-----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, GGkh57uGZu8oxXD5uOKCQ0Y2pfUAFOoXjI7P9aujZx985Nf0KQQ8ueDST8TA+ovY 3VCwmcGp30QSetBzPNWUxA== 0000950129-98-003813.txt : 19980907 0000950129-98-003813.hdr.sgml : 19980907 ACCESSION NUMBER: 0000950129-98-003813 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980904 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-K/A SEC ACT: SEC FILE NUMBER: 000-16621 FILM NUMBER: 98704726 BUSINESS ADDRESS: STREET 1: RURAL ROUTE 2, P.O. BOX 4400 CITY: NACOGDOCHES STATE: TX ZIP: 75961 BUSINESS PHONE: 409-559-9959 MAIL ADDRESS: STREET 1: RR 2 BOX 4400 CITY: NACOGDOCHES STATE: TX ZIP: 75961 10-K/A 1 GARNET RESOURCES CORPORATION - 12/31/97 1 FORM 10-K/A 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, 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 (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. [_] The aggregate market value of voting stock held by non-affiliates of the Registrant on March 2, 1998 was approximately $459,686. On such date, the last sale price of Registrant's Common Stock was $0.04 per share. As of March 2, 1998 11,492,162 shares of Registrant's Common Stock, par value $.01 per share, were outstanding. 2 TABLE OF CONTENTS Page ---- PART I.................................................................... 1 Item 1. Business....................................................... 1 General ....................................................... 1 Properties..................................................... 2 Financial Information about Industry Segments.................. 3 Narrative Description of Business.............................. 3 Financial Information about Foreign and Domestic Operations and Export Sales............................................... 6 Item 2. Properties..................................................... 6 Colombia....................................................... 6 Papua New Guinea............................................... 8 Supplementary Information in Respect of Oil and Gas Properties. 9 Item 3. Legal Proceedings.............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............ 10 PART II................................................................... 10 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................ 10 Market Information............................................. 10 Holders........................................................ 10 Dividends...................................................... 11 Item 6. Selected Financial Data........................................ 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 12 Resources and Liquidity........................................ 12 Results of Operations.......................................... 14 Item 8. Financial Statements and Supplementary Data................... 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 16 PART III.................................................................. 16 Item 10. Directors and Executive Officers of the Registrant............. 16 Item 11. Executive Compensation......................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management. 20 Item 13. Certain Relationships and Related Transactions................. 22 PART IV................................................................... 22 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................... 22 Signatures.............................................................. 23 3 PART I Item 1. Business. (a) General. 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. The Company currently holds interest in oil and gas properties in the Republic of Colombia ("Colombia") and the Independent State of Papua New Guinea ("Papua New Guinea"). 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. Since inception, the Company has conducted and concluded exploration activities in five additional 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. A decline in the price of oil in 1997 and a decline in the rate of production commencing in the third quarter of 1997 resulted in a 73% decrease in the Company's estimate of discounted future net cash flows from proved reserves at December 31, 1997 and a 22% decrease in revenues from oil sales during 1997 compared to 1996. As a result, the Company recorded $25.8 million of write downs of oil and gas properties during 1997, resulting in a significant net loss during 1997 and negative stockholders' equity at December 31, 1997. In view of its operating losses and financial condition, the Company initiated further cost containment programs in 1997 including a 28% reduction in its Colombian personnel and the termination of all U.S. personnel other than Douglas W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief Financial Officer. The Company also engaged Rauscher Pierce Refsnes, Inc. as a financial advisor to provide assistance in negotiating a business combination or a debt restructuring transaction to address the Company's liquidity issues. Although the Company engaged in comprehensive efforts, including extensive negotiations with two separate candidates, the Company was not successful in concluding a transaction. The Company is currently engaged in negotiations to effect a business combination, although no assurance can be given that such negotiations will result in a definitive agreement or the consummation of a transaction. The Company is highly leveraged with $22.6 million in current debt consisting of (i) $15 million of 9 1/2% Convertible Subordinated Debentures due December 21, 1998 (the "Debentures") and (ii) $7.7 million ($7.6 million net to Garnet) of an outstanding loan (the "OPIC Loan") to Argosy from Chase Bank of Texas ("Chase") which is guaranteed by the Overseas Private Investment Corporation ("OPIC") and secured by Argosy's assets in Colombia and Garnet's direct and indirect interests in Argosy. Based on Argosy's year-end financial statements, Argosy has determined that it is no longer in compliance with certain covenants required by the finance agreement governing the OPIC Loan. In the absence of a waiver of such covenants, either OPIC or Chase have the right to call a default under the OPIC Loan, accelerate payment of all outstanding amounts due thereunder and realize upon the collateral securing the OPIC Loan. Although Argosy intends to apply for a waiver, and such waivers have been obtained in the past year, given the Company's financial position and negative working capital balance at December 31, 1997, no assurance can be given that such waiver will be granted or continued. Under the terms of the OPIC Loan, the 75% of proceeds from Argosy's oil sales which are paid in U.S. dollars are 1 4 deposited into an escrow account with Chase to secure payment of the OPIC Loan. The escrow account minimum required balance at March 15, 1998 was $1,700,000 and the total account balance was $1,953,000. Any excess in the escrow account over the minimum balance can be released to Argosy and used to pay operating expenses and amounts due under the OPIC Loan. Even if OPIC grants a waiver of the loan covenants with which Argosy is not in compliance, if the minimum balance required in such escrow account increases, as a result of a change in the amortization schedule or otherwise, sufficient funds may not be available to fund the Company's operations. The Company's financial forecasts indicate that, assuming no changes in its capital structure, working capital and cash flow from operations will not be sufficient to make the interest payment due on the Debentures on March 31, 1998, to pay principal and interest due under the OPIC Loan on June 15, 1998 and to maintain the minimum balance in the escrow account. The Company also does not expect working capital and cash flow from operations to be sufficient to repay the principal amount of the Debentures at maturity or earlier, if the Debenture holders call a default as a result of the non-payment of interest. The Company must complete a restructuring transaction or renegotiate the terms of the Debentures in order to avoid non-compliance with its obligations to pay the Debentures. As a result, management believes there is substantial doubt about the Company's ability to continue as a going concern. In the absence of a business transaction or a restructuring of the Company's indebtedness, the Company may seek protection from its creditors under the Federal Bankruptcy Code. (b) Properties. Argosy has an interest in a risk sharing contract signed in 1987 (the "Santana Contract") with Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"), involving exploration, development and production activities in 52,000 acres (the "Santana Block"), in the Putumayo Basin of southwestern Colombia. Argosy participates in these contracts through a 55% interest in a joint venture with Neo Energy, Inc. ("Neo"), a subsidiary of Aviva Petroleum Inc. Argosy also holds an interest, though its joint venture with Neo, in the following three additional oil and gas exploration contracts with Ecopetrol; (i) 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"), (ii) 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 (iii) 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"). These three contract areas have been submitted to Ecopetrol for relinquishment. Work commitments in all of the blocks have been met and approval of formal relinquishment is not expected to be withheld. Argosy and Neo remain liable for the costs of abandonment of five wells on the Putumayo Block. 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 12,245,000 barrels of oil during the period from commencement of production in April 1992 through December 1997. The Company's share of production since 1992 was approximately 2,330,000 barrels in the aggregate; the Company's share of 1997 production was 516,543 barrels. In 1997, one gross (.5 net) productive development well was drilled on the Santana Block. The 2 5 Company also completed its evaluation of data from a 3-D seismic survey over its Mary and Miraflor fields completed 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. Additionally the joint venture approved the construction of a small refinery to produce diesel fuel for consumption in operations. This small refinery is expected to begin operations during the first quarter of 1998. In an agreement dated November 24, 1997, among Occidental Kanau Ltd, ("Kanau"), Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos Niugini Exploration Pty. Limited ("Santos"), Niugini Energy, Inc ("Nuigini") and Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet, Garnet PNG agreed to exchange its 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"),for a 4% interest in a newly applied for but not yet issued petroleum prospecting license ("New PPL") covering the PPL-181 Area and Petroleum Prospecting License No. 158 ("PPL-158") held by Occidental PNG and Santos. 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, PPL-158, PPL-174 and New PPL, 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. (c) Financial Information about Industry Segments. The Company operates in one industry segment. (d) 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. Risks Associated with the Company's Business. The Company has expended significant amounts of capital on the acquisition, exploration and development of its properties. If the Company is unable to conclude a business combination or a debt restructuring transaction, it is unlikely that the Company will have the resources to finance any further exploration or development activity. Accordingly, there can be no assurance that any additional exploration or development activities will be conducted, other than those activities required to deplete the Company's existing reserves. The present environment for financing 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. 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." 3 6 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, 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. In 1997, Argosy's assets were damaged 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 4 7 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 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 two employees, using professional consulting services as needed. 5 8 (e) Financial Information about Foreign and Domestic Operations and Export Sales. Financial information about foreign and domestic operations may be found in Note 10 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. Argosy has 76 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 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 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 has a term of 28 years, including an exploration period of 10 years, which ended in July 1997. At the end of the exploration period, all acreage was relinquished except acreage contained within productive fields plus a three-mile reserve zone around each field. Under the terms of the Santana Contract, Ecopetrol is required to pay 30% of exploration costs, 50 % of development costs, and 65 % of operating expenses. They 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 65% 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 an additional 20% of the direct costs of drilling the discovery well. The Company's net participation in revenues and costs for the Santana Contract is as follows:
Production Operating Exploration Development Revenues Costs Costs Costs ---------- --------- ----------- ----------- After seven million barrels 15.3% 19.1% 38.2% 27.3% of accumulated production
6 9 The joint venture has completed its seismic acquisition and drilling obligations for the Santana Contract, resulting in the discovery of four oil fields, all of which have been declared commercial by Ecopetrol. 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 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 $.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. The average sales price per barrel of oil produced from the Santana Block during 1997 was $17.39. The contract also requires Argosy to pay a tariff to transport its oil through the Trans-Andean pipeline, the amount of which is presently $1.27 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. 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 accrues at the rate of 12% in 1996, 10% in 1997 and 7% in future years. 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. The production tax now only applies to production from the Miraflor field. 7 10 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. The PPL-158 area is located to the northwest and adjoining the PPL-181 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. The well was commenced in March 1997 and plugged and abandoned as a dry hole on April 17, 1997. PPL-181 is owned by Occidental (88%), Garnet PNG (6%) and Niugini (6%). According to the terms of the agreement governing the New PPL, the parties agreed to perform surface geological work and complete a seismic program during late 1997 and early 1998. These activities are presently underway and a decision regarding the drilling of an exploratory well in late 1998 or early 1999 will be made once the results of the geological work and seismic program have been evaluated. Garnet PNG is not obligated to pay any of the costs relative to the work presently underway. Should the parties decide to drill an exploratory well, the Company will have the option to pay its share of the cost of this well (estimated to be $224,000) and maintain its interest at 4% or reduce its interest to 2% and have no obligation to pay its share of the drilling, testing and completion costs of the well. 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. PPL-174 was surrendered on April 25, 1997. Under the provisions of PPL 158 and 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 8 11 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. 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, 1997, the Company owned 13 gross (2.0 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, 1997:
Gross Acres Net Acres ----------- --------- Colombia 48,636 26,750 Papua New Guinea 952,000 57,120 --------- ------ Total 1,000,636 83,870
Drilling Activity. The following table sets forth the number of wells drilled by the Company during the three years ended December 31, 1997.
Exploratory Development ------------------------------------------ ------------------------------------------- Productive Dry Productive Dry ------------------- ------------------- ------------------- ------------------- Year ended Gross Net Gross Net Gross Net Gross Net ------- ------- ------- ------- ------- ------- ------- ------- December 31, 1997: Colombia -- -- -- -- 1 .3 -- -- ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1996: Colombia -- -- 1 .4 2 .3 -- -- ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1995: Colombia -- -- 1 .4 1 .3 1 .3 Turkey -- -- 1 .3 - -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- -- -- 2 1 1 .3 1 .3 ======= ======= ======= ======= ======= ======= ======= =======
Present Activities. As of December 31, 1997, 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 9 12 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." 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. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) Market Information. Shares of Garnet's Common Stock have been traded on the OTC Bulletin Board under the symbol "GARN" since December 1997. Prior thereto, the Common Stock was trading on the Nasdaq Stock Market. The range of reported high and low sales prices for shares of Garnet's Common Stock as supplied by Nasdaq and the OTC Bulletin Board was as follows:
Calendar Period High Low --------------- ---- --- 1997 ---- Fourth Quarter $ .375 $ .040 Third Quarter .500 .250 Second Quarter .500 .313 First Quarter .969 .375 1996 ---- Fourth Quarter $ .53 $ .25 Third Quarter .63 .25 Second Quarter 1.00 .44 First Quarter 2.00 .94
(b) Holders. As of February 28, 1998, shares of Garnet's Common Stock were held of record by approximately 1,500 persons, including several holders who are nominees for an undetermined number of beneficial owners. 10 13 (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 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 US $290,000) 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: 1997 1996 1995 1994 1993 --------------------------------------------------------------------- Revenues $9,181,783 $11,709,227 $8,881,133 $4,355,365 $4,596,766 Net loss (27,790,244) (2,059,897) (4,623,322) (7,425,527) (3,447,093) Net loss per share (2.42) (.18) (.40) (.67) (.31) Weighted average shares outstanding 11,492,162 11,492,162 11,416,828 11,125,537 11,124,929 Cash dividends per share -- -- -- -- -- Year Ended December 31, ---------------------------------------------------------------------- Balance Sheet Data: 1997 1996 1995 1994 1993 ---------------------------------------------------------------------- Total assets 16,460,448 $48,521,555 $48,959,028 $49,300,037 $52,151,499 Long-Term Debt - 21,629,232 20,151,120 17,506,105 15,227,999 Stockholders' equity (7,583,336) 20,206,908 22,266,805 25,790,252 33,215,779
11 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (a) Resources and Liquidity The Company is highly leveraged with $22.6 million in current debt consisting of (i) $15 million of Debentures due December 21, 1998 and (ii) $7.7 million ($7.6 million net to Garnet) in principal outstanding under the OPIC Loan to Argosy. Based on Argosy's year-end financial statements, Argosy has determined that it is no longer in compliance with certain covenants required by the finance agreement governing the OPIC Loan. In the absence of a waiver of such covenants, either OPIC or Chase would have the right to call a default under the OPIC Loan, accelerate payment of all outstanding amounts due thereunder and realize upon the collateral securing the OPIC Loan. Although Argosy intends to apply for a waiver, and such waivers have been obtained during the past year, given the Company's financial position and negative working capital balance at December 31, 1997, no assurance can be given that such waiver will be granted or continued. Under the terms of the OPIC Loan, the 75% of proceeds from Argosy's oil sales which are paid in U.S. dollars are deposited into an escrow account with Chase to secure payment of the OPIC Loan. Argosy is required to maintain a minimum balance in such escrow account equal to six months of interest, principal and other fees due under the OPIC Loan. The escrow account minimum required balance at March 15, 1998 was $1,700,000 and the total account balance was $1,953,000. Any excess in the escrow account over the minimum balance can be released to Argosy and used to pay operating expenses and amounts due under the OPIC Loan. Even if OPIC grants a waiver of the loan covenants with which Argosy is not in compliance, if the minimum balance required in such escrow account increases, as a result of a change in the amortization schedule or otherwise, sufficient funds may not be available to fund the Company's operations. The Company's financial forecasts indicate that, assuming no changes in its capital structure, working capital and cash flow from operations will not be sufficient to make the interest payment due on the Debentures on March 31, 1998, to pay principal and interest due under the OPIC Loan on June 15, 1998 and to maintain the minimum balance in the escrow account. The Company also does not expect working capital and cash flow from operations to be sufficient to repay the principal amount of the Debentures at maturity or earlier if the Debenture holders call a default as a result of the non-payment of interest. The Company must complete a restructuring transaction or renegotiate the terms of the Debentures in order to avoid non-compliance with its obligations to pay the Debentures. As a result, management believes there is substantial dobut about the Company's ability to continue as a going concern. In the absence of a business transaction or a restructuring of the Company's indebtedness, the Company may seek protection from its creditors under the Federal Bankruptcy Code. In view of its operating losses and financial condition, the Company initiated further cost containment programs in 1997 including a 28% reduction in its Colombian personnel and the termination of all U.S. personnel other than Douglas w. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief Financial Officer. The Company also engaged Rauscher Pierce Refsnes, Inc. as a financial advisor to provide assistance in negotiating a business combination or a debt restructuring transaction to address the Company's liquidity issues. Although the Company engaged in comprehensive efforts, including extensive negotiations with two separate candidates, the Company was not successful in concluding a transaction. The Company is currently engaged in negotiations to effect a business combination, although no 12 15 assurance can be given that such negotiations will result in a definitive agreement or the consummation of a transaction. For the three years ended December 31, 1997, the Company expended approximately $19,200,000 for the acquisition, exploration and development of its oil and gas properties. Such expenditures include approximately $18,400,000 for exploration and development activities in Colombia, approximately $388,000 for exploration and related costs in Papua New Guinea, and approximately $360,000 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 totaled $14,231,000, and (ii) loans guaranteed by OPIC, the net proceeds of which were 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 ten year exploration phase of the Santana Contract, resulting in the discovery of four oil fields. 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 6,700 barrels of oil per day. The Company's share of such production is 15.3%. The Company is not planning to drill any wells during 1998. It is anticipated that any future foreign exploration and development activities will require substantial amounts of capital. If the Company is unable to conclude a business combination or a debt restructuring transaction, it is unlikely that the Company will have the resources to finance any further exploration or development activity. Accordingly, there can be no assurance that any additional exploration or development activities will be conducted, other than those activities required to deplete the Company's existing proved reserves. The present environment for financing 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. 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. 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. 13 16 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 conclude a business combination or a debt restructuring transaction. 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. YEAR 2000 Garnet is currently utilizing accounting software in the United States that is year 2000 compliant, however, Argosy Energy International, Garnet's subsidiary in Colombia, must upgrade its systems. An evaluation of alternative solutions to the year 2000 problem is complete and a new management information and accounting software package will be selected to upgrade the system in the near future. Garnet does not currently have any information concerning year 2000 compliance of its suppliers and customers. In the event that any of Garnet's significant suppliers or customers do not successfully and timely achieve year 2000 compliance, Garnet does not believe its business or operations would be adversely affected. NEW ACCOUNTING PRONOUNCEMENTS Garnet is assessing the reporting and disclosure requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement requires a public business enterprise to report financial and descriptive information about its reportable operating segments. The statement is effective for financial statements for periods beginning after December 15, 1997, but is not required for interim financial statements in the initial year of its application. Garnet will adopt the provisions of SFAS No. 131 in its December 1998 consolidated financial statements. Garnet is also assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 1999. Garnet believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. Garnet will adopt the provisions of SFAS No. 133 in the first quarter of the year 2000. (b) Results of Operations. The Company incurred net losses of $26,970,114 ($ 2.35 per share), $2,059,897 ($.18 per share) and $4,623,322 ($.40 per share) for the years ended December 31, 1997, 1996 and 1995, respectively. 14 17
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Average oil sales (BOPD) 1,415 1,578 1,443 Average oil price per barrel $ 17.39 $ 19.82 $ 16.39 Production costs per barrel $ 7.12 $ 5.91 $ 6.71 Depreciation, depletion and $ 9.20 $ 10.94 $ 9.37 amortization per barrel (excluding write down of oil and gas properties)
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. The Company's exploration and production activities are accounted for under the full cost method. Under this method, all acquisition, exploration and development costs, including certain related employee costs, incurred for the purpose of finding oil and gas are capitalized. Capitalized costs are limited to the sum of the present value of future net revenues discounted at 10% related to estimated production of proved reserves and the lower of cost or estimated fair value of unevaluated properties. 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 plus the costs of properties not being amortized, both adjusted for income tax effects, such excess is charged to expense. This process resulted in a $25.8 million write down of oil and gas properties during 1997. Interest income in 1997 declined from 1996 as a consequence of the expenditure of cash balances. General and administrative expenses increased in 1997 as a result of personnel changes and increased legal, travel and consulting fees related to efforts to effect a business combination. The increases in interest expense, net of amounts capitalized, resulted from decreases in costs attributable to assets eligible for interest capitalization. The Company has a benefit for current income taxes, all of which relates to Colombian operations, in 1997 because of write downs of oil and gas properties which eliminated the deferred tax 15 18 liability. No net deferred tax asset was established for this benefit. 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. The gains in 1996 and 1997 also relate to continued devaluation of the Colombian peso for those periods. 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. PART III Item 10. Directors and Executive Officers of the Registrant. The following table lists the names, ages, and principal occupations of each of the directors and executive officers of Garnet. Each director serves until the next annual meeting of shareholders and until his successor is elected and qualified; each executive officer serves at the discretion of the Board of Directors.
Name Age Position ---- --- -------- Robert J. Cresci 54 Director Montague H. Hackett, Jr........... 65 Director Douglas W. Fry.................... 55 President, Chief Executive Office and Director Edgar L. Dyes..................... 52 Vice President - Finance
Robert J. Cresci. Mr. Cresci has served as a director of Garnet since December 1993. Mr. Cresci has been a Managing Director of Pecks Management Partners Ltd., an investment management firm, since September 1990. Mr. Cresci currently serves on the boards of Bridgeport Machines, Inc., EIS International, Inc., Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., HarCor Energy, Inc., Meris Laboratories, Inc., Film Roman, Inc., Educational Medical, Inc., Source Media, Inc., Castle Dental Centers, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc. and several private companies. Montague H. Hackett, Jr. Mr. Hackett has served as a director of Garnet since April 1987 and was employed as Chairman of the Board of Garnet from January 1995 to January 1998. Since January 1996, Mr. Hackett also serves as Co-Chairman of Victory Ventures LLC, a privately held limited liability company ("Victory") since July 1997 and has been employed 16 19 by Victory since January 1996. Victory 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 March 1996. Since 1980 he has also been President of Argosy Energy Incorporated, a wholly owned subsidiary of Garnet, or of the subsidiary's predecessor. Edgar L. Dyes. Mr. Dyes has served as Vice President - Finance of Garnet since March 1997. From February 1991 through February 1997, he was employed by Argosy in Colombia, most recently as Vice President - Finance and Administration. Under the terms of its 9 1/2% Convertible Subordinated Debentures, Garnet includes a candidate selected by the purchasers of the Debentures in management's slate of nominees for election as directors and solicits proxies for such candidate if the purchasers continue to own at least 30% in aggregate principal amount of the Debentures originally issued. Mr. Cresci is the candidate selected by the purchasers of the Debentures. Directors' Fees. From 1990 through 1996, directors who were not full time employees received options to purchase shares of Garnet Common Stock. Directors are also reimbursed for expenses incurred in connection with attending meetings of the Board. In 1997, an aggregate of 306,975 options were issued to non-employee directors at an exercise price of $.428 per share, including an aggregate of 230,000 options issued in exchange for outstanding stock options held by them. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires officers, directors and holders of more than 10% of Garnet's Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership of the Common Stock with the Securities and Exchange Commission within certain time periods and to furnish Garnet with copies of all such reports. Based solely on its review of the copies of such reports furnished to Garnet by such Reporting Persons or on the written representations of such Reporting Persons, Garnet believes that, during the year ended December 31, 1997, all of the Reporting Persons complied with their Section 16(a) filing requirements, except that a Form 3 relating to Mr. Dyes, an executive officer, and a Form 3 relating to Mr. Rodriguez, a director, were each filed late. 17 20 Item 11. Executive Compensation. Summary Compensation Table The following table sets forth certain information regarding compensation earned in each of the last three fiscal years by the Chief Executive Officer, the Chairman of the Board, and an additional executive officer of Garnet (collectively, the "Named Executive Officer"):
Annual Compensation Long Term Compensation ------------------- ----------------------------- Awards Payouts ------------------- ------- Other Annual Rest- All Other Compen ricted Options/ LTIP Compen- Fiscal Salary Bonus -sation Stock(s) SARs Payouts sation Name and Principal Position Year ($) ($) ($) ($) (#)(1) ($) ($) ------ ------ ----- ------- -------- -------- ------- ------ Douglas W. Fry............. 1997 $152,500 none none none 258,202 none none President and Chief 1996 $152,500 none none none 146,058 none none Executive Officer(2) 1995 $152,500 none none none 30,000 none none Edgar L. Dyes.............. 1997 $135,000 none none none 91,135 none $2,320 Vice President and 1996 $120,000 none none none 14,000 none $1,800 Treasurer(3) 1995 $120,000 none none none 15,000 none $1,500
- ---------- (1) The number of options issued in 1997 to Messrs. Fry and Dyes include 176,058 and 29,000 options deemed issued as a result of the reduction in the exercise price of outstanding options held by such officers. (2) Mr. Fry was elected President of Garnet in September 1995 and Chief Executive Officer of Garnet in February 1996. Prior to September 1995, he served as President of Argosy Energy Incorporated ("Argosy") a wholly-owned subsidiary of Garnet. The amounts reported for 1995 reflect his compensation for the full fiscal years, including that earned as President of Argosy. (3) The amounts reported for all other compensation for Mr. Dyes represent the premium paid on a term life insurance policy for his benefit. Agreements with Executive Officers In April 1997, Garnet entered into agreements with certain executive officers and key employees, including Messrs. Fry and Dyes, providing for the payment of severance benefits to such persons in the event of a termination of their employment by Garnet (i) without Cause, as defined, (ii) upon death or disability or (iii) following a Change of Control, as defined; provided, however, that, in the event of a voluntary termination following a Change of Control, such payments shall only be made if there is "Good Reason" as defined. In the event of the termination of employment under such circumstance, Messrs. Fry and Dyes would receive a severance benefit, payable in cash, equal to one month's base salary for each year, or part thereof, of his employment by Garnet or its predecessors, which amount was $204,000 and $135,000, respectively, as of March 31, 1997. Messrs. Fry and Dyes would 18 21 also receive medical insurance coverage for a period of 18 months following the termination of his employment, life and disability insurance coverage for a period of two years and one year, respectively, following such termination and all stock options would vest and remain exercisable for a period of two years. A Change of Control is defined to include a transaction or series of transactions in which any person or group becomes the beneficial owner of outstanding voting securities representing 40% or more of the combined voting power of the then outstanding voting securities; the individuals constituting the Board of Directors, or any individual within the definition of Continuing Directors, cease to constitute at least a majority of the directors of Garnet; a merger of consolidation in which Garnet is not the surviving entity or in which the voting securities issued are entitled to cast, in the aggregate, in excess of 40% of the number of votes entitled to be cast prior to the transaction; the issuance of in excess of 4,596,865 shares in connection with a transaction or series of transactions between Garnet and one or more Debenture holders; a sale, lease, exchange or other transfer of all or substantially all of Garnet's assets; or any other change of control which would be required to be reported under the Securities Exchange Act of 1934. Option Grants During 1997 The following table provides information related to options granted to the Named Executive Officers during 1997. No stock appreciation rights have been issued by Garnet.
Potential Realizable % of Total Value at Assumed Options Exercise Annual Rates of Stock Granted or Price Appreciation for to Base Option Term(2) Options Employees in Price Expiration ---------------------- Name Granted(1) Fiscal Year ($/sh) Date 5% 10% - ---- ---------- ------------ -------- ---------- --- -------- Douglas W. Fry... 30,000(3) 3.6% $0.5625 3/26/05 $ 6,870 $16,011 146,058(3) 17.8% $0.5625 4/17/06 $39,231 $93,959 50,000 6.0% $0.5625 4/13/07 $15,505 $38,190 19,634 2.4% $0.3750 6/16/07 $ 4,058 $ 9,998 12,510 1.5% $0.4375 9/13/07 $ 3,017 $ 7,432 Edgar L. Dyes.... 14,000(3) 1.7% $0.5625 3/26/05 $ 3,206 $ 7,472 15,000(3) 1.8% $0.5625 4/17/06 $ 4,029 $ 9,650 40,000 4.9% $0.5625 4/13/07 $12,404 $30,552 11,098 1.4% $0.3750 6/16/07 $ 2,294 $ 5,651 11,037 1.3% $0.4375 9/13/07 $ 2,662 $ 6,557
- ---------- (1) Each of these options were granted pursuant to either the 1990 Stock Option Plan or the 1987 Stock Option Plan. The exercise price of the options was equal to the fair market value of a share of Garnet's Common Stock on the date of grant and may be paid in cash or by delivery of shares of Common Stock which have a fair market value on the date of exercise equal to the exercise price. The right to exercise each option vests over a four-year period but will accelerate upon the occurrence of certain events, including a change of control. The options are exercisable for a period of 10 years and 30 days after the date 19 22 of grant unless the optionee resigns, retires or dies, in which case the right to exercise the option is limited. (2) The values set forth in this column represent the gain which would be realized by each Named Executive Officer assuming (i) the options granted in 1997 are exercised on their respective expiration dates, and (ii) the value of a share of Garnet Common Stock has increased annually by a rate of 5% to 10%, respectively, during the term of the option. These growth rates are prescribed by the rules of the Securities and Exchange Commission and are not intended to forecast possible future appreciation for Garnet Common Stock. (3) Options deemed granted as a result of a decrease in the exercise price of outstanding options issued under Garnet's stock option plans. Option Exercises During 1997 and Year End Option Value The following table provides information related to options exercised by the Named Executive Officers during 1997 and the number and value of options held by year-end. No stock appreciation rights have been issued by Garnet.
Value of Unexercised Number of Unexercised In-the-Money Options Shares Options at FY-End(#) at FY-End($)(1) Acquired on Value --------------------------- --------------------------- Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ----------- --------------------------- --------------------------- Douglas W. Fry........... none none 112,851 165,351 none none Edgar L. Dyes............ none none 27,026 64,109 none none
- ---------- (1) Because the exercise price of all options exceed $.04, the market value of a share of Garnet Common Stock at December 31, 1997, the value of unexercised options was zero. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 1, 1998 as to each person who, to the knowledge of Garnet, was the beneficial owner of more than five percent of the outstanding Common Stock of Garnet.
Amount and Nature of Percent of Name and Address of Beneficial Owner or Group Beneficial Ownership(1) Class(2) - --------------------------------------------- ----------------------- -------- Wexford Management LLC.......................... 1,150,909(3) 9.1% 411 West Putnam Avenue Greenwich, Connecticut 06830 Pecks Management Partners Ltd................... 1,090,910(4) 8.7% One Rockefeller Plaza New York, New York 10020
- ---------- (1) Except as set forth below, to the best knowledge of Garnet, each beneficial owner has sole voting power and sole investment power. 20 23 (2) Based on 11,492,162 shares of Garnet's Common Stock issued and outstanding on March 1, 1998. Treated as outstanding for the purpose of computing the percentage ownership of each beneficial owner or group are shares ("Convertible Debenture Shares") issuable to such beneficial owner or group upon conversion of Garnet's 9 1/2% convertible subordinated debentures ("Debentures") and shares issuable upon exercise of vested stock options issued pursuant to Garnet's stock option plans. (3) According to a Schedule 13D dated April 23, 1997, the indicated number of shares consists of Convertible Debenture Shares issuable upon conversion of Debentures held by four investment funds. Wexford Management LLC ("Wexford Management") serves as investment advisor to three of the funds and as sub-investment advisor to the fourth fund which is organized as a corporation. Wexford Advisors, LLC ("Wexford Advisors") serves as the investment advisor to the corporate fund and as general partner to the remaining funds which are organized as limited partnerships. Wexford Management shares voting and dispositive power with respect to the Convertible Debenture Shares with each of the funds, with Wexford Advisors, and with Charles E. Davidson and Joseph M. Jacobs, each of whom is a controlling person of Wexford Management and Wexford Advisors. (4) According to Schedule 13G dated February 9, 1995 filed by Pecks Management Partners Ltd. ("Pecks"), as a registered investment advisor, the indicated number of shares consists of Convertible Debenture Shares issuable to three investment advisory clients of Pecks upon conversion of Debentures owned by such clients. One such client, Delaware State Employees' Retirement Fund, would acquire more than 5% of Garnet's Common Stock, if its Debenture were converted. Pecks has sole investment and dispositive power with respect to the Convertible Debentures Shares issuable to its clients and the discretion to convert the Debentures owned by them. The following table sets forth certain information as of March 1, 1998 concerning the shares of Common Stock of Garnet owned beneficially by each director, by each of the Named Executive Officers in the Summary Compensation Table, and by directors and officers of Garnet as a group:
Amount and Nature of Beneficial Percent of Name of Beneficial Owner or Group Ownership(1) Class (2) --------------------------------- ------------ --------- Robert J. Cresci.......................................... 62,950(3) * Edgar L. Dyes............................................. 40,826(4) * Douglas W. Fry............................................ 138,062(4) 1.2% Montague H. Hackett, Jr................................... 191,690(4) 1.6% Directors and officers of Garnet as a group (4 persons)... 433,528(4) 3.6%
- ---------- * Less than 1% (1) Except as noted below, each beneficial owner has sole voting power and sole investment power. 21 24 (2) Based on 11,492,162 shares of Garnet's Common Stock issued and outstanding on March 1, 1998. Treated as outstanding for the purpose of computing the percentage ownership of each director, each executive officer and all directors and executive officers as a group are shares issuable upon exercise of vested stock options issued pursuant to Garnet's stock option plans. (3) Consists solely of shares issuable upon exercise of vested stock options issued pursuant to Garnet's stock option plans. Does not include Convertible Debenture Shares issuable to clients of Pecks, of which Mr. Cresci is a managing director. For information with respect to such shares, see footnote 4 on page 20. (4) Consists solely of shares issuable upon exercise of vested stock options issued pursuant to Garnet's stock option plans. Item 13. Certain Relationships and Related Transactions. None 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, 1997. 22 25 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 31, 1998 Douglas W. Fry Officer and Director (principal executive officer) /s/ MONTAGUE H. HACKETT, JR. Chairman of the Board and March 31, 1998 - ---------------------------- Director Montague H. Hackett, Jr. /s/ ROBERT J. CRESCI - ---------------------------- Director March 31, 1998 Robert J. Cresci /s/ EDGAR L. DYES - ---------------------------- Vice President, Treasurer and March 31, 1998 Edgar L. Dyes Secretary (principal financial officer and principal accounting officer) 23 26 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, 1997 and 1996 F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-7 Notes to Consolidated Financial Statements F-9 Supplemental Oil and Gas Information F-22 Garnet Resources Corporation Financial Statement Schedule Schedule I - Condensed Financial Information of Registrant Balance Sheets, December 31, 1997 and 1996 F-27 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-29 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-30 F-1 27 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed further in Note 2 to the consolidated financial statements, the Company incurred substantial losses in 1997 and has negative working capital and stockholders' equity at December 31, 1997. The Company's management believes that available working capital and cash flows from operations will not be sufficient to make its required debt principal and interest payments as they become due beginning March 31, 1998. As a result, there is substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Houston, Texas March 20, 1998 F-2 28 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ ASSETS 1997 1996 ------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 425,019 $3,058,015 Restricted cash balances 1,699,231 1,049,349 Accounts receivable 1,476,485 3,541,223 Inventories 736,899 901,216 Prepaid expenses 108,577 132,199 ------------ ------------ Total current assets 4,446,211 8,682,002 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full-cost method)- Proved 59,317,097 56,500,390 Unproved (excluded from 263,908 227,846 amortization) ------------ ------------ 59,581,005 56,728,236 Other equipment 134,598 132,083 ------------ ------------ 59,715,603 56,860,319 Less - Accumulated depreciation, (48,213,229) (17,698,898) depletion and amortization ------------ ------------ 11,502,374 39,161,421 OTHER ASSETS 511,863 678,132 ------------ ------------ $16,460,448 $48,521,555 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 29 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Continued
December 31, ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ------------------------------------ ------------ ------------ CURRENT LIABILITIES: Current portion of long-term debt $22,641,480 $2,004,648 Accounts payable and accrued liabilities 1,123,104 3,323,214 ------------ ------------ Total current liabilities 23,764,584 5,327,862 LONG-TERM DEBT, net of current portion -- 21,629,232 ------------ ------------ DEFERRED INCOME TAXES -- 979,499 ------------ ------------ OTHER LONG-TERM LIABILITIES 279,200 378,054 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 75,000,000 shares authorized, 11,492,162 shares issued and outstanding as of December 31, 1997 and 1996 114,922 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (60,189,470) (32,399,226) ------------ ------------ Total stockholders' equity (7,583,336) 20,206,908 ------------ ------------ $16,460,448 $48,521,555 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 30 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ REVENUES: Oil sales $8,982,008 $11,446,587 $8,635,570 Interest 199,775 262,640 245,563 ------------ ------------ ------------ 9,181,783 11,709,227 8,881,133 ------------ ------------ ------------ COSTS AND EXPENSES: Production 3,677,603 3,410,162 3,533,572 Exploration 8,792 40,112 1,547,278 Loss (gain) on net assets held for disposition -- 42,748 -- General and administrative 941,079 652,746 1,672,501 Interest 2,294,853 2,108,346 1,491,131 Depreciation, depletion and amortization 4,764,036 6,334,748 4,949,682 Write down of oil and gas properties 25,752,034 -- -- Foreign currency translation (gain) loss (181,049) (25,498) (741,557) ------------ ------------ ------------ 37,257,348 12,563,364 12,452,607 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (28,075,565) (854,137) (3,571,474) PROVISION (BENEFIT) FOR INCOME TAXES (285,321) 1,205,760 1,051,848 ------------ ------------ ------------ NET LOSS $(27,790,244) $(2,059,897) $(4,623,322) ============ ============ ============ NET LOSS PER COMMON SHARE-BASIC AND DILUTED $(2.42) $(.18) $(.40) ============ ============ ============ WEIGHTED AVERAGE SHARES 11,492,162 11,492,162 11,416,828 OUTSTANDING ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 31 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock --------------------------- Capital in Retained Total Number of Excess of Earnings Stockholders' Shares Amount Par Value (Deficit) Equity ------------ ------------ ------------ ------------ ------------ 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 Net loss -- -- -- (27,790,244) (27,790,244) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 11,492,162 $114,922 $52,491,212 $(60,189,470) $(7,583,336) ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 32 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(27,790,244) $(2,059,897) $(4,623,322) Adjustments to reconcile net loss to net cash provided by operating activities - Exploration costs 8,792 40,112 1,547,278 (Gain) loss on net assets held for disposition -- 42,748 -- (Gain) loss on sale of other equipment -- 1,918 (4,970) Depreciation, depletion and amortization 4,764,036 6,334,748 4,949,682 Write down of oil and gas properties 25,752,034 -- -- Amortization of other assets 240,444 232,148 224,276 Deferred income taxes (979,499) 338,580 640,919 Change in assets and liabilities - Decrease (increase) in accounts receivable 723,856 (144,757) (673,808) Decrease in inventories 57,728 70,020 24,525 Decrease (increase) in prepaid expenses (3,205) 1,975 36,162 Increase (decrease) in accounts payable and accrued liabilities 569,712 (751,538) (586,645) Increase (decrease) in other long-term liabilities (44,522) (64,049) 134,013 Decrease (increase) in escrow account (649,882) 1,789,495 (2,838,844) ------------ ------------ ------------ Net cash provided (used) by operating activities 2,649,250 5,831,503 (1,170,734) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to oil and gas properties (5,685,717) (4,145,538) (9,331,942) Additions to other equipment (4,254) (21,492) (6,880) Proceeds from asset dispositions -- 292,244 5,000 (Increase) decrease in joint venture and contractor advances 1,365,960 (1,298,843) 621,225 Decease in inventories 106,589 15,296 300,256 Decrease in net assets held for disposition 1,749 73,798 110,683 (Increase) decrease in other assets (50,390) 25,277 24,170 Acquisition of partnership interests in Argosy Energy International, net of cash acquired -- -- (92,621) ------------ ------------ ------------ Net cash used for investing activities (4,266,063) (5,059,258) (8,370,109) ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 33 GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Continued
Year Ended December 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuances of debt $ -- $ -- $4,754,880 Repayments of debt (992,400) (560,998) (208,983) Costs of debt issuances (23,783) (27,579) (121,312) ----------- ----------- ----------- Net cash provided by (used for) financing activities (1,016,183) (588,577) 4,424,585 ----------- ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,632,996) 183,668 (5,116,258) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,058,015 2,874,347 7,990,605 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 425,019 $3,058,015 $2,874,347 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid for - Interest, net of amounts capitalized $2,186,208 $1,983,043 $1,334,676 Income taxes 486,296 582,047 490,624
F-8 34 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. Inter-company 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 3), 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, 1997 and 1996. Restricted cash- Restricted cash includes amounts held in escrow as required by the Company's finance agreement with Overseas Private Investment Corporation. Reference is made to Note 5-Long-term Debt. Inventories- Inventories consist of oil field equipment, materials and supplies, and crude oil. For presentation in the accompanying consolidated statements of cash flows, changes in oil field 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 $2,321,613, $2,410,958, and $2,252,483 in 1997, 1996 and 1995, respectively, of which $26,760, $302,612, and $761,352 were capitalized as additional costs of oil and gas properties. F-9 35 The capitalized costs of oil and gas properties in each cost center plus future development costs are amortized on a composite unit-of-production method based on future gross revenues from proved reserves. Sales 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. This process resulted in a $25.8 million write down of oil and gas properties during 1997. 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 common share represents basic earnings per share ("EPS") as defined in Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). Under SFAS No. 128, Basic EPS is calculated by dividing the net loss, after consideration of preferred stock dividends paid or accrued, by the weighted average number of common shares outstanding during each period presented. Diluted EPS, as defined in SFAS No. 128, is not presented separately as the effect of any potential common shares on reported losses would be antidilutive. Potential common shares for the Company include outstanding stock options. 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. Actual results may differ from these estimates. 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 F-10 36 Supplemental Oil and Gas Information for additional information regarding the process of estimating proved reserve quantities and related cash flows. (2) Resources and Liquidity A decline in the price of oil in 1997 and a decline in the rate of production commencing in the third quarter of 1997 resulted in a 73% decrease in the Company's estimate of discounted future net cash flows from proved reserves at December 31, 1997 and a 22% decrease in revenues from oil sales during 1997 compared to 1996. As a result, the Company recorded $25.8 million of write downs of oil and gas properties during 1997, resulting in a significant net loss during 1997 and negative stockholders' equity at December 31, 1997. The Company is highly leveraged with $22.6 million in current debt consisting of (i) $15 million of 9 1/2% Convertible Subordinated Debentures due December 21, 1998 (the "Debentures") and (ii) $7.7 million ($7.6 million net to Garnet) of an outstanding loan (the "OPIC Loan") to Argosy from Chase Bank of Texas ("Chase") which is guaranteed by the Overseas Private Investment Corporation ("OPIC") and secured by Argosy's assets in Colombia and Garnet's direct and indirect interests in Argosy. Based on Argosy's year-end financial statements, Argosy has determined that it is no longer in compliance with certain covenants required by the finance agreement governing the OPIC Loan. In the absence of a waiver of such covenants, either OPIC or Chase would have the right to call a default under the OPIC Loan, accelerate payment of all outstanding amounts due thereunder and realize upon the collateral securing the OPIC Loan. Although Argosy intends to apply for a waiver, and such waivers have been obtained in the past year, given the Company's financial position and negative working capital balance at December 31, 1997, no assurance can be given that such waiver will be granted or continued. Under the terms of the OPIC Loan, the 75% of proceeds from Argosy's oil sales which are paid in U.S. dollars are deposited into an escrow account with Chase to secure payment of the OPIC Loan. Argosy is required to maintain a minimum balance in such escrow account equal to six months of interest, principal and other fees due under the OPIC Loan. The escrow account minimum required balance at March 15, 1998 was $1,700,000 and the total account balance was $1,953,000. Any excess in the escrow account over the minimum balance can be released to Argosy and used to pay operating expenses and amounts due under the OPIC Loan. Even if OPIC grants a waiver of the loan covenants with which Argosy is not in compliance, if the minimum balance required in such escrow account increases, as a result of a change in the amortization schedule or otherwise, sufficient funds may not be available to fund the Company's operations. The Company's financial forecasts indicate that, assuming no changes in its capital structure, available working capital and cash flows from operations will not be sufficient to make the interest payment due on the Debentures on March 31, 1998, to pay principal and interest due under the OPIC Loan on June 15, 1998 and to maintain the minimum balance in the escrow account. The Company also does not expect working capital and cash flow from operations to be sufficient to repay the principal amount of the Debentures at maturity or earlier if the Debenture holders call a default as a result of the non-payment of interest. The Company must complete a restructuring transaction or renegotiate the terms of the Debentures in order to avoid non-compliance with its obligations to pay the Debentures. As a result, management believes there is substantial doubt about the Company's ability to continue as a going concern. In the absence of a business transaction or a restructuring of the Company's indebtedness, the Company may seek protection form its creditors under the Federal Bankruptcy Code. In view of its operating losses and financial condition, the Company initiated further cost containment programs in 1997 including a 28% reduction in its Colombian personnel and the termination of all U.S. personnel other than Douglas W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief Financial Officer. The Company also engaged Rauscher Pierce Refsnes, Inc. as a financial advisor to provide assistance in negotiating a business combination or a debt restructuring transaction to address the Company's liquidity issues. Although the Company engaged in comprehensive efforts, including extensive negotiations with two separate candidates, the Company was not successful in concluding a transaction. The Company is currently engaged in negotiations to effect a business F-11 37 combination, although no assurance can be given that such negotiations will result in a definitive agreement or the consummation of a transaction. (3) 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 52,000 acres located in the Putumayo Region of Colombia (the "Santana Block"). The contract provided for a ten-year exploration period, which expired in 1997 and for a production period expiring in 2015. Argosy and its joint venture partner also have two association contracts (the "Fragua Contract" and the "Yuruyaco Contract") with Ecopetrol. The Fragua Contract covers an area of approximately 32,000 acres contiguous to the northern boundary of the Santana Block (the "Fragua Block"), while the Yuruyaco Contract covers an area of approximately 39,000 acres contiguous to the eastern boundaries of the Santana Block and the Fragua Block (the "Yuruyaco Block"). Work obligations under these two contracts have been met and applications to relinquish the areas have been filed with Ecopetrol. 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 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 65% 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. In June 1996, cumulative oil production from the Santana Contract exceeded seven million barrels. Under the terms of the Santana Contract, 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 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 65% 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. F-12 38 The Company's resulting net participation in revenues and costs for the Santana Contract is as follows:
Production Operating Exploration Development Revenues Costs Costs Costs ---------- --------- ----------- ----------- Santana Contract: 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. The joint venture has the right to continue to explore for additional oil and gas deposits on the remaining acreage in the block, which is held under the commercial production provisions of the Santana 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 $.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 $.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. (4) Exploration licenses in Papua New Guinea- Garnet PNG Corporation, a wholly owned subsidiary of Garnet ("Garnet PNG"), owned a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting License No. 181 ("PPL-181") which covered 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. This license was surrendered on April 25, 1997. 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 was owned by Occidental (88%), Garnet PNG (6%) F-13 39 and Niugini Energy Pty. Limited (6%). The test well, Turama-1, was drilled in the first quarter of 1997, reaching a total depth of 9,652 feet. The well encountered the objective sands in the Jurassic-Cretaceous Imburu formation, but evaluations of samples and electric logs indicated that the sands were water bearing; therefore, the well was abandoned as a dry hole. In an agreement dated November 24, 1997, among Occidental Kanau Ltd. ("Kanau"), Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos Niugini Exploration Pty. Limited ("Santos"), Niugini Energy, Inc. ("Niugini") and Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet, Garnet PNG agreed to exchange its 6% interest (the "PPL-181 Interest") in Petroleum Prospecting License No. 181 ("PPL-181 Area"), for a 4% interest in a newly applied for but not yet issued, petroleum prospecting license ("New PPL") covering the PPL-181 Area and Petroleum Prospecting License No. 158 ("PPL-158") held by Occidental PNG and Santos. 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 US$ 290,000) 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. (5) Long-term debt- Long-term debt at December 31, 1997 and 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 7,641,480 8,633,880 ------------ ------------ 22,641,480 23,633,880 Less - Current portion (22,641,480) (2,004,648) ------------ ------------ $ -- $21,629,232 ============ ============
In December 1993, Garnet issued $15,000,000 of Convertible Subordinated Debentures (the "Debentures") due December 21, 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 3). F-14 40 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. The Debentures mature December 21, 1998; therefore, the entire balance has been classified as current in the accompanying consolidated balance sheet. As of December 31, 1997, Garnet was not in compliance with the minimum net worth covenant required by the Debentures. Additionally, 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, therefore the Company must consummate a restructuring transaction prior to their maturity date in order to avoid non-compliance with its obligation to pay the Debentures. If no restructuring transaction is consummated the Company will be required to re-negotiate the terms of the Debentures. In such event, the Company would explore the advantages and disadvantages in seeking protection from its creditors under Federal Bankruptcy Code. 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 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, 1997 was 6.125%. 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. Argosy is no longer in compliance with certain covenants required by the finance agreement governing the OPIC Loan. See Note 2, Resources and Liquidity, for additional information. (6) Stock option plans- Garnet has adopted stock option plans (the "Employee Plans") pursuant to which an aggregate of 1,473,000 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 authority to administer and interpret the Employees' Plan, 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' Plan. 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 F-15 41 employees vests over a period of four years, so that 20% of the options become exercisable on each anniversary from the date of grant. 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 was issuable as of December 31, 1997 upon exercise of options granted thereunder in exchange, among other things, for the surrender of 265,000 options previously granted to such directors under the 1990 Directors' Stock Option Plan that has since been terminated. Director's 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 director's stock option must be paid in cash. The 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 1997, 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.
1997 1996 1995 --------- --------- --------- Pro forma net loss $(27,903,082) $(2,101,716) $(5,102,286) Pro forma net loss per share $(2.43) $(.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:
1997 1996 1995 ----- ----- ----- Expected life (years) 5.0 5.0 4.3 Risk-free interest rate 5.89% 6.17% 6.62% Volatility 63.65% 57.00% 44.40% Dividend 0.00% 0.00% 0.00%
F-16 42 The following is a summary of stock option activity and related information for 1997, 1996 and 1995.
1997 1996 1995 ------------------- -------------------- ---- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Shares Options outstanding, beginning of year 1,178,726 $2.86 1,329,102 $4.72 1,369,500 Options granted 698,956 .46 480,000 1.19 618,000 Options forfeited (451,080) 5.09 (336,102) 7.44 -- Options expired (85,372) 1.19 (294,274) 3.31 (658,398) ---------- ----- ---------- ----- ---------- Options outstanding, end of year 1,341,230 $.83 1,178,726 $2.86 1,329,102 ========== ===== ========== ===== ========= Option price range $.38 to $1.19 to $2.50 to at end of year $2.50 $13.83 $13.83 Options available for grant at end of year 448,270 410,774 470,398 ======= ======= ======= Weighted average fair value of options granted during the year $.24 $.66 $1.19 ======= ======= =======
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------------ ------------------- Number Number Average Weighted Exercisable Weighted Outstanding Remaining Average at Average Range of at December Contractual Exercise December Exercise Exercise Prices 31, 1997 Life Price 31, 1997 Price - --------------- ----------- ----------- -------- ----------- -------- $0.375-40.438 490,956 4.3 years $0.42 391,766 $0.43 $0.5625 630,274 7.0 years $0.56 259,606 $0.56 $2.50 220,000 0.5 years $2.50 220,000 $2.50 --------- ----- ------- $0.375-42.50 1,341,230 $0.83 871,372 ========= ===== =======
F-17 43 (7) Income taxes- Income (loss) before income taxes and the provision for income taxes consisted of the following:
Year Ended December 31, ------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Income (loss) before income taxes - Domestic $ (5,613,734) $ (1,847,919) $ (2,340,158) Foreign (22,461,831) 993,782 $ (1,231,316) ------------ ------------ ------------ $(28,075,565) $ (854,137) $ (3,571,474) ============ ============ ============ Provision (benefit) for income taxes - Foreign - Current $ 694,178 $ 868,344 $ 410,929 Deferred (979,499) 337,416 640,919 ------------ ------------ ------------ $ (285,321) $ 1,205,760 $ 1,051,848 ============ ============ ============
The provisions for income taxes and deferred income taxes payable relate to the Colombian activities of Argosy. No deferred taxes were provided in 1997 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, 1997 and 1996 were as follows:
1997 1996 ------------ ------------ Deferred tax liability $ 27,198 $ 2,109,649 Deferred tax asset (12,677,641) (11,061,573) Valuation allowance 12,650,443 9,931,423 ------------ ------------ Net deferred tax liability $ -- $ 979,499 ============ ============
Temporary differences included in the deferred tax liabilities related primarily to property and equipment. Deferred tax assets principally consisted of net operating loss carryforwards. The Colombian deferred tax liability was eliminated due to a write down of oil and gas properties during 1997, totaling $25.8 million. F-18 44 As of December 31, 1997, the Company had a regular U.S. tax net operating loss carryforward and an alternative minimum tax loss carryforward of approximately $30,900,000 and $30,600,000 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. (8) 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. 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. (9) Concentration of credit risk- During the years ended December 31, 1997, 1996 and 1995, all of the Company's oil production was purchased by Ecopetrol. As of December 31, 1997 and 1996, accounts receivable included approximately $1,134,812 and $2,866,000 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. (10) Operations by geographic area- The Company operates in one industry segment. Information about the Company's operations for the years ended December 31, 1997, 1996 and 1995 by different geographic areas is shown below. F-19 45
Other United Foreign 1997 States Colombia Areas Total - ---- -------- ------------ -------- ------------ Oil and gas sales $ -- $ 8,982,008 $ -- $ 8,982,008 ======== ============ ======== ============ Operating profit (loss) $ -- $(25,211,665) $ (8,792) $(25,220,457) ======== ============ ======== General corporate income and expenses, net (2,855,108) ------------ Income (loss) before income taxes $(28,075,565) ============ Identifiable assets $349,612 $ 13,985,826 $ 760 $ 14,336,198 ======== ============ ======== Corporate assets: Cash and cash equivalents 2,124,250 ------------ Total assets $ 16,460,448 ============ 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 ============
F-20 46
United Other 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-21 47 GARNET RESOURCES CORPORATION AND SUBSIDIARIES SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) 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, ----------------- --------------------------------- 1997 1996 ------------ ------------ Proved properties $ 59,317,097 $ 56,500,390 Unproved properties 263,908 227,846 ------------ ------------ 59,581,005 56,728,236 Accumulated depreciation, depletion and amortization (48,115,622) (17,610,628) ------------ ------------ Net capitalized costs $ 11,465,383 $ 39,117,608 ============ ============
As of December 31, 1997 and 1996, all capitalized costs pertained to oil and gas properties in Colombia. The Company's investment in oil and gas properties as of December 31, 1997 includes $263,908 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. Costs Incurred
Other Year Ended Foreign December 31, 1997 Colombia Areas Total - ----------------- ---------- ---------- ---------- Property acquisition- Proved properties $ -- $ -- $ -- Unproved properties -- 760 760 Exploration 308,239 -- 308,239 Development 2,543,770 -- 2,543,770 ---------- ---------- ---------- Total costs incurred $2,852,009 $ 760 $2,852,769 ========== ========== ==========
F-22 48
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 ========== ========== ==========
Results of Operations Year Ended December 31, --------------------- ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Revenues $ 8,982,008 $ 11,446,587 $ 8,635,570 Expenses- Production costs 3,677,603 3,410,162 3,533,572 Depreciation, depletion and amortization 4,764,036 6,323,999 4,936,955 Write down of oil and gas properties 25,752,034 ------------ ------------ ------------ 34,193,673 9,734,161 8,470,527 ------------ ------------ ------------ Results of operations before income taxes (25,211,665) 1,712,426 165,043 Provision for income taxes -- 710,657 70,638 ------------ ------------ ------------ Results of operations from oil and gas $(25,211,665) $ 1,001,769 $ 94,405 producing activities ============ ============ ============ Sales price per barrel $17.39 $19.82 $16.39 Production costs per barrel 7.12 5.91 6.71 Depreciation, depletion and amortization per dollar of oil and gas revenues (excluding write down of oil and gas properties) .53 .55 .57
F-23 49 During the years ended December 31, 1997, 1996 and 1995, all of the Company's oil and gas producing operations were located in Colombia. During 1997, 1996 and 1995 the Company also charged to expense a total of $8,792, $40,112 and $1,547,278 respectively, of acquisition and exploration costs pertaining to its activities in other foreign areas. Oil and Gas Reserve Quantities 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. Estimates of the Company's proved reserves and related valuations, as shown in the following tables were developed pursuant to SFAS No. 69. Huddleston & Co., Inc. provided estimates of future recoverable oil reserves and projected future net revenues. The Company's proved reserves were comprised entirely of crude oil in Colombia, and are stated in barrels.
December 31, ------------------------------------- 1997 1996 1995 --------- --------- --------- Proved developed and undeveloped reserves: Beginning of year 3,415,909 3,942,231 4,626,883 Revisions of previous estimates (1,109,268) 51,106 (377,493) Production (516,543) (577,428) (526,834) Purchases of reserves in place -- -- 219,675 --------- --------- --------- End of year 1,790,098 3,415,909 3,942,231 ========= ========= ========= Proved undeveloped reserves at end of year -- 980,824 2,002,811 Proved developed reserves at end of year 1,790,098 2,435,085 1,939,420
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. F-24 50 Standardized Measure of Discounted Future Net Cash Flows
As of December 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Future cash inflows $25,617,420 $77,207,720 $69,343,840 Future costs- Production 9,348,337 13,778,938 18,021,679 Development 395,643 3,513,309 5,264,508 ----------- ----------- ----------- Future net cash flows before income taxes 15,873,440 59,915,473 46,057,653 Future income taxes 961,636 6,010,111 4,232,095 ----------- ----------- ----------- Future net cash flows 14,911,804 53,905,362 41,825,558 10% discount factor 3,430,104 10,755,572 11,151,677 ----------- ----------- ----------- Standardized measure of discounted future net cash flows $11,481,700 $43,149,790 $30,673,881 =========== =========== ===========
Changes In Standardized Measure of Discounted Future Net Cash Flows
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Standardized measure, beginning of year $ 43,149,790 $ 30,673,881 $ 32,434,723 Increases (decreases) Sales, net of production costs (5,304,405) (8,036,425) (5,101,998) Net change in sales prices, net of production costs (25,277,345) 14,139,910 1,578,689 Changes in estimated future development costs 1,346,106 (1,111,112) (1,749,979) Development costs incurred during the year that reduced future development costs 1,751,409 3,310,248 4,994,019 Revisions of quantity estimates (9,310,817) 2,540,160 (9,003,192) Accretion of discount 4,808,672 3,359,280 3,702,993 Net change in income taxes 4,116,800 (2,018,011) 1,676,288 Purchases of reserves in place -- -- 1,758,109 Changes in production rates (timing) and other (3,798,510) 291,859 384,229 ------------ ------------ ------------ Standardized measure end of year $ 11,481,700 $ 43,149,790 $ 30,673,881 ============ ============ ============
F-25 51 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-26 52 SCHEDULE I GARNET RESOURCES CORPORATION Condensed Financial Information of Registrant Balance Sheets
December 31, ------------------------------ ASSETS 1997 1996 ------ ------------ ------------ CURRENT ASSETS: Cash $ 164,092 $ 86,119 Accounts receivable 28,116 494,261 Prepaid expenses 27,330 24,124 ------------ ------------ Total current assets 219,538 604,504 ------------ ------------ INVESTMENTS IN AND ADVANCES TO 6,988,613 34,427,950 SUBSIDIARIES ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Furniture and equipment 72,255 69,928 Less - Accumulated depreciation (47,116) (41,731) ------------ ------------ 25,139 28,197 ------------ ------------ OTHER ASSETS 205,784 309,497 ------------ ------------ $ 7,439,074 $ 35,370,148 ============ ============
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 53 SCHEDULE I GARNET RESOURCES CORPORATION Condensed Financial Information of Registrant Balance Sheets (Continued)
December 31, ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ------------------------------------ ------------ ------------ CURRENT LIABILITIES: Current portion of Long-term debt $ 15,000,000 -- Accounts payable and accrued liabilities 22,410 163,240 ------------ ------------ 15,022,410 163,240 LONG-TERM DEBT -- 15,000,000 ------------ ------------ OTHER LONG-TERM LIABILITIES -- -- ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 75,000,000 shares authorized, 11,492,162 shares issued and outstanding as of December 31, 1997 and 1996 114,922 114,922 Capital in excess of par value 52,491,212 52,491,212 Retained earnings (deficit) (60,189,470) (32,399,226) ------------ ------------ Total stockholders' equity (7,583,336) 20,206,908 ------------ ------------ $ 7,439,074 $ 35,370,148 ============ ============
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 54 SCHEDULE I GARNET RESOURCES CORPORATION Condensed Financial Information of Registrant Statements of Operations
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ INTEREST INCOME $ 6,378 $ 140,732 $ 519,630 ------------ ------------ ------------ COSTS AND EXPENSES: Exploration -- 1,775 798,263 General and administrative 1,256,948 1,134,107 1,953,436 Interest 1,712,745 1,243,668 819,134 Depreciation 7,114 8,273 5,874 ------------ ------------ ------------ 2,976,807 2,387,823 3,576,707 ------------ ------------ ------------ INCOME (LOSS) BEFORE EQUITY IN (2,970,429) (2,247,091) (3,057,077) EARNINGS (LOSSES) OF SUBSIDIARIES EQUITY IN EARNINGS (LOSSES) OF (24,819,815) 187,194 (1,566,245) SUBSIDIARIES ------------ ------------ ------------ NET LOSS $(27,790,244) $ (2,059,897) $ (4,623,322) ============ ============ ============
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II. F-29 55 SCHEDULE I GARNET RESOURCES CORPORATION Condensed Financial Information of Registrant Statements of Cash Flows
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(27,790,244) $ (2,059,897) $ (4,623,322) Equity in (earnings) loss of subsidiaries 24,819,815 (187,194) 1,566,245 Exploration costs -- 1,775 798,263 Depreciation 7,114 8,273 5,874 Changes in components of working capital 99,923 (378,881) 159,500 Other 154,103 89,927 213,309 ------------ ------------ ------------ Net cash used for operating activities (2,709,289) (2,525,997) (1,880,131) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investments in and advances from (to) subsidiaries 2,619,522 (161,156) (6,131,388) Capital expenditures (54,446) (25,929) (132,902) Loans repaid by Argosy Energy International 222,186 1,710,518 2,353,784 ------------ ------------ ------------ Net cash provided by (used for) investing activities 2,787,262 1,523,433 (3,910,506) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net cash used for financing activities -- -- -- ------------ ------------ ------------ NET (DECREASE) INCREASE CASH 77,973 (1,002,564) (5,790,637) CASH AT BEGINNING OF PERIOD 86,119 1,088,683 6,879,320 ------------ ------------ ------------ CASH AT END OF PERIOD $ 164,092 $ 86,119 $ 1,088,683 ============ ============ ============
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of Part II. F-30 56 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, as amended. 3(A) (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 Incorpora- tion, as amended. 4(A) (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 57 Item No. Item Title Exhibit No. 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. * (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., incorporated by reference to Exhibit 10(D) to Registrant's Form 10-K for the fiscal year ended December 31, 1996. (F) Extension of Contract of Sale of Santana Crude dated February 10, 1997 by and among Empresa Colombiana de Petroleos, Argosy Energy International and Neo Energy, Inc. 10(F) (G) 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 * 58 Item No. Item Title Exhibit No. (H) 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. * (I) 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. (J) 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. * (K) 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. * (L) 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. * (M) 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. * (N) Petroleum Prospecting License No. 181, Incorporated by reference to Exhibit 10(A) to 59 Item No. Item Title Exhibit No. Registrant's Form 10-Q for the quarterly period ended September 30, 1995. * (O) 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. * (P) 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. * (Q) 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. * (R) 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. * (S) 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 * (T) Amendment No. 1 dated July 28, 1994 to Finance Agreement between Argosy Energy International and Overseas Private Investment 60 Item No. Item Title Exhibit No. Corporation, incorporated by reference to Exhibit 10(B) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (U) Amendment No. 2 dated March 24, 1995 to the 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. * (V) 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. * (W) 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. * (X) 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. * (Y) 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. * (Z) Guaranty dated July 26, 1994 from Overseas Private Investment Corporation to Texas Commerce Bank National Association, incorporated by reference to Exhibit 10(E) to 61 Item No. Item Title Exhibit No. Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (AA) 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. * (BB) 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. * (CC) 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. * (DD) 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. * (EE) 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. * (FF) Subordination Agreement dated August 3, 1994 made by Argosy Energy Incorporated in favor of Overseas Private Investment Corporation, 62 Item No. Item Title Exhibit No. incorporated by reference to Exhibit 10(L) to Registrant's Form 10-Q for the quarterly period ended September 30, 1994. * (GG) 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. * (HH) 1987 Stock Option Plan of Garnet Resources Corporation, incorporated by reference to Exhibit 10(F) to Form S-1 Registration Statement No. 33-16426. * (II) 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. * (JJ) 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. * (KK) Form of Garnet Resources Corporation Non-Incentive Stock Option Agreement for non-employees, incorporated by reference to Exhibit 10(H) to Form S-1 Registration Statement No. 33-16426. * (LL) 1997 Directors' 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 May 22, 1997. * 63 Item No. Item Title Exhibit No. (MM) 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. (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 EX-3.A 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3(A) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF GARNET RESOURCES CORPORATION ---------------------------------- Pursuant to Section 242 of the General Corporation Law ---------------------------------- THE UNDERSIGNED, President of Garnet Resources Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST: Article FOURTH of the Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows: "FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is SEVENTY-FIVE MILLION (75,000,000), all of the par value $0.01 per share, all of which shall be designated Common Stock." SECOND: The foregoing amendment has been duly adopted in accordance with the provisions of Sections 242 of the General Corporation Law. IN WITNESS WHEREOF, the undersigned has executed this Certificate this 22nd day of May, 1997. /s/ Douglas W. Fry -------------------------- Douglas W. Fry President 2 RESTATED CERTIFICATE OF INCORPORATION OF GARNET OIL CORPORATION (Incorporated June 4, 1986 under the name Garnet Oil Corporation) ----------------------- THE UNDERSIGNED, being the President and the Assistant Secretary of Garnet Oil Corporation, a Delaware corporation (the "Corporation"), hereby certify as follows: FIRST: The name of the corporation is Garnet Resources Corporation (the "Corporation"). SECOND: The address of its registered office in the State of Delaware is 229 South State Street, City of Dover, County of Kent. The name of the registered agent at such address is United States Corporation Company. THIRD: The nature of the business or purpose to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is -2- 3 20,000,000, all of the par value $.01 par value per share, all of which shall be designated Common Stock. FIFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights and powers conferred herein upon stockholders and directors are granted subject to this reservation. SIXTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, to make, alter or repeal the by-laws of the Corporation. SEVENTH: Meetings of the stockholders shall be held at such place, within or without the State of Delaware, as may be designated by or in the manner provided in the by-laws, or, if not so designated, at the registered office of the Corporation in the state of Delaware. Elections of directors need not be by written ballot unless and to the extent that the by-laws so provide. EIGHTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the -3- 4 State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of ss.291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of ss.279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH: To the fullest extent permitted by the Delaware General Corporation Law as the same exists and may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Without -4- 5 limiting the foregoing in any respect, a director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. TENTH: Section 1. Right to Indemnification. (i) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in case of any such -5- 6 amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; and (b) the Corporation shall indemnify and hold harmless in such manner any person who was or is made a party or is threatened to be made a party to a proceeding by reason of the fact that he, she or a person of whom he or she is the legal representative, is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation or a partnership, joint venture, trust or other enterprise; provided, however, that except as provided in Section 2 of this Article, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. In the event a director of officer of the Corporation shall serve as a director, officer, employee or agent of any Corporation, partnership, joint venture, trust or other enterprise in which the Corporation maintains an investment it shall be conclusively presumed for purposes of the -6- 7 indemnification provided for in subsection (b) above that such service has been undertaken at the request of the Corporation. The foregoing presumption shall apply regardless of whether such director or officer is serving such entity at the request of a third party or that his or her service with such entity was commenced prior to the effectiveness of this article of the certificate of incorporation or prior to his or her becoming an officer or director of the Corporation. The right to indemnification conferred in subsection (a) above shall be a contract right based upon an offer from the Corporation which shall be deemed to be accepted by such person's service or continued service with the Corporation for any period after the adoption of this article of the certificate of incorporation and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this section or otherwise. The Corporation -7- 8 may, by action of its Board of Directors, provide indemnification to employees or agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. Section 2. Right of Claimant to Bring Suit. If a claim under Section (1)(a) of this Article is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General -8- 9 Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Nonexclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. ELEVENTH: Each Share of the Corporation's previously issued and outstanding shares of Common Stock, par value $1.00 -9- 10 per share ("Old Common Stock") will automatically on effectiveness of this Restated Certificate of Incorporation and without any action on the part of the holder thereof become 2000 shares of Common Stock, par value $0.01 per share ("New Common Stock"). Holders of shares of Old Common Stock shall be entitled to exchange any certificates representing such shares of Old Common Stock for new certificates representing the appropriate number of shares of New Common Stock. IN WITNESS WHEREOF, the undersigned do hereby certify that this Restated Certificate of Incorporation was duly adopted by the vote of the Board of Directors of the Corporation and the written consent of the sole shareholder of the Corporation in accordance with the provisions of Sections 242, 228 and 245 of the General Corporation Law and that they have executed this Certificate this 20th day of March, 1987. /s/ George M. Nevers ------------------------------ George M. Nevers President ATTEST: /s/ W. Kirk Bosche - --------------------------------- W. Kirk Bosche Assistant Secretary -10- EX-4.A 3 EXCERPTS FROM RESTATED CERT. OF INCORPORATION 1 Exhibit 4(A) EXCERPTS FROM THE CERTIFICATE OF INCORPORATION OF GARNET RESOURCES CORPORATION **** FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is SEVENTY-FIVE MILLION (75,000,000), all of the par value $0.01 per share, all of which shall be designated Common Stock. FIFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights and powers conferred herein upon stockholders and directors are granted subject to this reservation. SIXTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, to make, alter or repeal the by-laws of the Corporation. SEVENTH: Meetings of the stockholders shall be held at such place, within or without the State of Delaware, as may be designated by or in the manner provided in the by-laws, or, if not so designated, at the registered office of the Corporation in the state of Delaware. Elections of directors need not be by written ballot unless and to the extent that the by-laws so provide. EIGHTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of ss.291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of ss.279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and 2 the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH: To the fullest extent permitted by the Delaware General Corporation Law as the same exists and may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Without limiting the foregoing in any respect, a director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. TENTH: Section 1. Right to Indemnification. (i) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; and (b) the Corporation shall indemnify and hold harmless in such manner any person who was or is made a party or is threatened to be made a party to a proceeding by reason of the fact that he, she or a person of whom he or she is the legal representative, is or was serving at the request of the -2- 3 Corporation as a director, officer, employee or agent of another Corporation or a partnership, joint venture, trust or other enterprise; provided, however, that except as provided in Section 2 of this Article, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. In the event a director of officer of the Corporation shall serve as a director, officer, employee or agent of any Corporation, partnership, joint venture, trust or other enterprise in which the Corporation maintains an investment it shall be conclusively presumed for purposes of the indemnification provided for in subsection (b) above that such service has been undertaken at the request of the Corporation. The foregoing presumption shall apply regardless of whether such director or officer is serving such entity at the request of a third party or that his or her service with such entity was commenced prior to the effectiveness of this article of the certificate of incorporation or prior to his or her becoming an officer or director of the Corporation. The right to indemnification conferred in subsection (a) above shall be a contract right based upon an offer from the Corporation which shall be deemed to be accepted by such person's service or continued service with the Corporation for any period after the adoption of this article of the certificate of incorporation and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees or agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. Section 2. Right of Claimant to Bring Suit. If a claim under Section (1)(a) of this Article is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to -3- 4 enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Nonexclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. -4- EX-10.F 4 EXTENSION OF CONTRACT OF SALE OF SANTANA CRUDE 1 EXHIBIT 10(F) ADDITIONAL CONTRACT NUMBER 1 TO CONTRACT DIJ - 1207 SELLER : ARGOSY ENERGY INTERNATIONAL AND NEO ENERGY INC. OBJECT : CONTRACT OF PURCHASE AND SALE OF SANTANA CRUDE PERIOD : JANUARY 1, 1998 TO DECEMBER 31, 1998 VALUE : UNDETERMINED AMOUNT The contracting parties, on the one hand the COLOMBIAN OIL COMPANY "ECOPETROL", which will from now on be called ECOPETROL, a Commercial and Industrial Company of the State, duly authorized by Law 165 of 1948 and ruled by its statutes, approved by Decree 1209 of 1994, with main domicile in the city of Santafe de Bogota, D.C., represented by LUIS AUGUSTO YEPES G., of legal age, identified with citizenship I.D. No. 19.125.070 issued in Bogota, with domicile in Bogota, who manifests that, in his condition of Vice President of International Commerce and Gas of ECOPETROL and duly faculted by the internal regulations of ECOPETROL, in particular by the Administrative Control Manual in its Second Chapter, acts in name and representation of this Company. On the other hand ARGOSY ENERGY INTERNATIONAL, company organized and existing according to the laws of Utah, United States of America, domiciled in Salt Lake City, Utah, with branch established in Colombia, constituted by means of Public Deed number 5323 issued by Notary Seventh of Bogota on October 25, 1993 and inscribed in 2 the Chamber of Commerce of Bogota on November 23, 1983 with registration No. 2008848, represented by SANTIAGO GONZALEZ ANGULO, of legal age, identified with citizenship I.D. No. 5.584.373 of Barrancabermeja and NEO ENERGY INC., a company organized and existing in accordance with the laws of the State of Texas, United States of America, domiciled in Dallas, Texas, whose branch is established in Colombia, constituted by means of Public Deed number 6.179, issued by Notary Fourth of Bogota on October 23, 1986 and inscribed in the Chamber of Commerce of Bogota, represented by WALDO E. CASAS, of legal age and identified with citizenship I.D. number 126.688 of Bogota, these companies will from now on be designated as THE SELLER, who together with ECOPETROL have agreed to celebrate the additional contract by means of which the duration of the purchase and sale contract DIJ - 1207 is extended, with the following considerations a) That ECOPETROL subscribed the purchase and sale contract DIJ - 1207 with companies ARGOSY ENERGY INTERNATIONAL and NEO ENERGY INC. for a period beginning on February 1, 1997 and ending on December 31, 1997; b) That both parties by common consent decided in due time to extend the duration of the contract for twelve (12) additional months; c) That by means of this additional contract the agreement that determined the extension of contract DIJ - 1207 is formalized. In accordance with the above mentioned considerations, the parties agree to: CLAUSE ONE - Extend the duration of contract DIJ - 1207 for the period included between January first (1), 1998 and December 31, -2- 3 1998, under the same terms and conditions stipulated in the original contract. CLAUSE TWO - The present document does not constitute a novation of contract DIJ - - 1207, which continues fully in force in all that has not been modified by this additional contract. Duly signed in Santafe de Bogota, D.C., on December, nineteen ninety seven (1997). COLOMBIAN OIL COMPANY ARGOSY ENERGY INTERNATIONAL LUIS AUGUSTO YEPES G. SANTIAGO GONZALEZ ANGULO Vice President of Legal Representative International Commerce and Gas -3- EX-21 5 SUBSIDIARIES OF 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 6 CONSENTS OF EXPERTS AND 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, 1998 included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-36999. Houston, Texas ARTHUR ANDERSEN LLP March 30, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 2,124,250 0 1,134,812 0 736,899 4,446,211 59,715,603 (48,213,229) 16,460,448 23,764,584 0 0 0 114,922 (7,698,258) 14,460,448 8,982,008 9,181,783 3,677,603 3,677,603 4,772,828 0 2,294,853 (28,075,565) (285,321) (27,790,244) 0 0 0 (27,790,244) (2.42) (2.42)
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