-----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, GYF+mdPVFQWOaMwZ0Bt/+RUQatFVSNGM6ejYuhpy6NxgVrpx85Rxd2W0oTzPcmyz T3l8F4LYIz2tA5AmJjFw3Q== 0000950129-97-004791.txt : 19971117 0000950129-97-004791.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950129-97-004791 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARNET RESOURCES CORP /DE/ CENTRAL INDEX KEY: 0000820084 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 742421851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16621 FILM NUMBER: 97720180 BUSINESS ADDRESS: STREET 1: 333 CLAY ST STE 4500 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137591692 MAIL ADDRESS: STREET 2: 333 CLAY ST STE 4500 CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 GARNET RESOURCES CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- Commission file number 0-16621 GARNET RESOURCES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 74-2421851 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11011 RICHMOND, SUITE 650, HOUSTON, TEXAS 77042-6720 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 783-0010 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ As of November 14, 1997, 11,492,162 shares of Registrant's Common Stock, par value $.01 per share, were outstanding. 2 GARNET RESOURCES CORPORATION (THE "REGISTRANT" OR THE "COMPANY") ---------------------------------------------------------------- INDEX
PART I - FINANCIAL INFORMATION PAGE - ------ ---- Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1997 (unaudited) and December 31, 1996 3-4 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1997 and 1996 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for Nine Months Ended September 30, 1997 and 1996 (unaudited) 6 Notes to Condensed Consolidated Financial Statements-September 30, 1997 (unaudited) 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13 PART II - OTHER INFORMATION - ------- Item 6. Exhibits and Reports on Form 8-K 14-15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. - ------------------------------ GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -----------------------------------
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS (unaudited) ------ CURRENT ASSETS: Cash and cash equivalents $ 2,589,972 $ 4,107,364 Accounts receivable 1,519,121 3,541,223 Inventories 787,766 901,216 Prepaid expenses 192,296 132,199 ------------ ------------ Total current assets 5,089,155 8,682,002 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full-cost method)- Proved 59,022,429 56,500,390 Unproved (excluded from amortization) 260,211 227,846 ------------ ------------ 59,282,640 56,728,236 Other equipment 134,408 132,083 ------------ ------------ 59,417,048 56,860,319 Less - Accumulated depreciation, depletion and amortization (36,655,645) (17,698,898) ------------ ------------ 22,761,403 39,161,421 ------------ ------------ OTHER ASSETS 572,253 678,132 ------------ ------------ $ 28,422,811 $ 48,521,555 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ------------------------------------- Continued
SEPTEMBER 30, DECEMBER 31, -------------- ------------ 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,835,940 $ 2,004,648 Accounts payable and accrued liabilities 1,223,682 3,323,214 ------------ ------------ Total current liabilities 3,059,622 5,327,862 ------------ ------------ LONG-TERM DEBT, net of current portion 21,301,740 21,629,232 ------------ ------------ DEFERRED INCOME TAXES -- 979,499 ------------ ------------ OTHER LONG-TERM LIABILITIES 292,257 378,054 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 75,000,000 shares authorized, 11,492,162 shares issued and outstanding as of September 30, 1997 and December 31, 1996 114,923 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (48,836,943) (32,399,226) ------------ ------------ Total stockholders' equity 3,769,192 20,206,908 ------------ ------------ $ 28,422,811 $ 48,521,555 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------------ (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ------------ ------------ -------------- -------------- REVENUES: Oil sales $ 2,084,492 $ 2,495,050 $ 7,297,972 $ 8,680,427 Interest 49,322 69,745 158,118 204,244 ------------ ------------ -------------- -------------- 2,133,814 2,564,795 7,456,090 8,884,671 ------------ ------------ -------------- -------------- COSTS AND EXPENSES: Production 898,251 778,223 2,829,103 2,610,638 Exploration 6,100 -- 9,552 5,258 Loss on net assets held for disposition -- -- -- 46,777 General and administrative 378,609 140,158 944,424 481,831 Interest 600,860 554,074 1,746,077 1,644,722 Depreciation, depletion and amortization 541,850 1,065,649 4,741,622 4,622,126 Write down of oil and gas properties -- -- 14,216,868 -- Foreign currency translation (gain) loss (99,488) 39,514 (204,249) (85,919) ------------ ------------ -------------- -------------- 2,326,182 2,577,618 24,283,397 9,325,433 ------------ ------------ -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES (192,368) (12,823) (16,827,307) (440,762) PROVISION FOR INCOME TAXES 171,659 240,054 (389,590) 880,765 ------------ ------------ -------------- -------------- NET LOSS $ (364,027) $ (252,877) $ (16,437,717) $ (1,321,527) NET LOSS PER SHARE $ (.03) $ (.02) $ (1.43) $ (.11) ============ ============ ============== ============== WEIGHTED AVERAGE SHARES OUTSTANDING 11,492,162 11,492,162 11,492,162 11,492,162 ============ ============ ============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1997 1996 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(16,437,717) $(1,321,527) Exploration costs 9,552 5,258 Loss on net assets held for disposition -- 46,777 Depreciation, depletion and amortization 4,741,622 4,622,126 Write down of oil and gas properties 14,216,868 -- Deferred income taxes (979,499) 277,368 Changes in components of working capital 1,024,450 (105,241) Other 180,144 173,768 ------------ ----------- Net cash provided by operating activities 2,755,420 3,698,529 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,045,158) (4,247,864) Proceeds from asset dispositions -- 287,395 (Increase) decrease in joint venture and contractor advances 1,328,011 1,001 Acquisition of interests in Argosy Energy International, net of cash acquired -- -- Other (37,591) 90,714 ------------ ----------- Net cash used for investing activities (3,754,738) (3,868,754) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt (477,423) (576,658) Costs of debt issuances (40,651) (27,514) ------------ ----------- Net cash used for financing activities (518,074) (604,172) ------------ ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,517,392) (774,397) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,107,364 5,713,191 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,589,972 $ 4,938,794 ============ =========== Supplemental disclosures of cash flow information: Cash paid for - Interest, net of amounts capitalized $ 1,632,678 $ 1,440,509 Income taxes 419,216 237,283
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 GARNET RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 ------------------------------ (Unaudited) (1) FINANCIAL STATEMENT PRESENTATION- The condensed consolidated financial statements include the accounts of Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its wholly owned subsidiaries. Garnet and its wholly owned subsidiaries are collectively referred to as the "Company." These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and include all adjustments (which consist solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements and the notes thereto included in its Form 10-K for the year ended December 31, 1996. (2) COLOMBIAN OPERATIONS- Through its ownership of interests in Argosy Energy International, a Utah limited partnership ("Argosy"), the Company has an indirect interest in a risk sharing contract in Colombia (the "Santana Contract") with Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Santana Contract has a ten-year exploration period and a twenty two-year production period expiring in 1997 and 2015 respectively. The exploration period expired in July 1997, and required a partial relinquishment of the remaining contract area leaving only the area surrounding the commercial fields plus a five kilometer buffer zone. Expenditure obligations required by the Santana Contract have been met. One development well, Linda No. 5 was completed in the second quarter of 1997 and is currently on production. The joint venture may drill one additional well in 1998. As of September 30, 1997, future costs for additional drilling are estimated at $1.0 to $1.2 million, net to the Company's interest. Argosy and its joint venture partner also have three additional association contracts with Ecopetrol (the "Fragua Contract", the "Yuruyaco Contract" and the "Aporte Putumayo Contract"). The joint venture has filed for formal relinquishment of all three of these contract areas, acceptance of which is anticipated before year-end. The Company has no further expenditure obligations with respect to these contracts, except for costs related to abandonment of old wells on the Aporte Putumayo Block which is estimated to be $277,000 net to Garnet's interest. Expenditure obligations for the first two years of the Yuruyaco Contract were satisfied with the acquisition of 50 kilometers of 2-D seismic over the area. Argosy serves as the operator of the Colombian properties under joint venture agreements. The Santana Contract provides 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 cumulative oil production from the Santana Contract reached seven million barrels, 7 8 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%. 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 Company's resulting net participation in revenues and costs for the Santana Contract are as follows:
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%
The joint venture has completed its seismic acquisition and drilling obligations for the ten year exploration period of the Santana Contract, resulting in the discovery of four oil fields, all of which have been declared commercial by Ecopetrol. 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 $.515 per barrel. 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 $.415 per barrel. Under the terms of its contract with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, Argosy has experienced no difficulty in repatriating the remaining 75% of such payments which are payable in United States dollars. As general partner, the Company's subsidiary is contingently liable for any obligations of Argosy and may be contingently liable for claims generally related to the conduct of Argosy's business. (3) LONG-TERM DEBT- Long-term debt at September 30, 1997 and December 31, 1996 consisted of the following:
1997 1996 ----------- ----------- 9 1/2% convertible subordinated debentures $15,000,000 $15,000,000 Notes payable by Argosy to a U.S. bank 8,137,680 8,633,880 ----------- ----------- 23,137,680 23,633,880 Less - Current portion (1,835,940) (2,004,648) ----------- ----------- $21,301,740 $21,629,232 =========== ===========
In 1993 Garnet issued $15,000,000 of convertible subordinated debentures (the "Debentures") due December 1998. The Debentures bear interest at 9 1/2% per annum payable quarterly and are convertible at the option of the holders into Garnet common stock at $5.50 per 8 9 share. If the Company elects to prepay the Debentures under certain circumstances, it will issue warrants under the same economic terms as the Debentures. At the option of a holder, in the event of a change of control of the Company, the Company will be required to prepay such holder's Debenture at a 30% premium. The Debentures are secured by a pledge of all of the common stock of Garnet's wholly owned subsidiary which serves as the general partner of Argosy (see Note 2). Under the terms of an agreement with the holders of its Debentures, Garnet has agreed that it will not pay dividends or make distributions to the holders of its common stock. As of September 30, 1997, 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 October 1, 1998. 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 complete the construction of its production facilities in Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana Contract and related assets, as well as the pledge of Garnet's direct and indirect interests in Argosy. The terms of the guaranty agreement also restrict Argosy's ability to make distributions to its partners, including the Company, prior to the repayment of the guaranteed loans. The maximum term of the loans is not to exceed seven years, and the principal amortization schedule is based on projected cash flows from wells on the Santana Block. The loans bear interest at the lender's eurodollar deposit rate plus .25% per annum for periods of two, three or six months as selected by Argosy. The interest rate at September 30, 1997 was 5.875%. 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. Based on the Qualifying Oil Reserves Certificate issued May 15, 1997, the company is in compliance with the covenants and ratios required by the OPIC Loan Agreements. (4) STOCK OPTION PLANS- Garnet and a predecessor entity have adopted stock option plans (the "Employees' Plans") pursuant to which an aggregate of 1,262,000 shares of Garnet's common stock is currently authorized to be issued upon exercise of options granted or to be granted to officers, employees, and certain other persons or entities who perform substantial services for or on behalf of Garnet or its subsidiaries. The Stock Option and Compensation Committee of Garnet's Board of Directors (the "Committee") is vested with authority to administer and interpret the Employees' Plans, to determine the terms upon which options may be granted, to prescribe, amend and rescind such interpretations and determinations and to grant options. Current Committee members are not eligible to receive options under the Employees' Plans. The Employee stock options are generally 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 generally determined that the right to exercise non-incentive options issued to employees vests over a period of four years, so that 20% of the options become exercisable on each anniversary of the date of grant. 9 10 On May 22, 1997, Garnet adopted the 1997 Directors Stock Option Plan (the "1997 Directors Plan") pursuant to which an aggregate of 470,000 shares of Garnet's common stock is authorized to be issued upon exercise of options granted to non-employee directors. An aggregate of 306,975 shares were issuable as of September 30, 1997 upon exercise of options granted thereunder in exchange, among other things, for the surrender of options previously granted to such directors. Directors stock options are exercisable for a period of 5 years from the date of grant. The purchase price of shares issuable upon exercise of a directors stock option must be paid in cash. As of March 31, 1997, an aggregate of 265,000 shares of Garnet common stock were issuable upon exercise of options granted under the 1990 Directors Stock Option Plan. As the 1990 Directors Stock Option Plan expired on March 8, 1996, no further options may be issued thereunder. As all outstanding options under the 1990 Directors Stock Option Plan were surrendered on May 22, 1997 for new options, no shares are issuable upon exercise of options granted under the 1990 Directors Stock Option Plan. The following is a summary of stock option activity in connection with the Employees' Plans and the Directors' Plan:
Shares Price Range ------ ----------- Options outstanding at December 31, 1994 1,369,500 $2.50-$13.83 Options granted 618,000 2.50- 2.87 Options expired (658,398) 2.50- 13.83 ---------- ------------ Options outstanding at December 31, 1995 1,329,102 2.50- 13.83 Options granted 480,000 1.19 Options cancelled (336,102) 4.00- 11.75 Options expired (294,274) 2.87- 4.05 ---------- ------------ Options outstanding at December 31, 1996 1,178,726 1.19- 13.83 Options cancelled (419,088) 1.19- 13.83 Options granted 641,563 0.38- 0.56 ---------- ------------ Options outstanding at September 30, 1997 1,401,201 $0.38-$ 2.50 ========== ============
As of September 30, 1997, options for 958,477 shares were exercisable. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, a new standard for accounting for stock-based compensation. This standard established a fair-value based method of accounting for stock options awarded after December 31, 1995 and encourages companies to adopt SFAS No. 123 in place of the existing accounting method, which requires expense recognition only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. Companies that do not follow SFAS No. 123 for accounting purposes must make annual pro forma disclosures of its effects. Adoption of the standard was required in 1996, although earlier implementation was permitted. The Company did not adopt SFAS No. 123 for accounting purposes; however it will make annual pro forma disclosures of its effects. 10 11 (5) INCOME TAXES- The provisions for income taxes relate to the Colombian activities of Argosy. The Colombian deferred tax liability was eliminated due to a write down of oil and gas properties in the first six months of 1997, totaling $14.2 million. No United States deferred taxes were provided because the tax bases of the Company's assets exceed the financial statement bases, resulting in a deferred tax asset which the Company has determined is not presently realizable. As of December 31, 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES Since December 31, 1996, the Company has expended approximately $5,100,000 for the acquisition, exploration and development of its oil and gas properties. Principal funding for these activities was provided primarily by cash flow from operations and by available cash balances. The Company has no significant lines of credit. Argosy and its joint venture partner have completed the seismic acquisition and drilling obligations for the ten year exploration period of the Santana Contract, resulting in the discovery of four oil 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 drill one additional well on the Santana Block in 1998. The Company's share of the costs of drilling and completing this well is expected to range from $1,000,000 to $1,200,000. 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 8,000 barrels of oil per day. The Company's share of such production is 15.3%. The Company expects to fund its operations, including its exploration and development activities, from cash flow from operations and working capital. Under the terms of an escrow agreement executed in connection with the OPIC loan, the Company's revenues from its Colombian properties which are payable in U.S. Dollars (75% of such revenues) are paid into an escrow account at Texas Commerce Bank. On the 15th day of each month, an amount in excess of the aggregate of all principal, interest and fees payable to OPIC over the succeeding six months is disbursed to the Company from the escrow account while the remaining amount is held to secure the payment of amounts due OPIC. As a principal payment of $1,350,000 is due under the OPIC loan on June 15, 1998, the amount to be held in the escrow account will increase on December 15, 1997 until such payment is made. Based on its current production and the current oil price, the Company believes that the 25% of Colombian revenues payable in pesos together with the amounts expected to be released from the escrow account will be sufficient to fund its operating expenses and the interest payments on its Debentures. If the Company incurs unexpected substantial expenses or if its 11 12 revenues from production decrease, the Company may be required to curtail its operations or apply to OPIC for a release of funds from the escrow account. In such event, no assurance can be made that OPIC would agree to amend the terms of the escrow account. In February 1997, Garnet retained Rauscher Pierce Refsnes, Inc. to assist Garnet in negotiating a transaction intended to maximize shareholder value such as a merger, debt restructuring, recapitalization and/or sale of assets (a "Restructuring Transaction"). As the Company does not expect working capital and cash flow from operations to be sufficient to repay the principal amount of the Debentures at maturity, the Company must consummate a Restructuring Transaction prior to their maturity date in order to avoid non-compliance with its obligations under the Debentures. If no restructuring transaction is consummated the Company will be required to renegotiate the terms of the Debentures to extend the maturity date so that the Debentures may be repaid out of cash flow from operations over time. There can be no assurance that the Company will be successful in consummating a Restructuring Transaction or in renegotiating the terms of the Debentures. In addition, 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 its liquidity. As of September 30, 1997, Garnet was not in compliance with the minimum net worth covenant required by the Debentures. Although the Debenture holders have waived compliance with this requirement through October 1, 1998, if Garnet is unable to increase its net worth to the minimum required by such date, it will be necessary to extend the waiver or renegotiate the terms of the debt, which will otherwise mature in December 1998. The Company intends to use its existing working capital and cash flow from production in Colombia, to the extent available, to finance its planned exploration and development activities. Any additional exploration and development activities will require substantial amounts of additional capital. The Company may also consider entering into arrangements whereby certain costs of exploration are paid by others to earn an interest in the properties. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of an oil and gas business is uncertain due, in part, to the substantial instability in oil and gas prices in recent years and to the volatility of financial markets. There can be no assurance that the additional financing which may be necessary to fund the Company's operations and obligations will be available on economically acceptable terms. In addition, the Company's ability to continue its exploration and development programs may be dependent upon its joint venture partners financing their portion of such costs and expenses. There can be no assurance that the Company's partners will contribute, or be in a position to contribute, their costs and 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. As described herein, the Company's operations are primarily located outside the United States. Although certain of such operations are conducted in foreign currencies, the Company considers the U.S. dollar to be the functional currency in most of the countries in which it operates. In addition, the Company has no significant operations in countries with highly inflationary economies. As a result, the Company's foreign currency transaction gains and losses have not been significant. Exchange controls exist for the repatriation of funds from Colombia and Papua New Guinea. The Company believes that the continuing viability of its operations in these countries will not be affected by such restrictions. 12 13 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 consummate a Restructuring Transaction or to renegotiate the terms of the Company's outstanding Debentures. 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. RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE SAME PERIODS IN 1996 ----------------------------------------------------- The Company reported net losses of $364,027 ($.03 per share) and $252,877 ($.02 per share) for the three months ended September 30, 1997 and 1996, respectively. Oil and gas revenues decreased by 411,000 for the third quarter compared to the same period in 1996. The decrease was mostly attributable to lower average crude oil sales prices.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ------ ----- ------ ----- Average oil sales (BOPD) 1,411 1,401 1,503 1,657 Average oil price per barrel $16.05 $19.36 $17.78 $19.12 Production costs per barrel $ 6.92 $ 6.04 $ 6.89 $ 5.75 Depreciation, depletion and amortization per barrel $ 4.15 $ 8.24 $11.53 $10.16
The company experienced an increased net loss compared to the same period in 1996 due to lower sales revenues, higher producing costs and reduced reimbursements of administrative costs from joint venture partners. As a result of full cost accounting rules, the company was required to write down its oil and gas properties by $14.2 million in the first six months of 1997. The full cost ceiling test for the current period using post balance sheet oil prices for the calculation of future net revenues resulted in no additional write down. 13 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ----------------------------------------- (a) EXHIBITS
ITEM EXHIBIT NO. ITEM TITLE NO. ---- --------------------------------------- ---- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Not Applicable (3) Articles of Incorporation and By-Laws: Not Applicable (4) Instruments defining the rights of security holders, including indentures: Not Applicable (10) Material contracts: Not Applicable (11) Statement regarding computation of per share earnings is not required because the relevant computations can be clearly determined from the material contained in the Financial Statements included herein. (15) Letter re: unaudited interim financial information: Not Applicable (18) Letter re: change in accounting principles: Not Applicable (19) Report furnished to security holders: Not Applicable (22) Published report regarding matters submitted to vote of security holders: Not Applicable (23) Consents of experts and counsel: Not Applicable (24) Power of attorney: Not Applicable (27) Financial Data Schedule. 27 (99) Additional Exhibits: Not Applicable
14 15 (b) REPORTS ON FORM 8-K No Reports on Form 8-K were filed by Registrant during the three months ended September 30, 1997. 15 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GARNET RESOURCES CORPORATION Date: November 14, 1997 /s/ Edgar L. Dyes ---------------------------- Edgar L. Dyes, Vice President and Treasurer (As both a duly authorized officer of Registrant and as principal financial officer of Registrant) 16
EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 SEP-30-1997 2,589,972 0 1,267,122 0 787,766 5,089,155 59,417,048 (36,655,645) 28,422,811 3,059,622 21,301,740 0 0 114,923 3,654,269 28,422,811 7,297,972 7,456,090 2,829,103 2,829,103 4,751,174 0 1,746,077 (16,437,717) (389,590) (16,437,717) 0 0 0 (16,437,717) (1.43) (1.43)
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