<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-16621
GARNET RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2421851
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
33 CLAY STREET, SUITE 4500, HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
(713) 759-1692
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 14, 1995, 11,492,162 shares of Registrant's Common Stock, par value
$.01 per share, were outstanding.
<PAGE> 2
GARNET RESOURCES CORPORATION (the "Registrant" or the "Company")
I N D E X
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1995 (unaudited)
and December 31, 1994 3-4
Consolidated Statements of
Operations for the Three Months
and Six Months Ended June 30, 1995
and 1994 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 1995 and 1994 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements-June 30, 1995 (unaudited) 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17-18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,565,056 $ 7,990,605
Accounts receivable 2,740,942 2,276,500
Inventories 1,450,540 1,257,207
Prepaid expenses 279,461 133,692
----------- -----------
Total current assets 8,035,999 11,658,004
----------- -----------
NET ASSETS HELD FOR DISPOSITION 524,583 514,624
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties
(full-cost method) -
Proved 41,661,365 35,948,942
Unproved (excluded from
amortization) 7,188,467 6,416,808
----------- -----------
48,849,832 42,365,750
Other equipment 135,617 142,993
----------- -----------
48,985,449 42,508,743
Less - Accumulated depreciation,
depletion and amortization (8,544,598) (6,446,953)
----------- -----------
40,440,851 36,061,790
----------- -----------
OTHER ASSETS 1,021,971 1,065,619
----------- -----------
$50,023,404 $49,300,037
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Continued
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 199,866 $ 1,932,156
Accounts payable and accrued
liabilities 3,823,045 3,703,494
----------- -----------
Total current liabilities 4,022,911 5,635,650
----------- -----------
LONG-TERM DEBT, net of current portion 19,358,640 17,506,105
----------- -----------
DEFERRED INCOME TAXES 235,763 -
----------- -----------
OTHER LONG-TERM LIABILITIES 511,929 368,030
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
20,000,000 shares authorized,
11,492,162 shares issued and
outstanding as of June 30, 1995,
11,125,537 shares issued and
outstanding as of December 31, 1994 114,922 111,255
Capital in excess of par value 52,491,212 51,395,004
Retained earnings (deficit) (26,711,973) (25,716,007)
----------- -----------
Total stockholders' equity 25,894,161 25,790,252
----------- -----------
$50,023,404 $49,300,037
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales $ 2,569,194 $ 747,136 $ 4,208,141 $ 1,635,084
Interest 57,842 92,360 155,548 194,883
----------- ----------- ----------- -----------
2,627,036 839,496 4,363,689 1,829,967
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production 883,029 502,980 1,698,427 1,207,062
Exploration - 205 16,204 205
General and administrative 565,258 318,507 952,781 680,502
Interest 315,705 206,702 683,421 460,213
Depreciation, depletion and
amortization 1,363,522 300,103 2,110,144 738,958
Foreign currency translation
(gain)loss (328,461) 12,232 (510,700) 33,414
----------- ----------- ----------- -----------
2,799,053 1,340,729 4,950,277 3,120,354
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (172,017) (501,233) (586,588) (1,290,387)
PROVISION (BENEFIT) FOR INCOME TAXES 308,093 (63,904) 409,378 45,428
----------- ----------- ----------- ----------
NET LOSS $ (480,110) $ (437,329) $ (995,966) $(1,335,815)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (.04) $ (.04) $ (.09) $ (.12)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,492,162 11,125,537 11,340,245 11,125,537
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (995,966) $ (1,335,815)
Exploration costs 16,204 205
Depreciation, depletion and amortization 2,110,144 738,958
Deferred income taxes 235,763 (124,503)
Changes in components of working capital (1,569,781) (124,963)
Other 240,932 96,121
------------- -------------
Net cash provided by (used for)
operating activities 37,296 (749,997)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,117,048) (3,959,501)
Decrease in joint venture and contractor advances 902,191 3,029,048
Acquisition of interests in Argosy Energy
International, net of cash acquired (92,621) --
Other (13,117) 19,635
------------- -------------
Net cash used for investing activities (4,320,595) (910,818)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (90,475) (541,058)
Costs of debt issuances (51,775) (38,799)
------------- -------------
Net cash used for
financing activities (142,250) (579,857)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,425,549) (2,240,672)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,990,605 11,332,144
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,565,056 $ 9,091,472
============= =============
Supplemental disclosures of cash flow information:
Cash paid for -
Interest, net of amounts capitalized $ 643,165 $ 420,674
Income taxes 389,754 55,465
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(Unaudited)
(1) Financial statement presentation-
The condensed consolidated financial statements include the accounts of
Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its wholly
owned subsidiaries. Garnet and its wholly owned subsidiaries are collectively
referred to as the "Company." These financial statements have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and include all adjustments (which consist
solely of normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of financial position and results of
operations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
Company's prior audited consolidated financial statements and the notes thereto.
(2) Colombian operations-
Through its ownership of interests in Argosy Energy International, a Utah
limited partnership ("Argosy"), the Company has an indirect interest in a risk
sharing contract in Colombia (the "Santana Contract") with Empresa Colombiana de
Petroleos, the Colombian national oil company ("Ecopetrol"). The Santana
Contract currently entitles Argosy and its joint venture partner to explore for
oil and gas on approximately 86,000 acres located in the Putumayo Region of
Colombia (the "Santana Block"), and provides for a 10-year exploration period
expiring in 1997, subject to a requirement for additional partial
relinquishments in 1997, and for a production period expiring in 2015. Argosy
and its joint venture partner also have an association contract (the "Fragua
Contract") with Ecopetrol which covers an area of approximately 32,000 acres
contiguous to the northern boundary of the Santana Block (the "Fragua Block").
The 10-year exploration period and 28-year contract term provided by the Fragua
Contract will expire in 2002 and 2020, respectively. Argosy and its joint
venture partner also have the right until 2003 to explore for and produce oil
and gas from approximately 77,000 acres located in the Putumayo Region (the
"Aporte Putumayo Block") pursuant to other agreements with Ecopetrol (the
"Aporte Putumayo Contracts"). Argosy and its joint venture partner have notified
Ecopetrol that they intend to relinquish the Aporte Putumayo Block and have
recently suspended production from the wells on the block, which were first
placed on production in 1976, because declining production rates have made
continued operation economically unattractive under the terms of the contract
with Ecopetrol for sale of the oil production.
7
<PAGE> 8
Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract and the Fragua Contract provide that
Ecopetrol will receive a royalty equal to 20% of production on behalf of the
Colombian government and, in the event a discovery is deemed commercially
feasible, Ecopetrol will acquire a 50% interest in the production, 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 the event accumulated oil
production from the Santana Contract exceeds seven million barrels, Ecopetrol
will continue to bear 50% of development costs, but its interest in production
revenues and operating costs will increase to 65%. If a commercial field on the
Fragua Block produces in excess of 60 million barrels, Ecopetrol's interest in
production and costs will increase in 5% increments from 50% to 70% as
accumulated production from the field increases in 30 million barrel increments
from 60 million barrels to 150 million barrels. The joint venture paid all costs
of the exploration program for the Santana Block during the first two years of
the contract and thereafter the joint venture and Ecopetrol have been obligated
to pay 70% and 30%, respectively, of such exploration costs. The joint venture
bears all costs and risks of exploration activities on the Fragua Block, subject
to Ecopetrol's right to acquire a 50% interest in commercial discoveries. In the
event a discovery is made and is not deemed by Ecopetrol to be commercially
feasible, the joint venture may continue to develop the field at its own expense
and will recover 200% of the costs thereof, at which time Ecopetrol will acquire
a 50% interest therein at no cost to Ecopetrol or further reimbursement by
Ecopetrol to Argosy.
In March 1995 the Company increased its ownership in Argosy by
exchanging 366,625 shares of Garnet's common stock with a value of $3.00 per
share and cash totalling $142,703 for the partnership interests held by certain
of Argosy's limited partners. The Company's resulting net participation in
revenues and costs for the Santana Contract and Fragua Contract are as follows:
<TABLE>
<CAPTION>
Santana Fragua
Contract Contract
---------------------------- ------------------------------
Production Operating Production Operating
Revenues Costs Revenues Costs
---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Production activities:
Before seven million barrels
of accumulated production 21.8% 27.2% N/A
After seven million barrels
of accumulated production 15.3% 19.1% N/A
Before 60 million barrels
of accumulated production N/A 21.8% 27.3%
After 150 million barrels
of accumulated production N/A 13.1% 16.4%
Exploration costs 38.1% 54.6%
Development costs 27.2% 27.3%
</TABLE>
8
<PAGE> 9
The joint venture has completed its seismic acquisition and drilling
obligations for the first eight years of the Santana Contract, resulting in the
discovery of four oil fields, all of which have been declared commercial by
Ecopetrol. The joint venture has the right to continue the exploration program
through 1997 with an obligation to conduct exploration programs to be approved
by Ecopetrol in 1995 through 1997. The joint venture has also completed its
obligations for the first three years of the Fragua Contract; no wells have yet
been drilled in the contract area.
Under the terms of a contract in force through December 31, 1994, oil
produced from the Santana Block either was sold to Ecopetrol or was exported if
Ecopetrol elected not to purchase it. If the joint venture's share of crude
production from the Santana Block was required for Colombia's domestic market,
the price paid by Ecopetrol was based on the equivalent value of products
refined from the crude, less a stipulated refining cost. Under the terms of a
new contract effective January 1, 1995, all oil produced from the Santana Block
is sold to Ecopetrol. If Ecopetrol exports the oil, the price paid is the export
price received by Ecopetrol adjusted for quality differences less a handling and
commercialization fee of $.465 per barrel. If Ecopetrol does not export the oil,
the price paid is based on quoted prices for Colombia's Cano Limon crude oil
adjusted for quality differences, plus or minus a sales value differential to be
determined by independent analysis, less Ecopetrol's cost to transport the crude
to Cartagena and a handling and commercialization fee of $.365 per barrel.
Prices determined under terms of the new contract are not expected to be
significantly different than those calculated pursuant to the previous contract.
Under the terms of 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.
As general partner, the Company's subsidiary is contingently liable for any
obligations of Argosy and may be contingently liable for claims generally
related to the conduct of Argosy's business.
(3) Exploration licenses in Papua New Guinea -
Garnet PNG Corporation, a wholly owned subsidiary of Garnet ("Garnet PNG"),
owns working interests in two petroleum prospecting licenses in Papua New Guinea
which entitle it and its joint venture partners to explore for oil. Garnet PNG
owns a 7.73% interest (the "PPL-174 Interest") in Petroleum Prospecting License
No. 174 ("PPL-174") which covers 126,000 acres (the "PPL- 174 Area"), and a 40%
interest (the "PPL-77 Interest") in Petroleum Prospecting License No. 77
("PPL-77") which covers 945,000 acres (the "PPL-77 Area"). In 1986 oil was
discovered approximately 10 miles from the northern border of the PPL-77 Area in
an adjoining license area operated by Chevron Niugini Pty. Limited, a subsidiary
of Chevron Overseas Petroleum Inc. ("Chevron").
In 1989 Garnet PNG, Niugini Energy Pty. Limited ("Niugini") and
9
<PAGE> 10
Chevron entered into a farmout agreement, pursuant to which Chevron paid 100% of
certain exploration costs on the PPL-77 Area including the drilling of an
exploratory well, which was plugged and abandoned as a dry hole in 1990, and a
400-mile seismic survey, which resulted in interpretation of a large potential
oil prospect (the "Kamusi Prospect") on PPL-77 and two adjoining licenses. In
1991 Chevron withdrew from the joint venture with Garnet PNG and Niugini, and
reassigned its interest in PPL-77 to Garnet PNG and Niugini. As Garnet PNG was
unable to consummate a farmout agreement or make other arrangements to drill the
well which was then required to be drilled by December 1992, management of the
Company concluded in 1992 that the Company's investment in PPL-77 should be
charged to expense.
Notwithstanding this conclusion, the Company continued its efforts to
arrange for the drilling of a well on the Kamusi Prospect and entered into an
agreement in 1994 with several other companies to fund the costs of such well.
In January 1995 the Government of Papua New Guinea issued PPL-174 to Garnet PNG
and its joint venture partners. PPL-174 covers the Kamusi Prospect and includes
a portion of the acreage formerly within the boundaries of PPL-77 and adjoining
areas. Under the terms of PPL-174, the Kamusi Prospect well must be commenced by
January 18, 1996. Garnet PNG expects to contribute approximately $238,000 to the
costs of the well.
In April 1995 the Company entered into an agreement with Occidental
International Exploration and Production Company ("Occidental") covering PPL-77.
Under the agreement, and subject to the approval of the Papua New Guinea
Government, a new license on the acreage is to be issued to and owned by
Occidental (88%), Garnet (6%) and Niugini (6%), and Occidental agreed to drill
and complete at its cost a test well on the new license within the first 2
years. The Government has approved the application, and the new license is
expected to be issued in the fourth quarter of 1995. The Government of Papua New
Guinea has extended the expiration date of PPL-77 until January 1996.
In connection with its acquisition of the PPL-77 Interest from Niugini in
1987, Garnet PNG agreed to pay the first $2,545,000 of the costs to be incurred
by Garnet PNG and Niugini in connection with an exploration program on the
PPL-77 Area (the "Commitment Amount"), all of which has been paid. Garnet PNG
has agreed to continue to pay 100% of certain costs until the well on the Kamusi
Prospect has been drilled, and will recoup Niugini's 60% share of such costs out
of Niugini's net share of proceeds from production, if any. Such costs in excess
of the Commitment Amount are expected to include only nominal amounts to be
incurred in concluding the aforementioned contractual arrangements for drilling
the well on the Kamusi Prospect.
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 $US370,000) 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.
10
<PAGE> 11
(4) Long-term debt-
Long-term debt at June 30, 1995 and December 31, 1994 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
9 1/2% convertible subordinated debentures $15,000,000 $15,000,000
Note payable by Argosy to a U.S. bank 4,358,640 4,161,080
Note payable by Argosy to a Colombian bank 199,866 277,181
----------- -----------
19,558,506 19,438,261
Less - Current portion (199,866) (1,932,156)
----------- -----------
$19,358,640 $17,506,105
=========== ===========
</TABLE>
In 1993 Garnet issued $15,000,000 of convertible subordinated debentures
(the "Debentures") due December 1998. The Debentures bear interest at 9 1/2% per
annum payable quarterly and are convertible at the option of the holders into
Garnet common stock at $5.50 per share. If the Company elects to prepay the
Debentures under certain circumstances, it will issue warrants under the same
economic terms as the Debentures. At the option of a holder, in the event of a
change of control of the Company, the Company will be required to prepay such
holder's Debenture at a 30% premium. The Debentures are secured by a pledge of
all of the common stock of Garnet's wholly owned subsidiary which serves as the
general partner of Argosy (see Note 2). Under the terms of an agreement with the
holders of its Debentures, Garnet has agreed that it will not pay dividends or
make distributions to the holders of its common stock.
In May 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 first stage loan of $4,400,000 was completed in August 1994. Receipt
of the second stage loan of $4,800,000 is subject to a number of conditions,
including compliance with certain drilling and production schedules and oil
sales requirements. The Company plans to use 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
11
<PAGE> 12
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 June 30, 1995 was 6 5/16%. In addition Argosy pays the lender a commitment
fee of .25% per annum on the undisbursed and uncancelled amount of the guaranty,
and also paid the lender a facility fee of $46,000. In consideration for OPIC's
guaranty, Argosy agreed to pay OPIC certain fees, including a facility fee of
$92,000, a guaranty fee of 2.4% per annum on the outstanding balance of the
loans guaranteed, a commitment fee of .67% per annum on the undisbursed and
uncancelled amount of the guaranty, and a cancellation fee equal to .67% of the
amount canceled. As of June 30, 1995, Argosy was not in compliance with certain
financial ratios required under the finance agreement. OPIC has waived
compliance with these requirements through July 1, 1996.
In 1993 Argosy received a loan from a Colombian bank, which is secured by
receivables from Ecopetrol for well costs allocable to Ecopetrol but paid by
Argosy. The loan bears interest at U.S. prime plus 2%, and is repaid in varying
amounts from Ecopetrol's share of production from the wells. The interest rate
at June 30, 1995 was 11%.
(5) Stockholders' equity -
Stock option plans -
Garnet and a predecessor entity have adopted stock option plans (the
"Employee Plans") pursuant to which an aggregate of 1,488,000 shares of Garnet's
common stock is authorized to be issued upon exercise of options granted to
officers, employees, and certain other persons or entities who perform
substantial services for or on behalf of Garnet or its subsidiaries.
The Stock Option and Compensation Committee of Garnet's Board of Directors
(the "Committee") is vested with sole and exclusive authority to administer and
interpret the Employee Plans, to determine the terms upon which options may be
granted, to prescribe, amend and rescind such interpretations and determinations
and to grant options to directors. Current Committee members are not eligible to
receive options under the Employee Plans.
In addition, Garnet has adopted the 1990 Directors' Stock Option Plan (the
"Directors' Plan") pursuant to which an aggregate of 470,000 shares of Garnet's
common stock is authorized to be issued to directors who are not employees of
the Company. Under the terms of the Directors' Plan, as amended, options may be
granted at the discretion of the Board of Directors, provided, however, that the
timing of option grants is restricted to the second quarter of Garnet's fiscal
year.
Each option is exercisable for a period of 10 years and 30 days from the
date of grant. The purchase price of shares issuable upon exercise of an option
may be paid in cash or by delivery of shares with a value equal to the exercise
price of the option. The Committee has determined that the right to exercise
non-incentive options issued to employees vests over a period of four years, so
that 20% of the option
12
<PAGE> 13
becomes exercisable on each anniversary of the date of grant. Non-incentive
options issued to directors and other eligible participants generally are fully
exercisable on and after the date of grant.
The following is a summary of stock option activity in connection with the
Employee Plans and the Directors' Plan:
<TABLE>
<CAPTION>
Shares Price Range
------ -----------
<S> <C> <C>
Options outstanding at December 31, 1992 952,500 $2.50-$13.83
Options granted 310,000 4.78- 5.75
Options exercised (3,000) 2.50
Options expired (30,000) 4.78- 13.83
--------- ------------
Options outstanding at December 31, 1993 1,229,500 2.50- 13.83
Options granted 140,000 4.05
--------- ------------
Options outstanding at December 31, 1994 1,369,500 2.50- 13.83
Options granted 618,000 2.50- 2.87
Options expired (568,398) 2.50- 13.83
--------- ------------
Options outstanding at June 30, 1995 1,419,102 $2.50-$13.83
========= ============
</TABLE>
As of June 30, 1995, options for 1,161,878 shares were exercisable.
(6) Income taxes -
The provisions for income taxes relate to the Colombian activities of
Argosy. No United States deferred taxes were provided because the tax bases of
the Company's assets exceed the financial statement bases, resulting in a
deferred tax asset which the Company has determined is not presently realizable.
As of December 31, 1994, the Company had a regular tax net operating loss
carryforward and an alternative minimum tax loss carryforward of approximately
$22,400,000 and $22,000,000, respectively. These loss carryforwards will expire
beginning in 2001 if not utilized to reduce U.S. income taxes otherwise payable
in future years, and are limited as to utilization because of the occurrences of
"ownership changes" (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) in 1991 and earlier years. Such loss carryforwards also
exclude regular tax net operating loss carryforwards aggregating approximately
$4,500,000 attributable to certain of Garnet's subsidiaries, which can be used
in certain circumstances to offset taxable income generated by such
subsidiaries.
(7) Acquisition of RGO Energy Inc. and RGO Partners, Ltd. -
In 1991, in transactions accounted for as purchases, Garnet acquired RGO
Energy Inc. and RGO Partners, Ltd., two privately-owned entities (referred to
collectively herein as "the RGO Entities"). At the date of acquisition,
approximately 60% of the assets of the RGO Entities was comprised of cash, with
the balance being primarily
13
<PAGE> 14
working, royalty and mineral interests in producing and undeveloped oil and gas
properties in the United States. All of the working interests acquired in the
mergers were sold in 1993. Because management intends to sell the remaining
royalty and mineral interests when the market conditions are suitable, these
assets are reflected as "Net assets held for disposition" in the accompanying
consolidated balance sheets.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
Since December 31, 1994, the Company has expended approximately
$5,000,000 for the acquisition, exploration and development of its oil and gas
properties. Such expenditures include approximately $4,200,000 for exploration
and development activities on the Santana Block and Fragua Block in Colombia,
approximately $100,000 for exploration and related costs for the PPL-77 Area and
PPL-174 Area in Papua New Guinea, and approximately $700,000 for exploration
activities in Turkey and other countries.
Funding for these activities was provided primarily by reducing the
Company's cash balances from approximately $7,991,000 at December 31, 1994 to
approximately $3,565,000 at June 30, 1995. Other than the OPIC guaranty, the
Company has no significant lines of credit.
Argosy and its joint venture partner have completed the seismic acquisition
and drilling obligations for the first eight years of the Santana Contract,
resulting in the discovery of four oil fields. The joint venture has the right
to continue the exploration program through 1997 with an obligation to conduct
exploration programs to be approved by Ecopetrol in 1995 through 1997. The
Company plans to perform additional seismic work and to drill one additional
exploratory well on the Santana Block during the remainder of 1995 and 1996,
with estimated total costs to the Company of $1,900,000. The seismic programs
required during the first three years of the Fragua Contract have also been
completed. An additional seismic survey is planned for 1996, for which the
Company's share of the costs is estimated to be $250,000. The Company and its
joint venture partner have applied for a new association contract covering
39,000 acres adjacent to the Santana Block and the Fragua Block. If the new
contract is consummated, the Company plans to conduct a seismic program in 1996,
for which its share of the costs is estimated to be $400,000.
The Toroyaco and Linda fields, the first two fields discovered on the
Santana Block, began producing in 1992. The Mary and Miraflor fields, the last
two fields discovered, were declared as commercial by Ecopetrol in 1993. In
August 1994 the Company resumed a limited early production program from one well
in the Mary field, and added additional wells in the Mary and Miraflor fields to
this program in the first and second quarters of 1995. Production from the four
fields is presently approximately 7,000 barrels of oil per day. The
14
<PAGE> 15
Company's share of such production is 21.8%; it also receives an additional
21.8% of the production from certain wells until it recovers the drilling and
completion costs for those wells allocable to Ecopetrol but paid by the Company.
As of June 30, 1995, the Company was completing the construction of
production facilities for the Mary and Miraflor fields, for which the Company's
share of the remaining costs is expected to be approximately $1,950,000. The
Company also plans to drill four additional development wells in the Toroyaco
and Linda fields in 1996. The Company's share of the costs of drilling and
completing each of the wells in these fields is expected to range from $700,000
to $900,000. To increase producing rates in existing wells, the Company plans to
perform hydraulic fracture stimulations on six wells in 1995, at an estimated
total cost to the Company of $950,000.
Under the terms of PPL-174, an exploratory well on the Kamusi Prospect in
Papua New Guinea must be commenced by January 18, 1996. Garnet PNG expects to
contribute approximately $238,000 to the costs of the well.
As described herein, the Company's operations are primarily located outside
the United States. Although certain of such operations are conducted in foreign
currencies, the Company considers the U.S. dollar to be the functional currency
in most of the countries in which it operates. In addition, the Company has no
significant operations in countries with highly inflationary economies. As a
result, the Company's foreign currency transaction gains and losses have not
been significant. Exchange controls exist for the repatriation of funds from
Colombia and Papua New Guinea. The Company believes that the continuing
viability of its operations in these countries will not be affected by such
restrictions.
It is anticipated that the Company's foreign exploration and development
activities will require substantial amounts of capital. To finance its planned
exploration and development activities, the Company intends to utilize its
existing working capital, cash flow from production in Colombia, proceeds of
OPIC-guaranteed loans, and cash proceeds expected to be received from the sale
of assets held for disposition, although there can be no assurance that any of
such assets can be sold on terms acceptable to the Company. The $4.8 million
second stage of the OPIC-guaranteed development financing is expected to be
funded in the third quarter of 1995, subject to completion of documentation and
compliance with other requirements. The Company has also identified over $1.5
million in annual reductions of U.S. and Colombian general and administrative
expenses and production costs, which it plans to implement during the remainder
of 1995 and early 1996. The Company may also consider entering into arrangements
whereby certain costs of exploration will be paid by others to earn an interest
in the properties.
The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of an oil and gas business is uncertain
due, in part, to the substantial instability
15
<PAGE> 16
in oil and gas prices in recent years and to the volatility of financial
markets. There can be no assurance that the additional financing which may be
necessary to fund the Company's operations and obligations will be available on
economically acceptable terms. In addition, the Company's ability to continue
its exploration and development programs may be dependent upon its joint venture
partners financing their portion of such costs and expenses. There can be no
assurance that the Company's partners will contribute, or be in a position to
contribute, their costs and expenses of the joint venture programs. If the
Company's partners cannot finance their obligations to the joint ventures, the
Company may be required to accept an assignment of the partners' interests
therein and assume their financing obligations. If sufficient funds cannot be
raised to meet the Company's obligations in connection with its properties, the
interests in such properties might be sold or forfeited.
Results of Operations
Three months and six months ended June 30, 1995
compared with the same periods in 1994
The Company reported net losses of $480,110 ($.04 per share) and $437,329
($.04 per share) for the three months ended June 30, 1995 and 1994,
respectively, and $995,966 ($.09 per share) and $1,335,815 ($.12 per share) for
the six months ended June 30, 1995 and 1994, respectively.
Increases in 1995 in oil and gas revenues, production costs and
depreciation, depletion and amortization primarily reflect higher oil prices and
production from new wells in Colombia. Production costs per barrel decreased
because of a lower tariff on the Trans-Andean pipeline which became effective in
February 1994, and because of reduced trucking charges resulting from the
completion of the Uchupayaco-Santana pipeline in June 1994. The Company's
comparative average daily sales volumes in barrels of oil per day ("BOPD"),
average sales prices and costs per barrel in Colombia for such periods were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average oil sales (BOPD) 1,663 647 1,408 729
Average oil price per barrel $ 16.98 $ 12.68 $ 16.51 $ 12.39
Production costs per barrel $ 5.84 $ 8.54 $ 6.66 $ 9.14
Depreciation, depletion and
amortization per barrel $ 8.99 $ 5.05 $ 8.26 $ 5.56
</TABLE>
General and administrative expenses increased as a result of charges
incurred in connection with management changes in 1995. The increase in 1995 in
interest expense, net of amounts capitalized, is attributable primarily to the
OPIC-guaranteed loan received in August 1994. The foreign currency translation
gain recorded in 1995 resulted from an approximate 6% devaluation in the
Colombian
16
<PAGE> 17
peso during the first half of 1995 and the settlement of a liability. The
provision for income taxes, all of which relates to Colombian operations, was
higher because of a deferred tax provision recorded in 1995 and a deferred tax
benefit recorded in 1994.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the shareholders of the Company was held on June 21,
1995, pursuant to notice, at which the following persons were elected directors
of the Company to serve until the next annual meeting of the shareholders or
until their successors are elected and qualify:
Robert J. Cresci
Montague H. Hackett, Jr.
Alastair Manson
George M. Nevers
Wendell W. Robinson
Arthur L. Swanson
John V. Tunney
Subsequent to the Annual Meeting, Mr. Nevers resigned as a director of the
Company.
In addition, a proposal was approved by the shareholders of the Company at
the Annual Meeting to amend the 1990 Stock Option Plan to increase by 300,000
shares the number of shares of the Company's Common Stock available for options
to be granted to officers, employees, and certain other persons or entities
performing substantial services for or on behalf of Garnet or its subsidiaries.
The proposal was approved by the affirmative vote of the holders of 8,411,833
shares of the Company's Common Stock; the holders of 838,287 shares of the
Company's Common Stock voted against the proposal.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Item Exhibit
No. Item Title No.
---- ---------- -------
<S> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession:
Not Applicable
(3) Articles of Incorporation and By-Laws:
Not Applicable
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Item Exhibit
No. Item Title No.
---- ---------- -------
<S> <C> <C>
(4) Instruments defining the rights of security
holders, including indentures:
Not Applicable
(10) Material contracts: Not Applicable
(11) Statement regarding computation of per share
earnings is not required because the relevant
computations can be clearly determined from
the material contained in the Financial
Statements included herein.
(15) Letter re unaudited interim financial
information:
Not Applicable
(18) Letter re change in accounting principles:
Not applicable
(19) Report furnished to security holders:
Not Applicable
(22) Published report regarding matters submitted
to vote of security holders:
Not Applicable
(23) Consents of experts and counsel:
Not Applicable
(24) Power of attorney: Not Applicable
(27) Financial Data Schedule. 27
(99) Additional Exhibits: Not Applicable
</TABLE>
(b) Reports on Form 8-K
A Report on Form 8-K dated June 29, 1995 was filed by
Registrant during the three months ended June 30, 1995.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GARNET RESOURCES CORPORATION
Date: August 14, 1995 /s/ W. Kirk Bosche'
----------------------------
W. Kirk Bosche',
Vice President and Treasurer
(As both a duly authorized
officer of Registrant and as
principal financial officer
of Registrant)
19
<PAGE> 20
Exhibit Index
(a) Exhibits
<TABLE>
<CAPTION>
Item Exhibit
No. Item Title No.
---- ---------- -------
<S> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession:
Not Applicable
(3) Articles of Incorporation and By-Laws:
Not Applicable
(4) Instruments defining the rights of security
holders, including indentures:
Not Applicable
(10) Material contracts: Not Applicable
(11) Statement regarding computation of per share
earnings is not required because the relevant
computations can be clearly determined from the
material contained in the Financial Statements
included herein.
(15) Letter re unaudited interim financial information:
Not Applicable
(18) Letter re change in accounting principles:
Not Applicable
(19) Report furnished to security holders:
Not Applicable
(22) Published report regarding matters submitted to
vote of security holders:
Not Applicable
(23) Consents of experts and counsel:
Not Applicable
(24) Power of attorney: Not Applicable
(27) Financial Data Schedule. 27
(99) Additional Exhibits: Not Applicable
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> JUN-30-1995
<CASH> 3,565,056
<SECURITIES> 0
<RECEIVABLES> 1,876,775
<ALLOWANCES> 0
<INVENTORY> 1,450,540
<CURRENT-ASSETS> 8,035,999
<PP&E> 48,985,449
<DEPRECIATION> (8,554,598)
<TOTAL-ASSETS> 50,023,404
<CURRENT-LIABILITIES> 4,022,911
<BONDS> 19,358,640
<COMMON> 114,922
0
0
<OTHER-SE> 25,779,239
<TOTAL-LIABILITY-AND-EQUITY> 50,023,404
<SALES> 4,208,141
<TOTAL-REVENUES> 4,363,689
<CGS> 1,698,427
<TOTAL-COSTS> 1,698,427
<OTHER-EXPENSES> 2,126,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 683,421
<INCOME-PRETAX> (586,588)
<INCOME-TAX> 409,378
<INCOME-CONTINUING> (995,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (995,966)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
