, 1996 and 1995 were as follows:
1996 1995 ------------ ------------ Deferred tax liability $ 2,109,649 $ 1,271,884 Deferred tax asset (11,061,573) (10,024,880) Valuation allowance 9,931,423 9,393,915 ------------ ------------ Net deferred tax liability $ 979,499 $ 640,919 ============ ============
F-16 37 Temporary differences included in the deferred tax liabilities related primarily to property and equipment. Deferred tax assets principally consisted of net operating loss carryforwards. As of December 31, 1996, the Company had a regular tax net operating loss carryforward and an alternative minimum tax loss carryforward of approximately $30,200,000 and $29,800,000, 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 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. (7) FAIR VALUE OF FINANCIAL INSTRUMENTS- The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these items. The carrying amounts of notes payable by Argosy to U.S. and Colombian banks approximate fair value because the interest rates on these instruments change with market interest rates. There are no quoted market prices for the Debentures. Because the Debentures are convertible into shares of Garnet's common stock, the fair value of the Debentures is contingent on market prices for the common stock, the value of the Company's assets, and the results of its operations. In addition the Debentures contain unique terms, conditions, covenants and restrictions. Consequently the Company is unable to estimate the fair value of the Debentures. (8) CONCENTRATION OF CREDIT RISK- During the years ended December 31, 1996, 1995 and 1994, all of the Company's oil production was purchased by Ecopetrol. As of December 31, 1996 and 1995, accounts receivable included approximately $2,866,000 and $1,513,000, respectively, from Ecopetrol. The Company believes that its oil production could be sold to other purchasers at similar prices in lieu of sales to Ecopetrol. (9) OPERATIONS BY GEOGRAPHIC AREA- The Company operates in one industry segment. Information about the Company's operations for the years ended December 31, 1996, 1995 and 1994 by different geographic areas is shown below. F-17 38
OTHER UNITED FOREIGN 1996 STATES COLOMBIA AREAS TOTAL - ---- ------ -------- ----- ----- Oil and gas sales $ -- $11,446,587 $ -- $11,446,587 ============ =========== ======== =========== Operating profit (loss) $ (42,748) $ 1,701,677 $(40,112) $ 1,618,817 ============ =========== ======== General corporate income and expenses, net (2,472,954) ----------- Income (loss) before income taxes $ (854,137) =========== Identifiable assets $ 633,606 $43,780,585 $ -- $44,414,191 ============ =========== ======== Corporate assets: Cash and cash equivalents 4,107,364 ----------- Total assets $48,521,555 ===========
OTHER UNITED FOREIGN 1995 STATES COLOMBIA AREAS TOTAL - ---- ------------- ------------ ----------- ------------ Oil and gas sales $ -- $ 8,635,570 $ -- $ 8,635,570 ============ =========== =========== ============ Operating profit (loss) $ (6,476) $ 158,792 $(1,547,278) $ (1,394,962) ============ =========== =========== ============ General corporate income and expenses, net (2,176,512) ------------ Income (loss) before income taxes $ (3,571,474) ============ Identifiable assets $ 937,359 $43,303,637 $ 4,841 $ 44,245,837 ============ =========== =========== ============ Corporate assets: Cash and cash equivalents 5,713,191 ------------ Total assets $ 49,959,028 ============
The operating loss in other foreign areas represents oil and gas acquisition and exploration costs charged to expense, of which $674,554 was in Papua New Guinea, $798,263 was in France and $74,461 was in other countries. F-18 39
OTHER UNITED FOREIGN 1994 STATES COLOMBIA AREAS TOTAL - ---- ------ -------- ----- ----- Oil and gas sales $ -- $ 3,952,351 $ -- $ 3,952,351 ============ ============ =========== ============ Operating profit (loss) $ (1,905,734) $ (519,292) $(2,814,809) $ (5,239,835) ============ ============ =========== General corporate income and expenses, net (2,099,710) ------------ Income (loss) before income taxes $ (7,339,545) ============ Identifiable assets $ 1,411,740 $ 38,851,245 $ 1,046,447 $ 41,309,432 ============ ============ =========== Corporate assets: Cash and cash equivalents 7,990,605 Total assets $ 49,300,037
The operating loss in the United States reflects a provision for loss on net assets held for disposition of $1,900,000. The operating loss in other foreign areas represents oil and gas acquisition, exploration and capitalized interest costs charged to expense, of which $1,878,094 was in Turkey, $651,913 was in Canada, $206,625 was in France, and $78,177 was in other countries. F-19 40 GARNET RESOURCES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL OIL AND GAS INFORMATION The following tables set forth information about the Company's oil and gas producing activities pursuant to the requirements of SFAS No. 69 "Disclosures About Oil and Gas Producing Activities." CAPITALIZED COSTS DECEMBER 31, ------------------------------ 1996 1995 ------------ ------------ Proved properties $ 56,500,390 $ 46,044,011 Unproved properties 227,846 4,598,001 ------------ ------------ 56,728,236 50,642,012 Accumulated depreciation, depletion and amortization (17,610,628) (11,286,629) ------------ ------------ Net capitalized costs $ 39,117,608 $ 39,355,383 ============ ============ As of December 31, 1996 and 1995, all capitalized costs pertained to oil and gas properties in Colombia. The Company's investment in oil and gas properties as of December 31, 1996 includes $227,846 in unevaluated properties which have been excluded from amortization. Such costs will be evaluated in future periods based on management's assessment of exploration activities, expiration dates of licenses, permits and concessions, changes in economic conditions and other factors. F-20 41
COSTS INCURRED OTHER YEAR ENDED FOREIGN DECEMBER 31, 1996 COLOMBIA AREAS TOTAL - ----------------- ---------- ----------- --------- Property acquisition- Proved properties $ -- $ -- $ -- Unproved properties -- 5,258 5,258 Exploration 1,257,150 34,854 1,292,004 Development 4,829,074 -- 4,829,074 ---------- ---------- ---------- Total costs incurred $6,086,224 $ 40,112 $6,126,336 ========== ========== ========== YEAR ENDED DECEMBER 31, 1995 Property acquisition- Proved properties $1,590,943 $ -- $1,590,943 Unproved properties -- 61,361 61,361 Exploration 1,439,406 502,544 1,941,950 Development 6,229,286 -- 6,229,286 ---------- ---------- ---------- Total costs incurred $9,259,635 $ 563,905 $9,823,540 ========== ========== ========== YEAR ENDED DECEMBER 31, 1994 Property acquisition- Proved properties $ -- $ -- $ -- Unproved properties -- 149,971 149,971 Exploration 1,982,601 1,469,399 3,452,000 Development 5,149,002 -- 5,149,002 ---------- ---------- ---------- Total costs incurred $7,131,603 $1,619,370 $8,750,973 ========== ========== ==========
F-21 42 RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 1996 1994 ----------- ---------- ----------- Revenues $11,446,587 $8,635,570 $ 3,952,351 ----------- ---------- ----------- Expenses- Production costs 3,410,162 3,533,572 2,506,049 Depreciation, depletion and amortization 6,323,999 4,936,955 1,949,364 ----------- ---------- ----------- 9,734,161 8,470,527 4,455,413 ----------- ---------- ----------- Results of operations before income taxes 1,712,426 165,043 (503,062) Provision for income taxes 710,657 70,638 -- ----------- ---------- ----------- Results of operations from oil and gas producing activities $ 1,001,769 94,405 $ (503,062) =========== ========== =========== Sales price per barrel $ 19.82 $ 16.39 $ 13.44 Production costs perbarrel 5.91 6.71 8.52 Depreciation, depletion and amortization per dollar of oil and gas revenues .55 .57 .49
During the years ended December 31, 1996, 1995 and 1994, all of the Company's oil and gas producing operations were located in Colombia. During 1996, 1995 and 1994 the Company also charged to expense a total of $40,112, $1,547,278 and $2,814,809 respectively, of acquisition and exploration costs pertaining to its activities in other foreign areas. OIL AND GAS RESERVE QUANTITIES (UNAUDITED) Proved reserves represent estimated quantities of crude oil and natural gas which geological and engineering data demonstrate to be reasonably recoverable in the future from known reservoirs under existing economic and operating conditions. Proved developed reserves can be expected to be recovered through existing wells with existing equipment and operating methods. Estimates of proved and proved developed oil and gas reserves are subject to numerous uncertainties inherent in the process of developing the estimates including the estimation of the reserve quantities and estimated future rates of production and timing of development expenditures. The accuracy of any reserve estimate is a function of the quantity and quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Additionally, the estimated volumes to be commercially recoverable may fluctuate with changes in prices of oil and natural gas. F-22 43 Estimates of the Company's proved reserves and related valuations, as shown in the following tables, were developed pursuant to SFAS No. 69. Estimates of future recoverable oil reserves and projected future net revenues were provided by Huddleston & Co., Inc. The Company's proved reserves were comprised entirely of crude oil in Colombia, and are stated in barrels.
1996 1995 1994 ---------- ---------- ---------- Proved developed and undeveloped reserves: Beginning of year 3,942,231 4,626,883 5,330,622 Revisions of previous estimates 51,106 (377,493) (409,677) Production (577,428) (526,834) (294,062) Purchases of reserves in place -- 219,675 -- ---------- ---------- ---------- End of year 3,415,909 3,942,231 4,626,883 ========== ========== ========== Proved developed reserves at end of year 2,435,085 1,939,420 2,076,892
The following tables present the standardized measure of discounted future net cash flows relating to proved oil and gas reserves and the changes in the standardized measure of discounted future net cash flows. Future cash inflows and costs were computed using prices and costs in effect at the end of the applicable year without escalation. Future income taxes were computed by applying the appropriate statutory income tax rate to the pretax future net cash flows reduced by future tax deductions and net operating loss carryforwards. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- Future cash inflows $77,207,720 $69,343,840 $71,887,880 Future costs- Production 13,778,938 18,021,679 15,541,058 Development 3,513,309 5,264,508 7,944,542 ----------- ----------- ----------- Future net cash flows before income taxes 59,915,473 46,057,653 48,402,280 Future income taxes 6,010,111 4,232,095 5,980,232 ----------- ----------- ----------- Future net cash flows 53,905,362 41,825,558 42,422,048 10% discount factor 10,755,572 11,151,677 9,987,325 ----------- ----------- ----------- Standardized measure of discounted future net cash flows $43,149,790 $30,673,881 $32,434,723 =========== =========== ===========
F-23 44 CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Standardized measure, beginning of year $ 30,673,881 $ 32,434,723 $ 21,876,531 Increases (decreases) - Sales, net of production costs (8,036,425) (5,101,998) (1,446,302) Net change in sales prices, net of production costs 14,139,910 1,578,689 13,222,039 Changes in estimated future development costs (1,111,112) (1,749,979) (167,944) Development costs incurred during the year that reduced future development costs 3,310,248 4,994,019 4,079,420 Revisions of quantity estimates 2,540,160 (9,003,192) (5,808,213) Accretion of discount 3,359,280 3,702,993 2,422,386 Net change in income taxes (2,018,011) 1,676,288 (2,247,878) Purchases of reserves in place -- 1,758,109 -- Changes in production rates (timing) and other 291,859 384,229 504,684 ------------ ------------ ------------ Standardized measure, end of year $ 43,149,790 $ 30,673,881 $ 32,434,723 ============ ============ ============
The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's proved reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs and a discount factor more representative of the time value of money and the risks inherent in reserve estimates. F-24 45 SCHEDULE I GARNET RESOURCES CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS DECEMBER 31, ------------------------------ ASSETS 1996 1995 ------ ------------ ------------ CURRENT ASSETS: Cash $ 86,119 $ 1,088,683 Accounts receivable 494,261 1,986,660 Prepaid expenses 24,124 26,100 ------------ ------------ Total current assets 604,504 3,101,443 ------------ ------------ INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES 34,427,950 34,079,600 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Furniture and equipment 69,928 63,918 Less - Accumulated depreciation (41,731) (47,064) ------------ ------------ 28,197 16,854 ------------ ------------ OTHER ASSETS 309,497 459,062 ------------ ------------ $ 35,370,148 $ 37,656,959 ============ ============ These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II. F-25 46 SCHEDULE I GARNET RESOURCES CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (CONTINUED)
DECEMBER 31, ------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 - ------------------------------------ ------------ ------------ CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 163,240 $ 325,978 ------------ ------------ LONG-TERM DEBT 15,000,000 15,000,000 ------------ ------------ OTHER LONG-TERM LIABILITIES -- 64,176 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 20,000,000 shares authorized, 11,492,162 shares issued and outstanding as of December 31, 1996 and 1995 114,922 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (32,399,226) (30,339,329) ------------ ------------ Total stockholders' equity 20,206,908 22,266,805 ------------ ------------ $ 35,370,148 $ 37,656,959 ============ ============
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II. F-26 47 SCHEDULE I GARNET RESOURCES CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- INTEREST INCOME $ 140,732 $ 519,630 $ 651,133 ----------- ----------- ----------- COSTS AND EXPENSES: Exploration 1,775 798,263 281,588 General and administrative 1,134,107 1,953,436 1,817,112 Interest 1,243,668 819,134 951,138 Depreciation 8,273 5,874 4,771 ----------- ----------- ----------- 2,387,823 3,576,707 3,054,609 ----------- ----------- ----------- INCOME (LOSS) BEFORE EQUITY IN EARNINGS (LOSSES) OF SUBSIDIARIES (2,247,091) (3,057,077) (2,403,476) EQUITY IN EARNINGS (LOSSES) OF SUBSIDIARIES 187,194 (1,566,245) (5,022,051) ----------- ----------- ----------- NET LOSS $(2,059,897) $(4,623,322) $(7,425,527) =========== =========== ===========
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II. F-27 48 SCHEDULE I GARNET RESOURCES CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,059,897) $(4,623,322) $ (7,425,527) Equity in (earnings) losses of subsidiaries (187,194) 1,566,245 5,022,051 Exploration costs 1,775 798,263 281,588 Depreciation 8,273 5,874 4,771 Changes in components of working capital (378,881) 159,500 (110,478) Other 89,927 213,309 173,173 ----------- ----------- ------------ Net cash used for operating activities (2,525,997) (1,880,131) (2,054,422) ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investments in and advances from (to) subsidiaries (161,156) (6,131,388) (720,751) Capital expenditures (25,929) (132,902) (528,781) Loans to Argosy Energy International -- -- (4,390,000) Loans repaid by Argosy Energy International 1,710,518 2,353,784 3,853,512 ----------- ----------- ------------ Net cash provided by (used for) investing activities 1,523,433 (3,910,506) (1,786,020) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Costs of debt issuance -- -- (38,799) ----------- ----------- ------------ Net cash used for financing activities -- -- (38,799) ----------- ------------ NET DECREASE IN CASH (1,002,564) (5,790,637) (3,879,241) CASH AT BEGINNING OF PERIOD 1,088,683 6,879,320 10,758,561 ----------- ----------- ------------ CASH AT END OF PERIOD $ 86,119 $ 1,088,683 $ 6,879,320 =========== =========== ============
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II. F-28 49 INDEX OF EXHIBITS
ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Not applicable. (3) Articles of Incorporation and By-Laws: (A) Restated Certificate of Incorporation filed on April 3, 1987, incorporated by reference to Exhibit 3(A) to Form S-1 Registration Statement No. 33-16426. * (B) By-Laws, as amended, incorporated by reference to Exhibit 3(B) to Registrant's Form 10-K for the fiscal year ended December 31, 1994. * (4) Instruments defining the rights of security holders, including indentures: (A) Excerpts from Restated Certificate of Incorporation, incorporated by reference to Exhibit 4(A) to Form S-1 Registration Statement No. 33-16426. * (B) Excerpts from By-Laws, as amended, incorporated by reference to Exhibit 4(B) to Form S-1 Registration Statement No. 33-16426. * (C) Specimen Certificate for Common Stock of Garnet Resources Corporation, par value $.01 per share, incorporated by reference to Exhibit 4(C) to Amendment No. 1 to Form S-1 Registration Statement No. 33-16426. * (D) Form of 9 1/2% convertible subordinated debenture, incorporated by reference to Exhibit 4 to Registrant's Form 10-K for the fiscal year ended December 31, 1993. * (9) Voting trust agreement: Not applicable. (10) Material contracts: (A) Risk Sharing Contract by and between Empresa Colombiana de Petroleos, on the one part, and Argosy Energy International and Neo Energy, Inc., on the other part, incorporated by reference to Exhibit 10(I) to Form S-1 Registration Statement No. 33-16426. * (B) Amendment dated March 6, 1990 to the Risk Sharing Contract by and between Empresa Colombiana de Petroleos, on the one part, and Argosy Energy International and Neo Energy, Inc. on the other part, incorporated by reference to Exhibit 10(EE) to Registrant's Form 10-K for the fiscal year ended December 31, 1989. *
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ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (C) Operating Agreement for the Santana Area dated as of September 16, 1987 by and between Argosy Energy International and Neo Energy, Inc., incorporated by reference to Exhibit 10(W) to Amendment No. 1 to Form S-1 Registration Statement No. 33-16426. * (D) Contract for Sale of Santana Crude dated March 6, 1995 by and among Empresa Colombiana de Petroleos, Argosy Energy International and Neo Energy, Inc., incorporated by reference to Exhibit 10(E) to Registrant's Form 10-K for the fiscal year ended December 31, 1994. * (E) Contract for Sale of Santana Crude dated February 10, 1997 by and among Empresa Colombiana de Petroleos, Argosy Energy International and Neo Energy, Inc. 10(D) (F) Association Contract for the Fragua Area effective June 1, 1992 by and between Empresa Colombiana de Petroleos, on the one part, and Argosy Energy International and Neo Energy, Inc., on the other part, incorporated by reference to Exhibit 10(JJ) to Registrant's Form 10-K for the fiscal year ended December 31, 1992. * (G) Operating Agreement for the Fragua Area dated as of April 15, 1992 by and between Argosy Energy International and Neo Energy, Inc., incorporated by reference to Exhibit 10(KK) to Registrant's Form 10-K for the fiscal year ended December 31, 1992. * (H) Association Contract for the Yuruyaco Area effective November 19, 1995 by and between Empresa Colombiana de Petroleos, on the one part, and Argosy Energy International and Neo Energy, Inc., on the other part incorporated by reference to Exhibit (G) to Registrant's Form 10-K for the fiscal year ended December 31, 1995. * (I) Operating Agreement for the Yuruyaco Area dated as of November 7, 1995 by and between Argosy Energy International and Neo Energy, Inc., incorporated by reference to Exhibit 10(A) to Registrant's Form 10-Q for the quarterly period ended March 31, 1996. * (J) Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated as of January 11, 1991, incorporated by reference to Exhibit 10(GG) to Form S-4 Registration Statement No. 33-43533. *
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ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (K) Amendment to Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated as of January 13, 1994, incorporated by reference to Exhibit 10(BB) to Registrant's Form 10-K for the fiscal year ended December 31, 1993. * (L) Second Amendment to Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated as of July 1, 1994 incorporated by reference to Exhibit 10(J) to Registrant's Form 10-K for the fiscal year ended December 31, 1994. * (M) Petroleum Prospecting License No. 174, incorporated by reference to Exhibit 10(O) to Registrant's Form 10-K for the fiscal year ended December 31, 1994. * (N) Operating Agreement for the Papua New Guinea PPL-174 Joint Venture among Arakis Energy Corporation, Bossrich Investment Limited, China National Oil and Gas Exploration and Development Corporation, China National United Oil Corporation, Garnet Resources Corporation, Gedd PNG Limited, Marubeni Corporation, and Niguini Energy Pty. Limited dated as of December 5, 1994, incorporated by reference to Exhibit 10(P) to Registrant's Form 10-K for the fiscal year ended December 31, 1994. * (O) Petroleum Prospecting License No. 181, incorporated by reference to Exhibit 10(A) to Registrant's Form 10-Q for the quarterly period ended September 30, 1995. * (P) Papua New Guinea PPL-77 Agreement dated April 27, 1995 among Garnet PNG Corporation, Niugini Energy Pty. Limited and Occidental International Exploration and Production Company, incorporated by reference to Exhibit 10(B) to Registrant's Form 10-Q for the quarterly period ended September 30, 1995. * (Q) Purchase Agreement dated as of December 21, 1993 among Garnet Resources Corporation and the Investors purchasing Registrant's 9 1/2% Convertible Subordinated Debentures, incorporated by reference to Exhibit 10(Y) to Registrant's Form 10-K for the fiscal year ended December 31, 1993. * (R) Pledge Agreement dated as of December 21, 1993 made by Garnet Resources Corporation in favor of Pecks Management Partners Ltd., incorporated by reference to Exhibit 10(Z) to Registrant's Form 10-K for the fiscal year ended December 31, 1993. *
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ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (S) Noteholders' and Stockholders' Agreement dated as of December 21, 1993 among Garnet Resources Corporation, the Investors purchasing Registrant's 9 1/2% Convertible Subordinated Debentures, and certain existing stockholders of Registrant, incorporated by reference to Exhibit 10(AA) to Registrant's Form 10-K for the fiscal year ended December 31, 1993. * (T) Finance Agreement dated May 2, 1994 between Argosy Energy International and Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(A) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (U) Amendment No. 1 dated July 28, 1994 to Finance Agreement between Argosy Energy International and Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(B) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (V) Amendment No. 2 dated March 24, 1995 to Finance Agreement between Argosy Energy International and Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(C) to Registrant's Form 10-Q for the quarterly period ended September 30, 1995. * (W) Amendment No. 3 dated September 26, 1995 to Finance Agreement between Argosy Energy International and Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(D) to Registrant's Form 10-Q for the quarterly period ended September 30, 1995. * (X) Loan Agreement dated August 3, 1994 by and between Texas Commerce Bank National Association and Argosy Energy International, incorporated by reference to Exhibit 10(C) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (Y) Stage I Promissory Note dated August 3, 1994 from Argosy Energy International to Texas Commerce Bank National Association in the principal amount of $4,400,000, incorporated by reference to Exhibit 10(D) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (Z) Stage II Promissory Note dated October 25, 1995 from Argosy Energy International to Texas Commerce Bank National Association in the principal amount of $4,800,000, incorporated by reference to Exhibit 10(E) to Registrant's Form 10-Q for the quarterly period ended September 30, 1995. *
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ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (AA) Guaranty dated July 26, 1994 from Overseas Private Investment Corporation to Texas Commerce Bank National Association, incorporated by reference to Exhibit 10(E) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (BB) Project Support Agreement dated August 3, 1994 among Garnet Resources Corporation, Argosy Energy International and Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(F) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (CC) Security Agreement dated August 3, 1994 made by Argosy Energy International to Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(G) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (DD) Escrow Agreement dated August 3, 1994 among Argosy Energy International, Overseas Private Investment Corporation, Texas Commerce Bank National Association, as Lender, and Texas Commerce Bank National Association, as Escrow Agent, incorporated by reference to Exhibit 10(H) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (EE) Conditional Assignment Agreement dated August 3, 1994 made by Argosy Energy International in favor of Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(J) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (FF) Subordination Agreement dated August 3, 1994 made by Garnet Resources Corporation in favor of Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(K) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (GG) Subordination Agreement dated August 3, 1994 made by Argosy Energy Incorporated in favor of Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(L) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (HH) Pledge Agreement dated August 3, 1994 made by Garnet Resources Corporation and Argosy Energy Incorporated to Overseas Private Investment Corporation, incorporated by reference to Exhibit 10(M) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (II) 1987 Stock Option Plan of Garnet Resources Corporation, incorporated by reference to Exhibit 10(F) to Form S-1 Registration Statement No. 33-16426. *
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ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (JJ) 1990 Stock Option Plan of Garnet Resources Corporation, as amended, incorporated by reference to Appendix A to Garnet Resources Corporation's Notice of Annual Meeting and Proxy Statement for its Annual Meeting of Shareholders held on June 21, 1995. * (KK) Form of Garnet Resources Corporation Non- Incentive Stock Option Agreement for employees, incorporated by reference to Exhibit 10(G) to Form S-1 Registration Statement No. 33-16426. * (LL) Incentive Stock Option Agreement for non- employees, incorporated by reference to Exhibit 10(H) to Form S-1 Registration Statement No. 33-16426. * (MM) 1987 Stock Option Plan of Argosy Energy Incorporated, incorporated by reference to Exhibit 10(BB) to Registrant's Form 10-K for the fiscal year ended December 31, 1988. * (NN) Form of Argosy Energy Incorporated Non- Incentive Stock Option Agreement for employees, incorporated by reference to Exhibit 10(CC) to Registrant's Form 10-K for the fiscal year ended December 31, 1988. * (OO) Form of Argosy Energy Incorporated Non- Incentive Stock Option Agreement for non- employees, incorporated by reference to Exhibit 10(DD) to Registrant's Form 10-K for the fiscal year ended December 31, 1988. * (PP) 1990 Directors' Stock Option Plan of Garnet Resources Corporation, as amended, incorporated by reference to Exhibit 10(Z) to Registrant's Form 10-K for the fiscal year ended December 31, 1992. * (QQ) Letter Agreement dated June 28, 1995 between George M. Nevers and Garnet Resources Corporation, incorporated by reference to Exhibit 10(F) to Registrant's Form 10-Q for the quarterly period ended September 30, 1995. * (11) Statement re 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. (12) Statements re computation of ratios: Not applicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders: Not applicable. (16) Letter re change in certifying accountant: Not applicable.
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ITEM NO. ITEM TITLE EXHIBIT NO. - -------- ---------- ----------- (18) Letter re change in accounting principles: Not applicable. (21) Subsidiaries of the registrant. 21 (22) Published report regarding matters submitted to vote of security holders: Not applicable. (23) Consents of experts and counsel. 23 (24) Power of attorney: Not applicable. (27) Financial Data Schedule. 27 (99) Additional exhibits: Not applicable.
* Incorporated by reference 27 EX-10.D 2 CONTRACT FOR SALE OF SANTANA CRUDE 1 EXHIBIT 10(d) 1 AGREEMENT No. DIJ-1207 SUPPLIER : ARGOSY ENERGY INTERNATIONAL and NEO ENERGY, INC. SUBJECT MATTER: SALE AND PURCHASE OF SANTANA CRUDE TERM : FEBRUARY 1, 1997 TO DECEMBER 31, 1997 AMOUNT : INDEFINITE The Parties hereto, on one hand EMPRESA COLOMBIANA DE PETROLEOS "ECOPETROL", hereinafter referred to as ECOPETROL, an industrial an commercial State-owned corporation, duly authorized under the Act 165, 1948, and governed by its bay-laws approved by the Decree 1209/94, with headquarters in the city of Santafe de Bogota, D.C., duly represented by LUIS AUGUSTO YEPES G., of age, bearing the Identity Card No. 19.125.070 issued in Bogota, domiciled in Bogota, who herein states and declares: a. That he acts in his capacity as Vice President and duly vested with legal powers and internal Ecopetrol standards.- b. That the execution of this Agreement has been authorized as stated in the Memorandum CGI-0217; an on the other hand, ARGOSY ENERGY INTERNATIONAL, a corporation organized and existing under Utah State, United States of America, domiciled in Salt Lake, Utah State, with branch office in Colombia, incorporated under the Public Indenture No. 5323, executed in the Notary Seven in Bogota on October 25, 1983 2 2 and filed with the Chamber of Commerce of Bogota, Registry No. 200848, on November 23, 1983, duly represented by SANTIAGO GONZALEZ ANGULO, of age, bearing the ID # 5.584.373 from Barrancabermeja, and NEO ENERGY INC., a corporation organized and existing under Texas State, United States of America, domiciled in Dallas Tx., which branch office is established in Colombia, incorporate under the Public Indenture No. 6.179 executed in the Notary Four in Bogota, on October 23, 1986 and filed with the Chamber of Commerce of Bogota, represented by WALDO E. CASAS, of age and bearing the Identity Card No. 126.688 from Bogota; above latter two companies hereinafter referred to as THE VENDOR, who have entered into this Sale and Purchase Agreement of Santana Crude, governed by the clauses below: CLAUSE 1.- SUBJECT MATER AND AMOUNT. THE VENDOR undertakes to sell and delivery ECOPETROL, under the condition hereunder, crude oil produced under "Santana" Joint Venture agreement, corresponding to VENDOR, in the amount and quality determined pursuant to provision in Clause 2 hereunder, which ECOPETROL undertakes to receive it and pay up. PARAGRAPH 1: "Santana" Joint Venture Agreement was entered into on May 27, 1987, with effective 3 3 date on July 27, 1987, between and by ECOPETROL and ARGOSY ENERGY INTERNATIONAL and NEO ENERGY, INC. PARAGRAPH 2: All and any purchase shall be made by ECOPETROL according to crude purchasing preliminary scheduling agreed upon by the parties hereto for six (6) month periods, which ECOPETROL may change by giving written notice to VENDOR no less than thirty (30) days in advance. PARAGRAPH 3: Crude amounts the VENDOR will sale ECOPETROL shall be invoiced separately by ARGOSY ENERGY INTERNATIONAL and NEO ENERGY, INC., according to their participation in the Joint Venture Agreement, as follows: ARGOSY ENERGY INTERNATIONAL, fifty five percent (55%) and NEO ENERGY, INC. forty five percent (45%). CLAUSE 2: QUALITY.- Crude Quality subject matter of this Agreement shall have the following specifications: a) Crude gravidity shall be that with such crude is obtained through the operations carried out to the production thereof. b) Water and sediment contents in the crude shall not be higher than 0.5% in volume and the determination thereof will be made by using the methods ASTM-D95 "water in bearing-oil products and bituminous materials by distillation", last revision, and ASTM-D473 "sediments in crude and combustoil by 4 4 extraction", last revision, respectively. c) Sulphur contents in crude shall be that with which such crude is obtained through the operations carried out for the production thereof; its determination will be made by using the ASTM-D2622 method, last revision "Ray-X sulphur analysis". d) Salt contents shall be greater than or equal to 20 lb/1000 crude oil barrels and the determination thereof will be made by the ASTM-D3230 method, "salts in crude (electrometric method)", last revision. When any of above parameters is not met, or otherwise the specifications above are not within the allowable range, ECOPETROL reserves the right to reject crude oil. And, if ECOPETROL chooses to accept crude with salt contents higher than the specifications hereto, oil price shall be penalized according to table below:
SALT CONTENTS PENALIZATION CHARGE ON LB/1000 BLS. USD/BARREL 20.1 30.0 0.160 VENDOR 30.1 40.0 0.180 VENDOR 40.1 60.0 0.200 VENDOR 60.1 80.0 0.220 VENDOR 80.1 100.0 0.240 VENDOR
It shall be understood that VENDOR shall make its best efforts to deliver crude oil hereunder, bearing a salt contents lower than twenty (20) lb. per 1000 barrels crude oil. 5 5 e) Any variance related to quality specifications hereinbelow referred to, acceptable for the parties hereto, should be included in a Record signed by ECOPETROL and the VENDOR representatives. CLAUSE 3: DELIVERY SITE AND TITLE.- Crude oil, subject matter of this Agreement shall be delivered by the VENDOR to ECOPETROL in Santana Terminal, where Crude will be subsequently measured and analyzed, from the standpoint above referred to, carried by ECOPETROL up to Tumaco Terminal. The title to property and the risk will pass from the VENDOR to ECOPETROL at the time when crude oil has passed through the outlet flange of the measuring system located at Santana terminal. PARAGRAPH 1: Should Santana Association will construct Santana-Orito Pipeline, measurement and transfer of crude title shall be effective in Orito. Additionally, from such date on, crude sale and purchase price will be changed, inasmuch as transportation rate from Santana-Orito will be not taken into account, pursuant to Resolution 9035 of February 18/94 from the Ministry of Mines and Energy. PARAGRAPH 2: Receipt capacity of Santana Crude will be limited to Santana-Orito pipeline capacity existing in this time. CLAUSE 4: TERM.- The initial term of this Agreement shall 6 6 be eleven (11) months from February 1, 1997 up to December 31, 1997 and may be extended for one (1) year additional periods by written agreement between the parties hereto, before the expiry date of this Agreement. CLAUSE 5: PRICE.- The price ECOPETROL will pay the VENDOR for the Crude delivered in Santana terminal shall be defined as follows: Price = base price more or less adjustment for quality less transportation, less handling and marketing. PARAGRAPH 1: Base price will the weighted average of export shipments invoiced by ECOPETROL during each month. PARAGRAPH 2: Adjustment for quality to be applied in this Agreement will be for API Gravity and sulphur contents which shall be computed on a monthly basis according to the method described in Exhibit 1 hereto. PARAGRAPH 3: Santana-Tumaco carriage cost, as well as the relevant carriage tax shall adhere the legal provisions then in force and will be subject to any amendment of such provisions during the Agreement term. In line with provisions in Resolution 9035 of February 18, 1994 from the Ministry of Mines and Energy, Santana-Tumaco carriage rate as of Dec. 31, 1996 accounts up to 1.2434 USD/Bl; carriage tax amount shall correspond to two percent (2%) of rate, 7 7 according provision in Sect. 17, Decree 2140/55, adopted as a permanent rule by the Act. 10/61. Such tax shall be paid pursuant to privisioin in Act 141, 1994, which as of January 31/97 is 0.0249 USE/Bl. Such rates, will be readjusted on a yearly basis according to provisions in Resolution 9035 above referred to. PARAGRAPH 4: Handling and marketing cost will be 0.515 USD/Bl. PARAGRAPH 5: If during any month or consecutive months there is no crude export, the prior month price will be applied. Such price will be adjusted the next month according to new price computed for exports. Santana Crude volume received during the corresponding month will be taken and the adjustment for quality will be computed by using the average of quotations of basket crude corresponding to the three months prior to the adjusted month. PARAGRAPH 6. If crude blend Tumaco cabotages will occur (South Blend) to Cartagena Refinery sale and price conditions ECOPETROL shall recognize to VENDOR, will the same obtained by the International Manager Office, for crude blend received by Cartagena Refinery, plus or minus the adjustment for quality, plus or minus the Santana-Tumaco carriage cost and the relevant tax, less Tumaco-Cartagena carriage (value 8 8 invoiced by ECOPETROL), less handling and marketing (USD 0.415/Bl). For such case, ECOPETROL shall adivise the VENDOR the mechanism to be used for price reckoning agreed on with Cartagena Refinery. CLAUSE 6: INVOICING AND PAYMENT CONDITIONS. VENDOR shall invoice ECOPETROL at its office in Bogota, within ten (10) first days of each month, the VENDOR-owned crude oil delivered to ECOPETROL during the latter month, after deducing the volume corresponding to royalties, contributions, and participation. Within seven (7) days of the term above referred to, ECOPETROL shall provide the VENDOR with the data required by the VENDOR to make the relevant invoicing. Payment shall be made on a monthly basis thirty (30) days following the date of the invoice receipt by ECOPETROL, after making the appropriate legal withholding, if any. Twenty five percent (25%) of the value shall be paid in Colombian currency and seventy five percent (75%) shall be paid in US Dollars. Invoicing shall be make upon the basis of net volume, water and sediment free, corrected at 60(degrees)F. For Colombian currency portion the relevant market exchange rate shall be used, as certificated by Bank Superintendency, computed as the 9 9 arithmetic average corresponding to Crude deliveries. PARAGRAPH 1: In the event of arrears to pay the portion payable in dollars, over invoices not timely challenged by ECOPETROL, ECOPETROL shall pay VENDOR, as interest payable in USD, the rate equivalent to "Prime Rate" as stated by Chase Manhattan Bank of New York, during the days of the effective arrears plus 2.0%. In the event of arrears to pay the portion payable in Colombian currency, over the respective amount in Col$, ECOPETROL shall pay the maximum interest, according to a certificate from Bank Superintendency. Invoices to collect dollars or pesos interest shall be paid within ten (10) days following the receipt of the invoice by ECOPETROL. PARAGRAPH: Should ECOPETROL has not USD available and of free disposal, or otherwise cannot obtain USD from the Colombian Government or the authorized agencies thereof, to pay oil purchases hereunder, ECOPETROL shall timely notice the VENDOR, without prejudice of the conditions set forth in Paragraph 1, hereinabove, and the parties hereto shall have available thirty (30) calendar days, from ECOPETROL notice, to mutually agree upon to reach to and agreement. PARAGRAPH 3: ECOPETROL shall have fifteen (15) business days to 10 10 review, amend or otherwise challenge the invoices submitted by the VENDOR. Any invoice which has not been challenged within such term shall be deemed as conclusive and correct. Any adjustment or amendment to be made to the invoice shall become the valid date the effective date of the amendment or adjustment before ECOPETROL. ECOPETROL shall, within the provided term, advise the VENDOR about any invoice challenged, for it to be adjusted and amended, clearly specifying the items to be amended or corrected, and the reasons thereof. CLAUSE 7: INSPECTION AND MEASURING.- For the purposes set forth in Clause 2 hereto, determination of quality shall be made as per operative procedures mutually set forth by the parties hereto according to a written Record. Either party may, from time to time, appoint an independent inspector for him/her to certify both quantity and quality, make tank appraisal or volume instruments gauging. Cost shall be fifty-fifty borne by ECOPETROL and the VENDOR. CLAUSE 8: TERMINATION. VENDOR or ECOPETROL may terminate this Sale and Purchase Agreement by giving notice with sixty (60) days before expiry term of Santana Crude Export Agreement. If VENDOR makes the decision to directly export its Santana Crude, it 11 11 shall advise in writing the PURCHASER, sixty (60) days in advance, and within such term ECOPETROL and VENDOR may terminate this Agreement. CLAUSE 9: DESTINATION -ECOPETROL may give crude oil purchased the destination as it deems suitable to its interests, provided however such destination will be allowed by the legal in force provisions applicable in that time. CLAUSE 10: ASSIGNMENT.- Neither Party hereto may assign, sell, or otherwise transfer the entire or any portion of their rights or obligations hereunder, to a third party, without prior and written consent of the other party. CLAUSE 11: FORCE MAJEURE.- Neither ECOPETROL nor the VENDOR will be liable of unfulfillment of all or any of the obligations hereunder, if such unfulfillment results from any event of force majeure or casus fortuitus duly documented. Force majeure shall not release ECOPETROL the obligation to pay the VENDOR those invoices on account of crude sale already delivered by VENDOR to ECOPETROL, as provided in Clause 7 hereunder. CLAUSE 12: COLOMBIAN LAWS GOVERNING THIS AGREEMENT.- For any and all purposes of this Agreement, parties hereto assign as domicile the city of Santafe de Bogota, D.C., Republic of Colombia. This Agreement shall 12 12 be governed by the Colombian laws, and the parties hereto shall subject to Colombian Courts venue and waive to any diplomatic claim concerning their rights and obligations hereunder, with the exception of justice denial. For all and any effects of this Agreement, it shall be understood incorporated in this Agreement, the provisions of Sect. 25, Act 40/93, and Chap. 2, Title III, Act 104/93, as amended. CLAUSE 13.- NOTICES.- Any notice related to, or connected with this Agreement shall make reference to this Clause and to the appropriate Clause. Such notices shall be forwarded via registered mail, telex, or otherwise delivered in the address below, and shall be considered received in the appropriate address in the date appearing in the letter receipt or otherwise in the date the telex was sent: If to Empresa Colombiana de Petroleos -ECOPETROL: Carrera 13 # 36-24, A.A. 59-38, Telex No. 44787 Attn. Vicepresidencia de Comercio Internacional y Gas If to VENDOR: ARGOSY ENERGY INTERNATIONAL Avenida 13 (Autopista Norte) No. 122-56 Piso 4-5 Facsimile: 6195480, Santafe de Bogota, D.C. Attn. Santiago Gonzalez A., President 13 13 and NEO ENERGY, INC Avenida 13 (Autopista Norte) # 122-56 Piso 4-5 Santafe de Bogota, D.C. Attn.: Waldo E. Casas, Legal Representative. Any address change shall be advised in writing and in advance to the other party. CLAUSE 14.- TAX AND EXPENSES.- Any tax and expenses incurred in for this Agreement execution and extensions/amendments thereof, shall be borne only by the VENDOR. CLAUSE 15: DISCREPANCIES: A) Should any discrepancy between the parties hereto will arise related to construction and performance of this Agreement, which cannot amicably settle, shall be subject to jurisdictional branch of the public Colombian power. B) Any in fact of technical in nature discrepancy which may arise between the parties hereto, by reason of construction or application of this Agreement, which cannot settle by mutual agreement, shall be subject to an arbitration award appointed as follows: One arbiter appointed by each party and the third arbiter appointed by mutual agreement by the two arbiters mutually appointed by the parties hereto. If the two arbiters do not reach to an agreement to appoint the third arbiter, 14 14 then the third arbiter shall be appointed, at the request of either party, by the Board of Director of the Sociedad Colombiana de Ingenieros, with headquarters in Santafe de Bogota, D.C. C) Any accounting in nature discrepancy which may arise among the parties by reason of construction and performance of this Agreement, which cannot amicably settled, shall be subject to arbiter award, who shall be Registered Accountants, as follows: One (1) appointed by each party, and the third arbiter appointed by the two arbiters appointed by the parties. In default of agreement between the two arbiters, and at the request of either party hereto, such third arbiter shall be appointed by the Junta Central de Contadores de Bogota, and in default thereof, by Sociedad Colombiana de Ingenieros. D) Both parties hereto declare and accept that arbiters' award shall have all and any effect of a transaction between the parties hereto, and hence, such award shall be conclusive. E) If any discrepancy will arise between the parties hereto, concerning technical, accounting, or legal nature of the dispute, such discrepancy shall be considered as legal and literal A) of this Clause shall be applied. The agreement reached by the parties as provided in this Clause 15 15 shall be understood without prejudice of the special procedures provided in this Agreement. IN WITNESS WHEREOF, this Agreement has been signed this 10th day of February, 1997, in documentary paper of ECOPETROL, which sheets bear the numbers 0003188 - - 0003195 for original and counterparts thereof. EMPRESA COLOMBIANA DE PETROLEOS -ECOPETROL LUIS AUGUSTO YEPES G. Vice-President ARGOSY ENERGY INTERNATIONAL NEO ENERGY, INC SANTIAGO GONZALEZ ANGULO WALDO E. CASAS Legal Representative Legal Representative 16 16 EXHIBIT 1 COMPUTATION ADJUSTMENT FOR QUALITY COMPENSATION Adjustment procedure for quality shall be applied on a monthly basis for deliveries of the prior month, according to the method below. DATA REQUIRED: o Regression Equation to compute reference prices according to information example furnished at the end of the current month. o Volume and quality (API and %wtS) of crude blend shipment(s) taken out Tumaco Terminal to be exported. o Volume and quality (API and %wtS) of Santana Crude delivered in Santana terminal, as well as the volume of deliveries in Mary, Miraflor, Toroyaco and Linda fields. o Value of base price crude blend delilvered in Tumaco, to be exported. PROCEDURE 1. To reckon reference prices of crude blend taken away from Tumaco and Santana crude delivered in Santana Terminal, by using regression equation according to the relevant quality. 17 17 2. With volumes of crude blend taken away in Tumaco and Santana crude delivered in Santana terminal, and the reference prices prior calculated, calculate value in USD of each. 3. Calculate fraction of Santana crude in crude blend dividing USD of Santana crude by USD crude blend. 4. Calculate Santana crude volume compensated, multiplying crude blend volume taken away in Tumaco by the fraction value of Santana crude. 5. Calculate compensation factor of Santana crude dividing compensated value of Santana crude by Santana crude volume delivered in Santana terminal. 6. Calculate compensation value as follows: Compensation value=base price*(compensation factor less 1) Base price shall be export value of crude blend FOB Tumaco. Example: All information given below is by way of example. Information required: 1. Regression equation: Price = Bo + B1* SG + B2* %wtS - ---------------------------- ----------------------- ------------------------ B2 = -0.7995 B1 = -3.8822 Bo = 20.1712 - ---------------------------- ----------------------- ------------------------ 18 18 Where: Bo = Independent term B1 = Regression coefficient associated to specific gravidity SGR = Crude specific gravity B2 = Regression coefficient associated to percent of sulphur weight %wtS = Percent of crude sulphur weight 2. Crude blend taken away in Tumaco terminal: Volume: 400.000 net barrels Quality: 28.90(degree)API (0.882 SGR), 0.790 %S Base price of crude blend delivered in Tumaco: 16.0000 USD/barrel 3. Santana Crude delivered in Santana terminal: Volume: 150.000 net barrels Quality: 26.50 (degree)API (0.896 SGR) Sulphur contents is derived as the average of sulphur contents in crude of Mary, Miraflor, Linda, and Toroyaco fields weighted by the volume delivered per field, as follows: 19 19
- ----------------------------------- --------------------------------- -------------------------------- CRUDE % WEIGHT OF S FIELD DELIVERIES (FIELDS) Barrels - ----------------------------------- --------------------------------- -------------------------------- MARY 0.579 81.661 - ----------------------------------- --------------------------------- -------------------------------- MIRAFLOR 0.644 13.454 - ----------------------------------- --------------------------------- -------------------------------- LINDA 0.481 3.766 - ----------------------------------- --------------------------------- -------------------------------- TOROYACO 0.527 60.164 - ----------------------------------- ------------------------------------------------------------------ TOTAL DELIVERIES 159.045 - --------------------------------------------------------------------- -------------------------------- WEIGHTED SULPHUR CONTENTS 0.550 - --------------------------------------------------------------------- --------------------------------
Sulphur quality: 0.550 %S Note: Sulphur contents of the several different fields is that supplied by Ecopetrol Technical Division, which, for such purposes will hire an independent inspection firm and the expenses shall be borne fifty-fifty Ecopetrol and the VENDOR. CALCULATION METHOD: 1. Replacing in the regression equation the quality of each crude. Crude blend price = 20.1712 + (-3.8822)* 0.882 + (-0.7995)* 0.790 = 16.1155 USD/Bl. Santana Crude price = 20.1712 + (-3.8822)* 0.896 + (-0.7995)* 0.550 = 16.2530 USD/Bl. 20 20 2. Value in USD each crude Crude blend = Volume* Price = 400.000 Bls* 16.1155 USD/Bl = USD6.446.200.00. Santana Crude = Volume* Price = 150.000 Barrels* 16.2530 USD/Bl = USD2.437.950,00. 3. Santana crude fraction in crude blend. 2.437.950,00/6.446.200,00 = 0.3782 4. Santana Crude compensated volume 400.000 Bls* 0.3782 = 151.250 Bls. 5. Santana Crude compensation factor 151.280.00 Bls/150.000,00 Bls = 1.0085 6. Compensation value = 16.00 USD/Bl* (1.0085 -1) = 0.1360 USD/Bl. INFORMATION ON REGRESSION EQUATION To calculate regression equation the table below of 14 international crude is used. Prices of such crude correspond to arithmetic average of the quotation in the three months prior to quality compensation appraisal. Such information, both of price and quality, shall be derived from the public monthly report issued by Platt's, and named as follows: "PLATTs OIL GRAM PRICE REPORT". Table of 14 international crude is as follows: 21 21
- ---------------------- ------------------- ------------------- ------------------- ------------------- PRICE (USD/Bl - ---------------------- ------------------- ------------------- ------------------- ------------------- CRUDE API SGR %WTS MONTH X YEAR X - ---------------------- ------------------- ------------------- ------------------- ------------------- FATAH 30.70 0.8724 1.90 21.50 - ---------------------- ------------------- ------------------- ------------------- ------------------- ARAB LIGHT 33.40 0.8581 0.17 22.53 - ---------------------- ------------------- ------------------- ------------------- ------------------- ARAB MEDIUM 28.50 0.8844 2.85 21.55 - ---------------------- ------------------- ------------------- ------------------- ------------------- ARAB HEAVY 27.40 0.8905 2.80 20.79 - ---------------------- ------------------- ------------------- ------------------- ------------------- BRENT BLEND 38.00 0.8348 0.30 24.04 - ---------------------- ------------------- ------------------- ------------------- ------------------- BONNY LIGHT 35.70 0.8463 0.14 24.01 - ---------------------- ------------------- ------------------- ------------------- ------------------- CANO LIMON 29.50 0.8789 0.45 24.45 - ---------------------- ------------------- ------------------- ------------------- ------------------- FORCADOS 31.00 0.8708 0.20 24.06 - ---------------------- ------------------- ------------------- ------------------- ------------------- FLOTA BLEND 36.00 0.8448 1.20 23.49 - ---------------------- ------------------- ------------------- ------------------- ------------------- ISTHMUS 33.00 0.8602 1.30 23.16 - ---------------------- ------------------- ------------------- ------------------- ------------------- KUWAIT 31.40 0.8686 2.52 21.26 - ---------------------- ------------------- ------------------- ------------------- ------------------- MANDJI 30.50 0.8735 1.10 22.08 - ---------------------- ------------------- ------------------- ------------------- ------------------- MAYA 22.00 0.9218 3.40 19.83 - ---------------------- ------------------- ------------------- ------------------- ------------------- EAST 29.50 0.8789 0.90 22.06 - ---------------------- ------------------- ------------------- ------------------- -------------------
Above international crude basket can be changed by mutual agreement between the parties hereto. NOTA 1: When crude quality of the basket will vary during any month, the average of the three quality values corresponding to the same months where quotations shall be taken. 22 22 NOTA 2: When in some month there is no quotation of any crude of the basket, the average of the two prior months shall be taken instead of the three quotations taken for price calculation of that month, and between the parties shall agree on in writing if basket will definitely be reduced or by which other crude will be replaced to calculate the price for the next price. EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiaries of the Registrant Name of Subsidiary Jurisdiction of Incorporation ----------------- ----------------------------- Argosy Energy Incorporated Delaware Argosy Petroleum Company, S.A. Colombia Garnet Acquisition II, Inc. Texas Garnet Energy Corporation Delaware Garnet Oil Corporation Delaware Garnet Pakistan Corporation Delaware Garnet PNG Corporation Delaware Garnet Resources Canada Ltd. British Columbia Garnet Spain Corporation Delaware Garnet Sulfur Company Nevada Garnet Turkey Corporation Delaware EX-23 4 CONSENTS OF EXPERTS & COUNSEL 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated March 20, 1997 included in the Form 10-K, into the Company's previously filed Registration Statement File No. 33-36999. ARTHUR ANDERSEN LLP Houston, Texas March 27, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 DEC-31-1996 4,107,364 0 1,689,097 0 901,216 8,682,002 56,860,319 (17,698,898) 48,521,555 5,327,862 21,629,232 0 0 114,922 20,091,986 48,521,555 11,446,587 11,709,227 3,410,162 3,410,162 6,374,860 0 2,108,346 (854,137) 1,205,760 (2,059,897) 0 0 0 (2,059,897) (0.18) (0.18)
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