<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 MARCH 31, 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
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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.)
333 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 May 15, 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> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1995 (unaudited)
and December 31, 1994 3-4
Consolidated Statements of
Operations for the Three Months
Ended March 31, 1995 and 1994
(unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1995 and 1994 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements-March 31, 1995 (unaudited) 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15-17
PART II - OTHER INFORMATION
- -------
Item 6. Exhibits and Reports on Form 8-K 18-19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1995 1994
- ------ ------------ -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,617,990 $ 7,990,605
Accounts receivable 2,906,814 2,276,500
Inventories 1,388,501 1,257,207
Prepaid expenses 252,263 133,692
----------- -----------
Total current assets 8,165,568 11,658,004
----------- -----------
NET ASSETS HELD FOR DISPOSITION 549,314 514,624
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties
(full-cost method)-
Proved 39,372,235 35,948,942
Unproved (excluded from
amortization) 7,322,526 6,416,808
----------- -----------
46,694,761 42,365,750
Other equipment 142,993 142,993
----------- -----------
46,837,754 42,508,743
Less - Accumulated depreciation,
depletion and amortization (7,193,575) (6,446,953)
----------- -----------
39,644,179 36,061,790
----------- -----------
OTHER ASSETS 1,028,526 1,065,619
----------- -----------
$49,387,587 $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>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------ ------------ ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,008,513 $ 1,932,156
Accounts payable and accrued
liabilities 2,998,398 3,703,494
----------- -----------
Total current liabilities 5,006,911 5,635,650
----------- -----------
LONG-TERM DEBT, net of current portion 17,625,090 17,506,105
----------- -----------
OTHER LONG-TERM LIABILITIES 381,315 368,030
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
20,000,000 shares authorized,
11,492,162 shares issued and
outstanding as of March 31, 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) (26,231,863) (25,716,007)
----------- -----------
Total stockholders' equity 26,374,271 25,790,252
----------- -----------
$49,387,587 $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
March 31,
1995 1994
----------- -----------
<S> <C> <C>
REVENUES:
Oil sales $ 1,638,947 $ 887,948
Interest 97,706 102,523
----------- -----------
1,736,653 990,471
----------- -----------
COSTS AND EXPENSES:
Production 815,398 704,082
Exploration 16,204 -
General and
administrative 387,523 361,995
Interest 367,716 253,511
Depreciation, depletion
and amortization 746,622 438,855
Foreign currency translation
(gain)loss (182,239) 21,182
----------- -----------
2,151,224 1,779,625
----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (414,571) (789,154)
PROVISION FOR INCOME TAXES 101,285 109,332
----------- -----------
NET LOSS $ (515,856) $ (898,486)
=========== ===========
NET LOSS PER SHARE $ (.05) $ (.08)
=========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 11,186,641 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>
Three Months Ended
March 31,
----------------------------
1995 1994
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (515,856) $ (898,486)
Exploration costs 16,204 -
Depreciation, depletion and
amortization 746,622 438,855
Deferred income taxes - 25,535
Changes in components of
working capital (990,666) (140,716)
Other 54,153 52,748
----------- -----------
Net cash used for
operating activities (689,543) (522,064)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,406,500) (2,143,817)
(Increase) decrease in joint venture
and contractor advances (135,846) 4,613,724
Acquisition of interests in Argosy Energy
International, net of cash acquired (92,621) -
Other (32,727) 3,710
----------- -----------
Net cash provided by (used for)
investing activities (3,667,694) 2,473,617
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (15,378) (485,797)
Costs of debt issuances - (2,265)
----------- -----------
Net cash used for
financing activities (15,378) (488,062)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,372,615) 1,463,491
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 7,990,605 11,332,144
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,617,990 $12,795,635
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid for -
Interest, net of amounts capitalized $ 334,647 $ 255,810
Income taxes 169,635 38,782
</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
MARCH 31, 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 172,000 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 1995 and 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
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<PAGE> 8
for sale of the oil production.
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>
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>
The joint venture has completed its seismic acquisition and
8
<PAGE> 9
drilling obligations for the first six years of the Santana Contract, resulting
in the discovery of four oil fields, all of which have been declared commercial
by Ecopetrol. As of March 31, 1995, a total of 10 productive wells had been
drilled in the Toroyaco, Linda, Mary and Miraflor fields, and another
development well in the Mary field was in progress. Five wells on other
geologic prospects have been plugged and abandoned as dry holes. 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 seismic obligation for
the first two 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-74 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
9
<PAGE> 10
Chevron Niugini Pty. Limited, a subsidiary of Chevron Overseas Petroleum Inc.
("Chevron").
In 1989 Garnet PNG, Niugini Energy Pty. Limited ("Niugini") and 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 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. 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
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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 $US400,000) per year may be fully remitted out of
Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted,
subject to clearance from the Bank of Papua New Guinea.
(4) Long-term debt-
Long-term debt at March 31, 1995 and December 31, 1994 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
9 1/2% convertible subordinated $15,000,000 $15,000,000
debentures
Note payable by Argosy to a
U.S. bank 4,358,640 4,161,080
Note payable by Argosy to a
Colombian bank 274,963 277,181
----------- -----------
19,633,603 19,438,261
Less - Current portion (2,008,513) (1,932,156)
----------- -----------
$17,625,090 $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.
11
<PAGE> 12
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 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 March 31, 1995
was 6 9/16%. 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 March 31, 1995, Argosy was not in compliance with
certain financial ratios required under the finance agreement. OPIC has waived
compliance with these requirements through April 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 March 31, 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 1,188,000 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.
At Garnet's 1995 annual meeting of shareholders, a proposal will be considered
to amend one of the Employee Plans to increase by 300,000 shares the number of
shares authorized to be issued.
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
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<PAGE> 13
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 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 293,000 2.69
Options expired (359,955) 2.50- 13.83
--------- ------------
Options outstanding at March 31, 1995 1,302,545 $2.50-$13.83
========= ============
</TABLE>
As of March 31, 1995, options for 942,430 shares were exercisable.
(6) Income taxes-
The provisions for income taxes relate to the Colombian activities of
Argosy. No United States or Colombian 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, respective-
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<PAGE> 14
ly. 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 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.
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<PAGE> 15
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
$3,300,000 for the acquisition, exploration and development of its oil and gas
properties. Such expenditures include approximately $2,700,000 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 $500,000 for
exploration activities in Turkey.
Funding for these activities was provided by reducing the Company's cash
balances from approximately $7,991,000 at December 31, 1994 to approximately
$3,618,000 at March 31, 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 six 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 during the remainder of 1995 on the Santana Block,
with estimated total costs to the Company of approximately $1,600,000. The
seismic program required during the first two years of the Fragua Contract has
also been completed. An additional seismic survey is planned for 1995, for
which the Company's share of the costs is estimated to be approximately
$250,000.
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 10,000 barrels of oil per day.
The 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 March 31, 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 $2,450,000. The
Company also plans to drill five additional development wells in the Toroyaco,
Linda and Miraflor fields in 1995 and 1996. The Company's share of the costs
of drilling and completing each of the wells in these fields is expected to
range from $650,000 to $800,000.
15
<PAGE> 16
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 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 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.
16
<PAGE> 17
Results of Operations
Three months ended March 31, 1995
compared with the same period in 1994
The Company reported net losses of $515,856 ($.05 per share) and $898,486
($.08 per share) for the three months ended March 31, 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
March 31,
----------------------
1995 1994
------ ------
<S> <C> <C>
Average oil sales (BOPD) 1,151 812
Average oil price per barrel $15.82 $12.15
Production costs per barrel $ 7.87 $ 9.63
Depreciation, depletion and
amortization per barrel $ 7.18 $ 5.97
</TABLE>
The increase in 1995 in interest expense, net of amounts capitalized,
is attributable to the OPIC-guaranteed loan received in August 1994. The
foreign currency translation gain recorded in 1995 resulted from an approximate
5% devaluation in the Colombian peso during the first quarter. The provision
for income taxes, all of which relates to Colombian operations, was higher in
1994 because of a deferred tax provision.
17
<PAGE> 18
PART II - OTHER INFORMATION
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
(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
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
(27) Financial Data Schedule. 27
(99) Additional Exhibits: Not Applicable
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by Registrant during the
three months ended March 31, 1995.
19
<PAGE> 20
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: May 15, 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)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,617,990
<SECURITIES> 0
<RECEIVABLES> 1,613,866
<ALLOWANCES> 0
<INVENTORY> 1,388,501
<CURRENT-ASSETS> 8,165,568
<PP&E> 46,837,754
<DEPRECIATION> (7,193,575)
<TOTAL-ASSETS> 49,387,587
<CURRENT-LIABILITIES> 5,006,911
<BONDS> 17,625,090
<COMMON> 114,922
0
0
<OTHER-SE> 26,259,349
<TOTAL-LIABILITY-AND-EQUITY> 49,387,587
<SALES> 1,638,947
<TOTAL-REVENUES> 1,736,653
<CGS> 815,398
<TOTAL-COSTS> 815,398
<OTHER-EXPENSES> 762,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 367,716
<INCOME-PRETAX> (414,571)
<INCOME-TAX> 101,285
<INCOME-CONTINUING> (515,856)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (515,856)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
