<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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-16621
GARNET RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2421851
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11011 RICHMOND, SUITE 650, HOUSTON, TEXAS 77042-6720
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 783-0010
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of August 12, 1996, 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 -
June 30, 1996 (unaudited)
and December 31, 1995 3-4
Consolidated Statements of
Operations for the Three Months and
Six Months Ended June 30, 1996 and 1995
(unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 1996 and 1995 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements- June 30, 1996 (unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-14
PART II - OTHER INFORMATION
- -------
Item 6. Exhibits and Reports on Form 8-K 15-16
</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,
ASSETS 1996 1995
------ ----------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,277,345 $ 5,713,191
Accounts receivable 2,904,138 2,302,712
Inventories 1,360,601 986,532
Prepaid expenses 180,732 249,454
----------- ------------
Total current assets 8,722,816 9,251,889
----------- ------------
NET ASSETS HELD FOR DISPOSITION - 403,941
----------- ------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties
(full-cost method)-
Proved 49,852,632 46,044,011
Unproved (excluded from
amortization) 3,640,279 4,598,001
----------- ------------
53,492,911 50,642,012
Other equipment 144,351 137,343
----------- ------------
53,637,262 50,779,355
Less - Accumulated depreciation,
depletion and amortization (14,944,743) (11,384,135)
----------- ------------
38,692,519 39,395,220
----------- ------------
OTHER ASSETS 785,704 907,978
----------- ------------
$48,201,039 $49,959,028
=========== ===========
</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,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ -------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,363,117 $ 4,043,758
Accounts payable and accrued
liabilities 2,162,670 2,418,270
----------- ------------
Total current liabilities 5,525,787 6,462,028
----------- ------------
LONG-TERM DEBT, net of current portion 20,269,992 20,151,120
----------- ------------
DEFERRED INCOME TAXES 835,076 640,919
----------- ------------
OTHER LONG-TERM LIABILITIES 372,029 438,156
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000
shares authorized, 11,492,162 shares
issued and outstanding as of June 30,
1996 and December 31, 1995 114,922 114,922
Capital in excess of par value 52,491,212 52,491,212
Retained earnings (deficit) (31,407,979) (30,339,329)
----------- -----------
Total stockholders' equity 21,198,155 22,266,805
----------- -----------
$48,201,039 $49,959,028
=========== ===========
</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,
1996 1995 1996 1995
------------ ---------- --------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales $ 3,288,288 $ 2,569,194 $ 6,185,377 $ 4,208,141
Interest 63,811 57,842 134,499 155,548
----------- ----------- ----------- -----------
3,352,099 2,627,036 6,319,876 4,363,689
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production 964,360 883,029 1,832,415 1,698,427
Exploration 5,258 - 5,258 16,204
Loss on net assets held
for disposition 46,777 - 46,777 -
General and
administrative 186,993 565,258 341,673 952,781
Interest 545,343 315,705 1,090,648 683,421
Depreciation, depletion
and amortization 1,949,174 1,363,522 3,556,477 2,110,144
Foreign currency
translation gain (30,161) (328,461) (125,433) (510,700)
----------- ----------- ----------- -----------
3,667,744 2,799,053 6,747,815 4,950,277
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (315,645) (172,017) (427,939) (586,588)
PROVISION FOR
INCOME TAXES 331,539 308,093 640,711 409,378
----------- ----------- ----------- -----------
NET LOSS $ (647,184) $ (480,110) $(1,068,650) $ (995,966)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (.06) $ (.04) $ (.09) $ (.09)
=========== =========== =========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 11,492,162 11,492,162 11,492,162 11,340,245
=========== =========== =========== ===========
</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,
--------------------------------------
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,068,650) $ (995,966)
Exploration costs 5,258 16,204
Loss on net assets held for disposition 46,777 -
Depreciation, depletion and amortization 3,556,477 2,110,144
Deferred income taxes 194,157 235,763
Changes in components of working capital (959,641) (1,569,781)
Other 115,530 240,932
----------- -----------
Net cash provided by operating activities 1,889,908 37,296
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,623,801) (5,117,048)
Proceeds from asset dispositions 287,395 -
(Increase) decrease in joint venture
and contractor advances (501,215) 902,191
Acquisition of interests in Argosy Energy
International, net of cash acquired - (92,621)
Other 91,896 (13,117)
----------- -----------
Net cash used for investing activities (2,745,725) (4,320,595)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (561,769) (90,475)
Costs of debt issuances (18,260) (51,775)
----------- -----------
Net cash used for financing activities (580,029) (142,250)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,435,846) (4,425,549)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 5,713,191 7,990,605
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,277,345 $ 3,565,056
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for -
Interest, net of amounts capitalized $ 949,084 $ 643,165
Income taxes 327,932 389,754
</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, 1996
(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 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").
The 10-year exploration periods provided by the Fragua Contract and the
Yuruyaco Contract will expire in 2002 and 2005, respectively, and the 28-year
contract terms will expire in 2020 and 2023, respectively. Argosy and its
joint venture partner also have the right until 2003 to explore for and produce
oil and gas from approximately 77,000 acres located in the Putumayo Region (the
"Aporte Putumayo Block") pursuant to other agreements with Ecopetrol. Argosy
and its joint venture partner have notified Ecopetrol that they intend to
abandon the remaining wells and relinquish the Aporte Putumayo Block because
declining production rates have made continued operation of the wells
economically unattractive.
Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract, the Fragua Contract and the Yuruyaco
Contract provide that Ecopetrol will receive a royalty equal to 20% of
production on behalf of the Colombian government and, in the event a discovery
is deemed commercially feasible, Ecopetrol will acquire a 50% interest in the
7
<PAGE> 8
remaining production from the field, bear 50% of the development costs, and
reimburse the joint venture, from Ecopetrol's share of future production from
each well, for 50% of the joint venture's costs of successful exploratory wells
in the field. After June 1996, when accumulated oil production from the
Santana Contract exceeded seven million barrels, Ecopetrol will continue to
bear 50% of development costs, but its interest in production revenues and
operating costs applicable to wells on the Santana Block increased to 65%. If a
commercial field on the Fragua Block produces in excess of 60 million barrels,
Ecopetrol's interest in production and costs will increase in 5% increments
from 50% to 70% as accumulated production from the field increases in 30
million barrel increments from 60 million barrels to 150 million barrels. If a
commercial field on the Yuruyaco Block produces in excess of 60 million
barrels, Ecopetrol's interest in production and costs will range from 50% to
75%, based on annual measurements of profitability as defined in the Yuruyaco
Contract. The joint venture paid all costs of the exploration program for the
Santana Block during the first two years of the contract and thereafter the
joint venture and Ecopetrol have been obligated to pay 70% and 30%,
respectively, of such exploration costs. The joint venture bears all costs and
risks of exploration activities on the Fragua Block and the Yuruyaco Block,
subject to Ecopetrol's right to acquire a 50% interest in commercial
discoveries. 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, the Fragua Contract and the Yuruyaco Contract are as
follows:
<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Santana Contract:
Before seven million barrels
of accumulated production 21.8% 27.2% 38.1% 27.2%
After seven million barrels
of accumulated production 15.3% 19.1% 38.1% 27.2%
Fragua Contract:
Before 60 million barrels
of accumulated production 21.8% 27.3% 54.6% 27.3%
After 150 million barrels
of accumulated production 13.1% 16.4% 54.6% 27.3%
Yuruyaco Contract:
Before 60 million barrels
of accumulated production 22.0% 27.5% 55.0% 27.5%
After 60 million barrels of
accumulated production at
maximum profitability 11.0% 13.8% 55.0% 27.5%
</TABLE>
The joint venture has completed its seismic acquisition and drilling
obligations for the first nine years of the Santana Contract, resulting in the
discovery of four oil fields, all of which have
8
<PAGE> 9
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 1996 and 1997. The joint
venture has also completed its seismic obligations for the first two years of
the Fragua Contract, but no wells have yet been drilled on the Fragua Block.
Under the terms of a contract with Ecopetrol, all oil produced from
the Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the
price paid is the export price received by Ecopetrol, adjusted for quality
differences, less a handling and commercialization fee of $.465 per barrel. 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. Under the terms of its contract
with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in
Colombian pesos which may only be utilized in Colombia. To date, Argosy has
experienced no difficulty in repatriating the remaining 75% of such payments
which are payable in United States dollars.
As general partner, the Company's subsidiary is contingently liable
for any obligations of Argosy and may be contingently liable for claims
generally related to the conduct of Argosy's business.
(3) LONG-TERM DEBT-
Long-term debt at June 30, 1996 and December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
9 1/2% convertible subordinated debentures $15,000,000 $15,000,000
Notes payable by Argosy to a U.S. bank 8,618,220 9,113,520
Note payable by Argosy to a Colombian bank 14,889 81,359
----------- -----------
23,633,109 24,194,879
Less - Current portion (3,363,117) (4,043,758)
----------- -----------
$20,269,992 $20,151,120
=========== ===========
</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. As
of June 30, 1996, Garnet was not in compliance with the minimum net worth
required by the Debentures. The Company has classified the Debentures as
long-term debt in the accompanying consolidated balance sheets because the
Debenture holders have waived compliance with this requirement through July 1,
1997 subject to the termination of such waiver on October 31, 1996 if the ratio
of the
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aggregate principal amount of outstanding Debentures to the sum of (i) the
number of net barrels of proved oil reserves as of September 30, 1996 plus (ii)
the number of net barrels of oil produced during the period from April 1,1996
through September 30, 1996 is greater than 4.5 to 1. Such ratio was 4.2 to 1
as of June 30, 1996.
In 1994 Argosy entered into a finance agreement with Overseas Private
Investment Corporation, an agency of the United States government ("OPIC"),
pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to
Argosy. The loans were funded in two stages of $4,400,000 in August 1994 and
$4,800,000 in October 1995. The Company plans to use these funds to drill
development wells and complete the construction of its production facilities in
Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana
Contract and related assets, as well as the pledge of Garnet's direct and
indirect interests in Argosy. The terms of the guaranty agreement also
restrict Argosy's ability to make distributions to its partners, including the
Company, prior to the repayment of the guaranteed loans. The maximum term of
the loans is not to exceed seven years, and the principal amortization schedule
is based on projected cash flows from wells on the Santana Block. The loans
bear interest at the lender's eurodollar deposit rate plus .25% per annum for
periods of two, three or six months as selected by Argosy. The interest rate
at June 30, 1996 was 5 7/8%. 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.
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, 1996 was 10 1/4%.
(4) STOCK OPTION PLANS-
Garnet and a predecessor entity have adopted stock option plans (the
"Employees' Plans") pursuant to which an aggregate of 1,483,000 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 Employees' Plans, to determine the terms upon
which options may be granted, to prescribe, amend and rescind such
interpretations and determinations and to grant options to directors. Current
Committee members are not eligible to receive options under the Employees'
Plans.
In addition, Garnet has adopted the 1990 Directors' Stock Option Plan
(the "Directors' Plan") pursuant to which an aggregate of 350,000 shares of
Garnet's common stock were issuable as of June 30, 1996 upon exercise of
options granted thereunder to directors who are not employees of the Company.
As the Directors' Plan expired in accordance with its terms on March 8, 1996,
no further options may be issued thereunder.
Each option is exercisable for a period of 10 years and 30 days from
the date of grant. The purchase price of shares issuable upon exercise of an
option may be paid in cash or by delivery of shares with a value equal to the
exercise price of the option. The Committee has determined that the right to
exercise non-incentive options issued to employees vests over a period of four
years, so that 20% of the option becomes exercisable on each anniversary of the
date of grant.
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<PAGE> 11
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 Employees' Plans and the Directors' Plan:
<TABLE>
<CAPTION>
Shares Price Range
--------- ------------
<S> <C> <C>
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 (658,398) 2.50- 13.83
--------- ------------
Options outstanding at December 31, 1995 1,329,102 2.50- 13.83
Options granted 480,000 1.19
Options cancelled (336,102) 4.00- 11.75
Options expired (45,000) 2.87- 4.05
--------- ------------
Options outstanding at June 30, 1996 1,428,000 $1.19-$13.83
========= ============
</TABLE>
As of June 30, 1996, options for 975,614 shares were exercisable.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, a new standard
for accounting for stock-based compensation. This standard established a
fair-value based method of accounting for stock options awarded after December
31, 1995 and encourages companies to adopt SFAS No. 123 in place of the
existing accounting method, which requires expense recognition only in
situations where stock compensation plans award intrinsic value to recipients
at the date of grant. Companies that do not follow SFAS No. 123 for accounting
purposes must make annual pro forma disclosures of its effects. Adoption of
the standard is required in 1996, although earlier implementation is permitted.
The Company does not intend to adopt SFAS No. 123 for accounting purposes;
however it will make annual pro forma disclosures of its effects commencing in
1996.
(5) 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, 1995, the Company had a regular tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $26,400,000 and $26,000,000 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
11
<PAGE> 12
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.
(6) 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, royalty and mineral interests acquired in the mergers were sold in
1993 and 1996. Because management intended to sell such assets when the market
conditions were suitable, these assets are reflected as "Net assets held for
disposition" in the accompanying consolidated balance sheet as of December 31,
1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Since December 31, 1995, the Company has expended approximately
$2,400,000 for the acquisition, exploration and development of its oil and gas
properties. Such expenditures include approximately $2,200,000 for exploration
and development activities on the Santana Block in Colombia, and approximately
$200,000 for exploration and related costs in Papua New Guinea.
Funding for these activities was provided primarily by cash flow from
operations and by available cash balances. The Company has no significant
lines of credit.
Argosy and its joint venture partner have completed the seismic
acquisition and drilling obligations for the first nine 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 1996 and 1997.
The Company plans to perform additional seismic work on the Santana Block
during 1996, with estimated total costs to the Company of $600,000. The
seismic programs required during the first two 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 $150,000. The
Company also plans to conduct a seismic program on the Yuruyaco Block in 1996,
for which its share of the costs is estimated to be $300,000.
The Toroyaco and Linda fields, the first two fields discovered on the
Santana Block, began producing in 1992. The Mary and Miraflor fields, the last
two fields discovered, were declared commercial by Ecopetrol in 1993.
Production from the four fields is presently approximately 10,000 barrels of
oil per day. Through June 1996, the Company's share of such production was
21.8%; it also received an additional 21.8% of the production from certain
wells until the drilling and completion costs for those wells allocable to
Ecopetrol but paid by the Company have been recovered. After June 1996, when
accumulated production from the Santana Block exceeded seven million barrels of
oil, the Company's share of production decreased to 15.3% and the
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<PAGE> 13
percentage of production applicable to the Ecopetrol recovery increased to
28.3%. The Company plans to drill at least four additional development wells
in the Toroyaco and Linda fields in 1996 and 1997, the first of which was in
progress as of June 30, 1996. The Company's share of the costs of drilling and
completing each of the wells in these fields is expected to range from $850,000
to $1,050,000.
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 and cash flow from production in Colombia.
In 1995 the Company also identified and implemented more than $1.5 million in
annual reductions of U.S. and Colombian general and administrative expenses and
production costs. 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 working capital of the Company was approximately $5,360,000 as of
June 30, 1996. The Company's working capital has been reduced to reflect
approximately $3,340,000 in principal payments presently due on the
OPIC-guaranteed debt in 1996 and 1997. Because the principal amortization
schedule is based on projected cash flows from developed oil reserves, the
Company hopes to reschedule such payments to later years as development
activities are conducted on the Santana Block. However, if the Company is
unable to reschedule such payments because of the timing of development
drilling, changes in oil prices, or other reasons, it may be necessary for the
Company to alter its planned exploration and development activities or take
other measures to improve its liquidity. As of June 30, 1996, Garnet was not
in compliance with the minimum net worth covenant required by the Debentures.
The Debenture holders have waived compliance with this requirement through July
1, 1997 subject to the termination of such waiver on October 31, 1996 if the
ratio of the aggregate principal amount of outstanding Debentures to the sum of
(i) the number of net barrels of proved oil reserves as of September 30, 1996
plus (ii) the number of net barrels of oil produced during the period from
April 1, 1996 through September 30, 1996 is greater than 4.5 to 1. Such ratio
was 4.2 to 1 as of June 30, 1996. If Garnet is unable to increase its net
worth to the minimum required by July 1, 1997 (or by October 31, 1996 if the
waiver is terminated as a result of the failure to maintain the aforementioned
ratio), it will be necessary to extend the waiver or renegotiate the terms of
the debt.
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
13
<PAGE> 14
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, 1996
COMPARED WITH THE SAME PERIODS IN 1995
The Company reported net losses of $647,184 ($.06 per share) and
$480,110 ($.04 per share) for the three months ended June 30, 1996 and 1995,
respectively, and $1,068,650 ($.09 per share) and $995,966 ($.09 per share) for
the six months ended June 30, 1996 and 1995, respectively.
Increases in 1996 in oil and gas revenues, production costs and
depreciation, depletion and amortization primarily reflect higher oil prices
and production from new wells and fracture stimulation treatments on existing
wells in Colombia. 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,
1996 1995 1996 1995
------ ----- ----- ------
<S> <C> <C> <C> <C>
Average oil sales (BOPD) 1,786 1,663 1,786 1,408
Average oil price per barrel $20.23 $16.98 $19.03 $16.51
Production costs per barrel $ 5.93 $ 5.84 $ 5.64 $ 6.66
Depreciation, depletion and
amortization per barrel $11.97 $ 8.99 $10.92 $ 8.26
</TABLE>
General and administrative expenses decreased as a result of the
aforementioned cost reduction program, as well as charges incurred in 1995 in
connection with management changes. The increase in 1996 in interest expense,
net of amounts capitalized, is attributable primarily to the OPIC-guaranteed
loan received in October 1995, and decreases in costs attributable to assets
eligible for interest capitalization. The provision for income taxes, all of
which relates to Colombian operations, was higher because of increases in the
Colombian presumptive income tax resulting from a higher tax rate effective
January 1, 1996 and ongoing capital expenditures related to productive assets.
14
<PAGE> 15
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
(27) Financial Data Schedule. 27
(99) Additional Exhibits: Not Applicable
</TABLE>
15
<PAGE> 16
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by Registrant during the three
months ended June 30, 1996.
16
<PAGE> 17
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 12, 1996 /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)
17
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,277,345
<SECURITIES> 0
<RECEIVABLES> 1,983,656
<ALLOWANCES> 0
<INVENTORY> 1,360,601
<CURRENT-ASSETS> 8,722,816
<PP&E> 53,637,262
<DEPRECIATION> (14,944,743)
<TOTAL-ASSETS> 48,201,039
<CURRENT-LIABILITIES> 5,525,787
<BONDS> 20,269,992
<COMMON> 114,922
0
0
<OTHER-SE> 21,083,233
<TOTAL-LIABILITY-AND-EQUITY> 48,201,039
<SALES> 6,185,377
<TOTAL-REVENUES> 6,319,876
<CGS> 1,832,415
<TOTAL-COSTS> 1,832,415
<OTHER-EXPENSES> 3,561,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,090,648
<INCOME-PRETAX> (427,939)
<INCOME-TAX> 640,711
<INCOME-CONTINUING> (1,068,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,068,650)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
