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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-16621
GARNET RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2421851
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11011 Richmond Avenue, Suite 650, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 783-0010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 2, 1998 was approximately $459,686. On such date, the last
sale price of Registrant's Common Stock was $0.04 per share.
As of March 2, 1998 11,492,162 shares of Registrant's Common Stock, par
value $.01 per share, were outstanding.
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TABLE OF CONTENTS
Page
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PART I.................................................................... 1
Item 1. Business....................................................... 1
General ....................................................... 1
Properties..................................................... 2
Financial Information about Industry Segments.................. 3
Narrative Description of Business.............................. 3
Financial Information about Foreign and Domestic Operations
and Export Sales............................................... 6
Item 2. Properties..................................................... 6
Colombia....................................................... 6
Papua New Guinea............................................... 8
Supplementary Information in Respect of Oil and Gas Properties. 9
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............ 10
PART II................................................................... 10
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 10
Market Information............................................. 10
Holders........................................................ 10
Dividends...................................................... 11
Item 6. Selected Financial Data........................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Resources and Liquidity........................................ 12
Results of Operations.......................................... 14
Item 8. Financial Statements and Supplementary Data................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 16
PART III.................................................................. 16
Item 10. Directors and Executive Officers of the Registrant............. 16
Item 11. Executive Compensation......................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Management. 20
Item 13. Certain Relationships and Related Transactions................. 22
PART IV................................................................... 22
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................... 22
Signatures.............................................................. 23
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PART I
Item 1. Business.
(a) General.
Garnet Resources Corporation, a Delaware corporation ("Garnet"), is
engaged primarily in the exploration, development and production of oil and gas
properties located outside the United States. As used herein, the "Company"
shall mean Garnet and its subsidiaries. The Company currently holds interest in
oil and gas properties in the Republic of Colombia ("Colombia") and the
Independent State of Papua New Guinea ("Papua New Guinea"). The Company's
activities in Colombia are conducted through Argosy Energy International, a Utah
limited partnership ("Argosy") in which Garnet is a limited partner and in which
a wholly owned subsidiary of Garnet is the general partner. Since inception, the
Company has conducted and concluded exploration activities in five additional
countries, and also owned a small number of working interests in producing oil
and gas properties in the United States, which were sold in 1992.
A decline in the price of oil in 1997 and a decline in the rate of
production commencing in the third quarter of 1997 resulted in a 73% decrease in
the Company's estimate of discounted future net cash flows from proved reserves
at December 31, 1997 and a 22% decrease in revenues from oil sales during 1997
compared to 1996. As a result, the Company recorded $25.8 million of write downs
of oil and gas properties during 1997, resulting in a significant net loss
during 1997 and negative stockholders' equity at December 31, 1997.
In view of its operating losses and financial condition, the Company
initiated further cost containment programs in 1997 including a 28% reduction in
its Colombian personnel and the termination of all U.S. personnel other than
Douglas W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief
Financial Officer. The Company also engaged Rauscher Pierce Refsnes, Inc. as a
financial advisor to provide assistance in negotiating a business combination or
a debt restructuring transaction to address the Company's liquidity issues.
Although the Company engaged in comprehensive efforts, including extensive
negotiations with two separate candidates, the Company was not successful in
concluding a transaction. The Company is currently engaged in negotiations to
effect a business combination, although no assurance can be given that such
negotiations will result in a definitive agreement or the consummation of a
transaction.
The Company is highly leveraged with $22.6 million in current debt
consisting of (i) $15 million of 9 1/2% Convertible Subordinated Debentures due
December 21, 1998 (the "Debentures") and (ii) $7.7 million ($7.6 million net to
Garnet) of an outstanding loan (the "OPIC Loan") to Argosy from Chase Bank of
Texas ("Chase") which is guaranteed by the Overseas Private Investment
Corporation ("OPIC") and secured by Argosy's assets in Colombia and Garnet's
direct and indirect interests in Argosy. Based on Argosy's year-end financial
statements, Argosy has determined that it is no longer in compliance with
certain covenants required by the finance agreement governing the OPIC Loan. In
the absence of a waiver of such covenants, either OPIC or Chase have the right
to call a default under the OPIC Loan, accelerate payment of all outstanding
amounts due thereunder and realize upon the collateral securing the OPIC Loan.
Although Argosy intends to apply for a waiver, and such waivers have been
obtained in the past year, given the Company's financial position and negative
working capital balance at December 31, 1997, no assurance can be given that
such waiver will be granted or continued. Under the terms of the OPIC Loan, the
75% of proceeds from Argosy's oil sales which are paid in U.S. dollars are
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deposited into an escrow account with Chase to secure payment of the OPIC Loan.
The escrow account minimum required balance at March 15, 1998 was $1,700,000 and
the total account balance was $1,953,000. Any excess in the escrow account over
the minimum balance can be released to Argosy and used to pay operating
expenses and amounts due under the OPIC Loan. Even if OPIC grants a waiver of
the loan covenants with which Argosy is not in compliance, if the minimum
balance required in such escrow account increases, as a result of a change in
the amortization schedule or otherwise, sufficient funds may not be available
to fund the Company's operations.
The Company's financial forecasts indicate that, assuming no changes
in its capital structure, working capital and cash flow from operations will not
be sufficient to make the interest payment due on the Debentures on March 31,
1998, to pay principal and interest due under the OPIC Loan on June 15, 1998 and
to maintain the minimum balance in the escrow account. The Company also does not
expect working capital and cash flow from operations to be sufficient to repay
the principal amount of the Debentures at maturity or earlier, if the Debenture
holders call a default as a result of the non-payment of interest. The Company
must complete a restructuring transaction or renegotiate the terms of the
Debentures in order to avoid non-compliance with its obligations to pay the
Debentures. As a result, management believes there is substantial doubt about
the Company's ability to continue as a going concern. In the absence of a
business transaction or a restructuring of the Company's indebtedness, the
Company may seek protection from its creditors under the Federal Bankruptcy
Code.
(b) Properties.
Argosy has an interest in a risk sharing contract signed in 1987
(the "Santana Contract") with Empresa Colombiana de Petroleos, the Colombian
national oil company ("Ecopetrol"), involving exploration, development and
production activities in 52,000 acres (the "Santana Block"), in the Putumayo
Basin of southwestern Colombia. Argosy participates in these contracts through a
55% interest in a joint venture with Neo Energy, Inc. ("Neo"), a subsidiary of
Aviva Petroleum Inc. Argosy also holds an interest, though its joint venture
with Neo, in the following three additional oil and gas exploration contracts
with Ecopetrol; (i) an association contract signed in 1992 (the "Fragua
Contract") covering approximately 32,000 acres contiguous to the northern
boundary of the Santana Block (the "Fragua Block"), (ii) an association contract
signed in 1995 (the "Yuruyaco Contract") covering approximately 39,000 acres
contiguous to the eastern boundaries of the Santana Block and the Fragua Block
(the "Yuruyaco Block"), and (iii) Association Agreements signed in 1972, as
amended (the "Aporte Putumayo Contracts"), covering approximately 77,000 acres
20 miles south of the Santana Block (the "Aporte Putumayo Block"). These three
contract areas have been submitted to Ecopetrol for relinquishment. Work
commitments in all of the blocks have been met and approval of formal
relinquishment is not expected to be withheld. Argosy and Neo remain liable for
the costs of abandonment of five wells on the Putumayo Block.
The Santana Block has been the focus of the Company's exploration
and development activities in Colombia in recent years. The Company has
discovered four oil fields on the Santana Block, which produced a total of
approximately 12,245,000 barrels of oil during the period from commencement of
production in April 1992 through December 1997. The Company's share of
production since 1992 was approximately 2,330,000 barrels in the aggregate; the
Company's share of 1997 production was 516,543 barrels. In 1997, one gross (.5
net) productive development well was drilled on the Santana Block. The
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Company also completed its evaluation of data from a 3-D seismic survey over its
Mary and Miraflor fields completed in 1996 to define the limits of the fields,
identify possible locations for additional development wells, and ascertain the
exploration potential of areas west of the Mary field. Additionally the joint
venture approved the construction of a small refinery to produce diesel fuel for
consumption in operations. This small refinery is expected to begin operations
during the first quarter of 1998.
In an agreement dated November 24, 1997, among Occidental Kanau Ltd,
("Kanau"), Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos
Niugini Exploration Pty. Limited ("Santos"), Niugini Energy, Inc ("Nuigini") and
Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet,
Garnet PNG agreed to exchange its 6% interest (the "PPL-181 Interest") in
Petroleum Prospecting License No. 181 ("PPL-181"), a license to explore for oil
and gas on approximately 952,000 acres (the "PPL-181 Area"),for a 4% interest in
a newly applied for but not yet issued petroleum prospecting license ("New PPL")
covering the PPL-181 Area and Petroleum Prospecting License No. 158 ("PPL-158")
held by Occidental PNG and Santos. Garnet PNG also held a 7.73% interest in an
adjoining license, Petroleum Prospecting License No. 174 ("PPL-174"), on which
an exploratory dry hole was drilled in the first quarter of 1996. For more
information regarding PPL-181, PPL-158, PPL-174 and New PPL, see "Properties -
Papua New Guinea".
Garnet was incorporated in the state of Delaware in June 1986.
Garnet's principal executive office is located at 11011 Richmond Avenue, Suite
650, Houston, Texas 77042 and its telephone number is (713) 783-0010.
(c) Financial Information about Industry Segments.
The Company operates in one industry segment.
(d) Narrative Description of Business.
General. The Company is currently engaged in the exploration of oil
and gas properties located in Colombia and Papua New Guinea, and is engaged in
the production and development of oil from its properties in Colombia.
Risks Associated with the Company's Business. The Company has
expended significant amounts of capital on the acquisition, exploration and
development of its properties. If the Company is unable to conclude a business
combination or a debt restructuring transaction, it is unlikely that the Company
will have the resources to finance any further exploration or development
activity. Accordingly, there can be no assurance that any additional exploration
or development activities will be conducted, other than those activities
required to deplete the Company's existing reserves. The present environment
for financing the ongoing obligations of an oil and gas business is uncertain
due, in part, to the substantial instability in oil and gas prices in recent
years and to the volatility of financial markets. For additional information on
the Company's cash requirements, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources."
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In addition, the Company's ability to continue its exploration and
development programs may be dependent upon the ability of its joint venture
partners to finance their portion of such costs and expenses. There can be no
assurance that the Company's partners will contribute, or be in a position to
contribute, their costs and expenses of the joint venture programs. If the
Company's partners do not finance their obligations to the joint ventures, the
Company may be required to accept an assignment of the partners' interests
therein and assume their financing obligations. If sufficient funds cannot be
raised to meet the Company's obligations in connection with its properties, the
interests in the affected properties might be sold or forfeited. In addition, if
sufficient funds are raised, there can be no assurance that the Company will be
able to discover, develop and produce sufficient reserves in Colombia, Papua New
Guinea or elsewhere to recover the costs and expenses incurred in connection
with the acquisition, exploration and development thereof and achieve
profitability.
The Company has invested and may continue to invest primarily in
properties located outside the United States, in certain countries which may be
considered politically and economically unstable. Accordingly, the Company is
subject to risks inherent in the ownership and development of foreign properties
including, without limitation, cancellation or renegotiation of contracts,
royalty and tax increases, retroactive tax claims, expropriation, adverse
changes in currency values, foreign exchange controls, import and export
regulations, environmental controls, and other laws, regulations or
international developments which may adversely affect the Company's properties.
In addition, there are usually significant logistical problems, costs and risks
in conducting oil and gas activities in remote, rugged and primitive regions
such as Papua New Guinea, or in Colombia where Argosy's operations are exposed
to potentially detrimental activities by the leftist guerrillas that have
operated there for many years. In 1997, Argosy's assets were damaged as a result
of guerrilla activities, although the losses have been substantially recovered
through insurance. There can be no assurance that Argosy's operations in
Colombia will not be the target of similar attacks in the future, or that Argosy
will be able to continue to insure its assets against similar losses.
The Company is subject to all the risks normally incident to
drilling for and producing oil and gas, including blowouts, cratering and fires,
any of which could result in damage to or loss of life or property. In
accordance with industry practice, the Company is not fully insured against
these risks, nor are all such risks insurable.
Competition. The oil and gas business is extremely competitive in
all of its phases and particularly in exploration for and development of new
sources of crude oil and natural gas. The Company must compete with other
companies that are larger and financially stronger in acquiring properties
suitable for exploration, in contracting for drilling equipment, and in securing
trained personnel. The Company is not a significant participant in the oil and
gas industry.
Markets. There is substantial uncertainty as to the prices which the
Company may receive for production from its existing oil reserves or from oil
and gas reserves, if any, which the Company may discover. The availability of a
ready market and the prices received for oil and gas produced depend upon
numerous factors beyond the control of the Company including, but not limited
to, adequate transportation facilities (such as pipelines), the marketing of
competitive fuels, fluctuating market demand, governmental regulation and world
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political and economic developments. World oil and gas markets are highly
volatile and shortage or surplus conditions substantially affect prices. As a
result, there have been dramatic swings in both oil and gas prices in recent
years. The sale of oil from the Santana Block in Colombia is governed by
contracts with Ecopetrol. There is no market for natural gas from the Putumayo
Region of Colombia. See "Properties - Colombia." It is possible that, under
market conditions prevailing in the future, the production and sale of oil or
gas, if any, from the Company's properties in Papua New Guinea may not be
commercially feasible.
Regulation. The Company's foreign operations are subject to
regulations imposed by the local regulatory authorities including, without
limitation, currency regulation, import and export regulation, taxation and
environmental controls. The regulations also generally specify, among other
things, the extent to which acreage may be acquired or relinquished, permits
necessary for drilling of wells, spacing of wells, measures required for
preventing waste of oil and gas resources and, in some cases, rates of
production and sales prices to be charged to purchasers.
Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
and the Ministry of the Environment. In 1993 Instituto de Recursos Naturales y
Ambiente ("Inderena"), a federal environmental agency in Colombia, began
reviewing the environmental standards and permitting processes for the oil
industry and in 1994 the Ministry of the Environment was organized. Accordingly,
it is possible that the review of current environmental laws, regulations and
the administration and enforcement thereof, or the passage of new environmental
laws or regulations in Colombia, could result in substantial costs and
liabilities in the future or in delays in obtaining the necessary permits to
conduct the Company's operations in that country.
The Company's operations in Papua New Guinea are currently governed
by the Department of Mining and Petroleum, which has jurisdiction over all
petroleum exploration in that country. In the event the Company develops and
operates a petroleum business in Papua New Guinea, the Company will be subject
to regulation by the Investment Promotion Authority, which regulates almost all
business operations with significant foreign equity or with foreign management
control.
Employees. The Company's operations are managed from its Houston,
Texas office, which consists of a staff of two employees, using professional
consulting services as needed.
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(e) Financial Information about Foreign and Domestic Operations and
Export Sales.
Financial information about foreign and domestic operations may be
found in Note 10 of the Notes to Consolidated Financial Statements contained in
Item 8 of Part II.
Item 2. Properties.
Colombia.
Through its interests in Argosy, the Company presently has a 54.6%
indirect interest in the Santana Contract. Argosy has 76 employees in Colombia
and serves as the operator of the Santana Block, the Fragua Block and the
Yuruyaco Block under operating agreements with Ecopetrol and with Neo.
The Colombian properties are located in the Putumayo Region of
southern Colombia which is bounded by the Andes mountains on the west and
northwest and the Upper Amazon Platform on the east which lies within the
northern portion of a larger regional basin extending nearly 800 miles southward
through Ecuador into eastern Peru and western Brazil.
Argosy's responsibilities as operator of the joint venture with Neo
are governed by the terms of operating agreements by and between Argosy and Neo,
which provide for the establishment of operating committees which consist of two
representatives from each of Argosy and Neo. Argosy has exclusive charge of
carrying out the program of operations within the budgets approved by the
operating committees and may demand payment in advance from each party of its
respective share of estimated monthly expenditures.
The Santana Contract has a term of 28 years, including an
exploration period of 10 years, which ended in July 1997. At the end of the
exploration period, all acreage was relinquished except acreage contained within
productive fields plus a three-mile reserve zone around each field. Under the
terms of the Santana Contract, Ecopetrol is required to pay 30% of exploration
costs, 50 % of development costs, and 65 % of operating expenses. They receive a
royalty equal to 20% of production on behalf of the Colombian Government and, in
the event a discovery is deemed commercially feasible, Ecopetrol will acquire a
65% interest in the remaining production from the field, bear 50% of the
development costs, and reimburse the joint venture, from Ecopetrol's share of
future production from each well, for an additional 20% of the direct costs of
drilling the discovery well.
The Company's net participation in revenues and costs for the
Santana Contract is as follows:
Production Operating Exploration Development
Revenues Costs Costs Costs
---------- --------- ----------- -----------
After seven million barrels 15.3% 19.1% 38.2% 27.3%
of accumulated production
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The joint venture has completed its seismic acquisition and drilling
obligations for the Santana Contract, resulting in the discovery of four oil
fields, all of which have been declared commercial by Ecopetrol.
Oil production from the Santana Block moves through the 25-mile
Uchupayaco-Santana pipeline built and completed by the joint venture in 1994 to
Ecopetrol's Trans-Andean pipeline, where it is transported an additional 230
miles to the Pacific coast export terminal at Tumaco. Under the terms of a
contract with Ecopetrol, all oil produced from the Santana Block is sold to
Ecopetrol. If Ecopetrol exports the oil, the price paid is the export price
received by Ecopetrol, adjusted for quality differences, less a handling and
commercialization fee of $.515 per barrel. If Ecopetrol does not export the oil,
the price paid is based on the price received from Ecopetrol's Cartagena
refinery, adjusted for quality differences, less Ecopetrol's cost to transport
the crude to Cartagena and a handling and commercialization fee of $.415 per
barrel. The average sales price per barrel of oil produced from the Santana
Block during 1997 was $17.39. The contract also requires Argosy to pay a tariff
to transport its oil through the Trans-Andean pipeline, the amount of which is
presently $1.27 per barrel. Under the terms of its contract with Ecopetrol, 25%
of all revenues from oil sold to Ecopetrol is paid in Colombian pesos, which may
only be utilized in Colombia.
In 1994 Argosy entered into a finance agreement with Overseas
Private Investment Corporation, an agency of the United States government
("OPIC"), pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank
loans to Argosy. The loans were funded in two stages of $4,400,000 in August
1994 and $4,800,000 in October 1995. The Company used these funds to drill
development wells and construct pipelines and production facilities in Colombia.
OPIC's guaranty is secured by Argosy's interest in the Santana Contract and
related assets, as well as the pledge of Garnet's direct and indirect interests
in Argosy. The maximum term of the loans is not to exceed seven years, and the
principal amortization schedule is based on projected cash flows from wells on
the Santana Block. The loans bear interest at the lender's eurodollar deposit
rate plus .25% per annum for periods of two, three or six months as selected by
Argosy. In consideration for OPIC's guaranty, Argosy pays OPIC a guaranty fee of
2.4% per annum on the outstanding balance of the loans guaranteed.
Argosy's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian taxation at a rate of 35%, although a
"presumptive" minimum income tax based on net assets may apply under certain
circumstances. Unless Argosy transfers such net income to its assigned capital
account, an additional remittance tax accrues at the rate of 12% in 1996, 10% in
1997 and 7% in future years. Payment of the additional remittance tax, if any,
may be deferred under certain circumstances if Argosy has reinvested such income
in Colombia. For oil fields discovered before 1995, the Colombian Government
also imposes a production tax equal to 7% of the crude oil price through 1997 if
the field began producing before 1995, or 5.5%, 4% and 2.5%, respectively, of
the crude oil prices in 1998, 1999 and 2000 if the field began producing after
1994. The production tax now only applies to production from the Miraflor field.
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Papua New Guinea.
The PPL-181 Area is located in the Western, Gulf and Southern
Highland Provinces of Papua New Guinea. The northern section of the PPL-181 Area
is in a mountainous tropical rain forest while the southern section of PPL-181
is predominantly lowlands jungle and coastal swamps. In 1986 oil was discovered
approximately 10 miles from the northern border of PPL-181 in an adjoining
license area. The PPL-158 area is located to the northwest and adjoining the
PPL-181 Area.
Under the terms of an agreement pertaining to PPL-181, Occidental
International Exploration and Production Company ("Occidental") agreed to drill
and complete at its cost a test well on the PPL-181 Area by September 1997. The
well was commenced in March 1997 and plugged and abandoned as a dry hole on
April 17, 1997. PPL-181 is owned by Occidental (88%), Garnet PNG (6%) and
Niugini (6%).
According to the terms of the agreement governing the New PPL, the
parties agreed to perform surface geological work and complete a seismic program
during late 1997 and early 1998. These activities are presently underway and a
decision regarding the drilling of an exploratory well in late 1998 or early
1999 will be made once the results of the geological work and seismic program
have been evaluated. Garnet PNG is not obligated to pay any of the costs
relative to the work presently underway. Should the parties decide to drill an
exploratory well, the Company will have the option to pay its share of the cost
of this well (estimated to be $224,000) and maintain its interest at 4% or
reduce its interest to 2% and have no obligation to pay its share of the
drilling, testing and completion costs of the well.
In the first quarter of 1996, an exploratory dry hole was drilled on
the PPL-174 area. Garnet PNG contributed approximately $238,000 to the costs of
the well. PPL-174 was surrendered on April 25, 1997.
Under the provisions of PPL 158 and PPL -181 the terms of any oil
and gas development are set forth in a Petroleum Agreement with the Government
of Papua New Guinea. The Petroleum Agreement provides that the operator must
carry out an appraisal program after a discovery to determine whether the
discovery is of commercial interest. If the appraisal is not carried out or the
discovery is not of commercial interest, the license may be forfeited. If the
discovery is of commercial interest, the operator must apply for a Petroleum
Development License. The Government retains a royalty on production equal to
1.25% of the wellhead value of the petroleum and, at its election, may acquire
up to a 22.5% interest in the petroleum development after recoupment by the
operator of the project costs attributable thereto out of production. In
addition, income from petroleum operations is subject to a Petroleum Income Tax
at the rate of 50% of net income, which is defined as gross revenue less
royalties, allowances for depreciation, interest deductions, operating costs and
previous tax losses carried forward. An Additional Profits Tax of 50% of cash
flow (after deducting ordinary income tax payments) is also payable when the
accumulated value of net cash flows becomes positive. For annual periods in
which net cash flows are negative, the cumulative amount is carried forward and
increased at an annual accumulation rate of 27%. The Additional Profits Tax is
calculated separately for each Petroleum Development License. In calculating the
applicable tax, interest expenses paid by Garnet PNG prior to the issuance
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of a Petroleum Development License and, thereafter, to the extent that Garnet
PNG's debt to equity ratio exceeds two-to-one, are not deductible.
Supplementary Information in Respect of Oil and Gas Properties.
Reserves Reported to Other Agencies. No estimates of the Company's
total proved net oil and gas reserves have been filed with or included in
reports to any federal authority or agency other than the Securities and
Exchange Commission and OPIC.
Productive Wells and Acreage. As of December 31, 1997, the Company
owned 13 gross (2.0 net) productive oil wells and 3,706 gross (923 net)
developed acres in Colombia.
Undeveloped Acreage. The following table sets forth estimates of the
undeveloped acreage for which oil and gas leases or concessions were held by the
Company as of December 31, 1997:
Gross Acres Net Acres
----------- ---------
Colombia 48,636 26,750
Papua New Guinea 952,000 57,120
--------- ------
Total 1,000,636 83,870
Drilling Activity. The following table sets forth the number of
wells drilled by the Company during the three years ended December 31, 1997.
Exploratory Development
------------------------------------------ -------------------------------------------
Productive Dry Productive Dry
------------------- ------------------- ------------------- -------------------
Year ended Gross Net Gross Net Gross Net Gross Net
------- ------- ------- ------- ------- ------- ------- -------
December 31, 1997:
Colombia -- -- -- -- 1 .3 -- --
======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1996:
Colombia -- -- 1 .4 2 .3 -- --
======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1995:
Colombia -- -- 1 .4 1 .3 1 .3
Turkey -- -- 1 .3 - -- -- --
------- ------- ------- ------- ------- ------- ------- -------
-- -- 2 1 1 .3 1 .3
======= ======= ======= ======= ======= ======= ======= =======
Present Activities. As of December 31, 1997, no wells were in
progress.
Additional Information. Reference is made to the Supplemental Oil
and Gas Information included in the consolidated financial statements contained
in Item 8 of Part II for
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additional information regarding the Company's oil and gas producing activities
prepared in accordance with the requirements of Statement of Financial
Accounting Standards No. 69 "Disclosures About Oil and Gas Producing
Activities."
Item 3. Legal Proceedings.
There are no material legal proceedings to which the Company is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
Shares of Garnet's Common Stock have been traded on the OTC Bulletin
Board under the symbol "GARN" since December 1997. Prior thereto, the Common
Stock was trading on the Nasdaq Stock Market. The range of reported high and low
sales prices for shares of Garnet's Common Stock as supplied by Nasdaq and the
OTC Bulletin Board was as follows:
Calendar Period High Low
--------------- ---- ---
1997
----
Fourth Quarter $ .375 $ .040
Third Quarter .500 .250
Second Quarter .500 .313
First Quarter .969 .375
1996
----
Fourth Quarter $ .53 $ .25
Third Quarter .63 .25
Second Quarter 1.00 .44
First Quarter 2.00 .94
(b) Holders.
As of February 28, 1998, shares of Garnet's Common Stock were held
of record by approximately 1,500 persons, including several holders who are
nominees for an undetermined number of beneficial owners.
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(c) Dividends.
Garnet has neither declared nor paid any cash dividends on its
Common Stock. Under the terms of an agreement with the holders of its 9 1/2%
convertible subordinated debentures (the "Debentures"), Garnet has agreed that
it will not pay dividends or make distributions to the holders of its Common
Stock while the Debentures are outstanding. Any future determination as to
declaration and payment of dividends, if permitted, will be made at the
discretion of the Board of Directors. The ability to pay dividends may be
further restricted by the agreements and regulations described below.
The terms of the guaranty agreement between Argosy and OPIC restrict
Argosy's ability to make distributions to its partners prior to the repayment of
the guaranteed loans. Also, under the terms of its contracts with Ecopetrol, 25%
of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may
only be utilized in Colombia. To date, Argosy has experienced no difficulty in
repatriating the remaining 75% of such payments which are payable in United
States dollars.
Upon presentation of a tax clearance certificate evidencing Garnet
PNG's compliance with the relevant provisions of Papua New Guinea's income tax
laws, profits, dividends and certain other payments, if any, up to an amount of
500,000 kina (approximately US $290,000) per year may be fully remitted out of
Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted,
subject to clearance from the Bank of Papua New Guinea.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 8
of Part II.
Year Ended December 31,
---------------------------------------------------------------------
Income Statement Data: 1997 1996 1995 1994 1993
---------------------------------------------------------------------
Revenues $9,181,783 $11,709,227 $8,881,133 $4,355,365 $4,596,766
Net loss (27,790,244) (2,059,897) (4,623,322) (7,425,527) (3,447,093)
Net loss per share (2.42) (.18) (.40) (.67) (.31)
Weighted average shares
outstanding 11,492,162 11,492,162 11,416,828 11,125,537 11,124,929
Cash dividends per share -- -- -- -- --
Year Ended December 31,
----------------------------------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994 1993
----------------------------------------------------------------------
Total assets 16,460,448 $48,521,555 $48,959,028 $49,300,037 $52,151,499
Long-Term Debt - 21,629,232 20,151,120 17,506,105 15,227,999
Stockholders' equity (7,583,336) 20,206,908 22,266,805 25,790,252 33,215,779
11
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Resources and Liquidity
The Company is highly leveraged with $22.6 million in current debt
consisting of (i) $15 million of Debentures due December 21, 1998 and (ii) $7.7
million ($7.6 million net to Garnet) in principal outstanding under the OPIC
Loan to Argosy. Based on Argosy's year-end financial statements, Argosy has
determined that it is no longer in compliance with certain covenants required by
the finance agreement governing the OPIC Loan. In the absence of a waiver of
such covenants, either OPIC or Chase would have the right to call a default
under the OPIC Loan, accelerate payment of all outstanding amounts due
thereunder and realize upon the collateral securing the OPIC Loan. Although
Argosy intends to apply for a waiver, and such waivers have been obtained
during the past year, given the Company's financial position and negative
working capital balance at December 31, 1997, no assurance can be given that
such waiver will be granted or continued. Under the terms of the OPIC Loan, the
75% of proceeds from Argosy's oil sales which are paid in U.S. dollars are
deposited into an escrow account with Chase to secure payment of the OPIC Loan.
Argosy is required to maintain a minimum balance in such escrow account equal to
six months of interest, principal and other fees due under the OPIC Loan. The
escrow account minimum required balance at March 15, 1998 was $1,700,000 and the
total account balance was $1,953,000. Any excess in the escrow account over the
minimum balance can be released to Argosy and used to pay operating expenses and
amounts due under the OPIC Loan. Even if OPIC grants a waiver of the loan
covenants with which Argosy is not in compliance, if the minimum balance
required in such escrow account increases, as a result of a change in the
amortization schedule or otherwise, sufficient funds may not be available to
fund the Company's operations.
The Company's financial forecasts indicate that, assuming no changes
in its capital structure, working capital and cash flow from operations will not
be sufficient to make the interest payment due on the Debentures on March 31,
1998, to pay principal and interest due under the OPIC Loan on June 15, 1998 and
to maintain the minimum balance in the escrow account. The Company also does not
expect working capital and cash flow from operations to be sufficient to repay
the principal amount of the Debentures at maturity or earlier if the Debenture
holders call a default as a result of the non-payment of interest. The Company
must complete a restructuring transaction or renegotiate the terms of the
Debentures in order to avoid non-compliance with its obligations to pay the
Debentures. As a result, management believes there is substantial dobut about
the Company's ability to continue as a going concern. In the absence of a
business transaction or a restructuring of the Company's indebtedness, the
Company may seek protection from its creditors under the Federal Bankruptcy
Code.
In view of its operating losses and financial condition, the Company
initiated further cost containment programs in 1997 including a 28% reduction in
its Colombian personnel and the termination of all U.S. personnel other than
Douglas w. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief
Financial Officer. The Company also engaged Rauscher Pierce Refsnes, Inc. as a
financial advisor to provide assistance in negotiating a business combination or
a debt restructuring transaction to address the Company's liquidity issues.
Although the Company engaged in comprehensive efforts, including extensive
negotiations with two separate candidates, the Company was not successful in
concluding a transaction. The Company is currently engaged in negotiations to
effect a business combination, although no
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15
assurance can be given that such negotiations will result in a definitive
agreement or the consummation of a transaction.
For the three years ended December 31, 1997, the Company expended
approximately $19,200,000 for the acquisition, exploration and development of
its oil and gas properties. Such expenditures include approximately $18,400,000
for exploration and development activities in Colombia, approximately $388,000
for exploration and related costs in Papua New Guinea, and approximately
$360,000 for acquisition and exploration activities in Turkey, France, Canada
and other countries. These activities have been financed primarily by proceeds
from (i) the issuance of the Debentures in 1993, the net proceeds of which
totaled $14,231,000, and (ii) loans guaranteed by OPIC, the net proceeds of
which were approximately $8,425,000. The Company has no significant lines of
credit.
Argosy and its joint venture partner have completed the seismic
acquisition and drilling obligations for the ten year exploration phase of the
Santana Contract, resulting in the discovery of four oil fields. The Toroyaco
and Linda fields, the first two fields discovered on the Santana Block, began
producing in 1992. The Mary and Miraflor fields, the last two fields discovered,
were declared commercial by Ecopetrol in 1993. Production from the four fields
is presently approximately 6,700 barrels of oil per day. The Company's share of
such production is 15.3%. The Company is not planning to drill any wells during
1998.
It is anticipated that any future foreign exploration and
development activities will require substantial amounts of capital. If the
Company is unable to conclude a business combination or a debt restructuring
transaction, it is unlikely that the Company will have the resources to finance
any further exploration or development activity. Accordingly, there can be no
assurance that any additional exploration or development activities will be
conducted, other than those activities required to deplete the Company's
existing proved reserves. The present environment for financing the ongoing
obligations of an oil and gas business is uncertain due, in part, to the
substantial instability in oil and gas prices in recent years and to the
volatility of financial markets. In addition, the Company's ability to continue
its exploration and development programs may be dependent upon its joint venture
partners' financing their portion of such costs and expenses. There can be no
assurance that the Company's partners will contribute, or be in a position to
contribute, their costs and expenses of the joint venture programs. If the
Company's partners cannot finance their obligations to the joint ventures, the
Company may be required to accept an assignment of the partners' interests
therein and assume their financing obligations. If sufficient funds cannot be
raised to meet the Company's obligations in connection with its properties, the
interests in such properties might be sold or forfeited.
As described herein, the Company's operations are primarily located
outside the United States. Although certain of such operations are conducted in
foreign currencies, the Company considers the U.S. dollar to be the functional
currency in most of the countries in which it operates. In addition, the Company
has no significant operations in countries with highly inflationary economies.
As a result, the Company's foreign currency transaction gains and losses have
not been significant. Exchange controls exist for the repatriation of funds from
Colombia and Papua New Guinea. See "Market for Registrant's Common Equity and
Related Stockholder Matters - Dividends." The Company believes that the
continuing viability of its operations in these countries will not be affected
by such restrictions.
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The foregoing discussion contains, in addition to historical
information, forward-looking statements. The forward-looking statements were
prepared on the basis of certain assumptions which relate, among other things,
to costs expected to be incurred in the development of the Company's properties,
the receipt of environmental and other necessary administrative permits required
for such development, future oil prices, future production rates, and the
ability to conclude a business combination or a debt restructuring transaction.
Even if the assumptions on which the projections are based prove accurate and
appropriate, the actual results of the Company's operations in the future may
vary widely from the financial projections due to unforeseen engineering,
mechanical or technological difficulties in drilling or working over wells,
regional political issues, general economic conditions, increased competition,
changes in government regulation or intervention in the oil and gas industry,
and other risks described herein. Accordingly, the actual results of the
Company's operations in the future may vary widely from the forward-looking
statements included herein.
YEAR 2000
Garnet is currently utilizing accounting software in the United
States that is year 2000 compliant, however, Argosy Energy International,
Garnet's subsidiary in Colombia, must upgrade its systems. An evaluation of
alternative solutions to the year 2000 problem is complete and a new management
information and accounting software package will be selected to upgrade the
system in the near future. Garnet does not currently have any information
concerning year 2000 compliance of its suppliers and customers. In the event
that any of Garnet's significant suppliers or customers do not successfully and
timely achieve year 2000 compliance, Garnet does not believe its business or
operations would be adversely affected.
NEW ACCOUNTING PRONOUNCEMENTS
Garnet is assessing the reporting and disclosure requirements of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement requires a public business enterprise to report
financial and descriptive information about its reportable operating segments.
The statement is effective for financial statements for periods beginning after
December 15, 1997, but is not required for interim financial statements in the
initial year of its application. Garnet will adopt the provisions of SFAS No.
131 in its December 1998 consolidated financial statements.
Garnet is also assessing the reporting and disclosure requirements
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 1999. Garnet believes SFAS
No. 133 will not have a material impact on its financial statements or
accounting policies. Garnet will adopt the provisions of SFAS No. 133 in the
first quarter of the year 2000.
(b) Results of Operations.
The Company incurred net losses of $26,970,114 ($ 2.35 per share),
$2,059,897 ($.18 per share) and $4,623,322 ($.40 per share) for the years ended
December 31, 1997, 1996 and 1995, respectively.
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Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Average oil sales (BOPD) 1,415 1,578 1,443
Average oil price per barrel $ 17.39 $ 19.82 $ 16.39
Production costs per barrel $ 7.12 $ 5.91 $ 6.71
Depreciation, depletion and $ 9.20 $ 10.94 $ 9.37
amortization per barrel
(excluding write down of
oil and gas properties)
During 1995 the Company charged to expense its remaining investments
in Papua New Guinea ($609,700) and France ($672,592), costs pertaining to oil
and gas exploration in other countries ($74,461), and interest previously
capitalized in connection with these activities ($190,525). During 1996 the
Company recorded a loss of $42,748 on the final disposition of the royalty and
mineral assets, and charged to expense $40,112 pertaining to ongoing costs in
countries other than Colombia.
The Company's exploration and production activities are accounted
for under the full cost method. Under this method, all acquisition, exploration
and development costs, including certain related employee costs, incurred for
the purpose of finding oil and gas are capitalized. Capitalized costs are
limited to the sum of the present value of future net revenues discounted at
10% related to estimated production of proved reserves and the lower of cost or
estimated fair value of unevaluated properties. If the net capitalized costs of
oil and gas properties in a cost center exceed an amount equal to the sum of
the present value of estimated future net revenues from proved oil and gas
reserves in the cost center plus the costs of properties not being amortized,
both adjusted for income tax effects, such excess is charged to expense. This
process resulted in a $25.8 million write down of oil and gas properties during
1997.
Interest income in 1997 declined from 1996 as a consequence of the
expenditure of cash balances. General and administrative expenses increased in
1997 as a result of personnel changes and increased legal, travel and consulting
fees related to efforts to effect a business combination. The increases in
interest expense, net of amounts capitalized, resulted from decreases in costs
attributable to assets eligible for interest capitalization. The Company has a
benefit for current income taxes, all of which relates to Colombian operations,
in 1997 because of write downs of oil and gas properties which eliminated the
deferred tax
15
18
liability. No net deferred tax asset was established for this benefit. The
foreign currency translation gain recorded in 1995 resulted from an approximate
19% devaluation in the Colombian peso during 1995 and the settlement of a
liability. The gains in 1996 and 1997 also relate to continued devaluation of
the Colombian peso for those periods.
Item 8. Financial Statements and Supplementary Data.
See Financial Statements and Financial Statement Schedules included
separately herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table lists the names, ages, and principal occupations
of each of the directors and executive officers of Garnet. Each director serves
until the next annual meeting of shareholders and until his successor is elected
and qualified; each executive officer serves at the discretion of the Board of
Directors.
Name Age Position
---- --- --------
Robert J. Cresci 54 Director
Montague H. Hackett, Jr........... 65 Director
Douglas W. Fry.................... 55 President, Chief Executive Office
and Director
Edgar L. Dyes..................... 52 Vice President - Finance
Robert J. Cresci. Mr. Cresci has served as a director of Garnet
since December 1993. Mr. Cresci has been a Managing Director of Pecks Management
Partners Ltd., an investment management firm, since September 1990. Mr. Cresci
currently serves on the boards of Bridgeport Machines, Inc., EIS International,
Inc., Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., HarCor Energy, Inc.,
Meris Laboratories, Inc., Film Roman, Inc., Educational Medical, Inc., Source
Media, Inc., Castle Dental Centers, Inc., Candlewood Hotel Co., Inc., SeraCare,
Inc. and several private companies.
Montague H. Hackett, Jr. Mr. Hackett has served as a director of
Garnet since April 1987 and was employed as Chairman of the Board of Garnet from
January 1995 to January 1998. Since January 1996, Mr. Hackett also serves as
Co-Chairman of Victory Ventures LLC, a privately held limited liability company
("Victory") since July 1997 and has been employed
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19
by Victory since January 1996. Victory conducts its operations through small and
medium-sized companies in which Victory holds controlling or other significant
equity interests. From October 1989 through June 1994, Mr. Hackett served as
President and as a director of Wood River Capital Corporation, a Small Business
Investment Company. From October 1991 through December 1995, Mr. Hackett was
also employed by Noel Group, Inc., a publicly traded company which also conducts
its operations through small and medium-sized companies.
Douglas W. Fry. Mr. Fry has been employed as President of Garnet and
has served as a director of Garnet since September 1995, and has been Chief
Executive Officer of Garnet since March 1996. Since 1980 he has also been
President of Argosy Energy Incorporated, a wholly owned subsidiary of Garnet, or
of the subsidiary's predecessor.
Edgar L. Dyes. Mr. Dyes has served as Vice President - Finance of
Garnet since March 1997. From February 1991 through February 1997, he was
employed by Argosy in Colombia, most recently as Vice President - Finance and
Administration.
Under the terms of its 9 1/2% Convertible Subordinated Debentures, Garnet
includes a candidate selected by the purchasers of the Debentures in
management's slate of nominees for election as directors and solicits proxies
for such candidate if the purchasers continue to own at least 30% in aggregate
principal amount of the Debentures originally issued. Mr. Cresci is the
candidate selected by the purchasers of the Debentures.
Directors' Fees. From 1990 through 1996, directors who were not full time
employees received options to purchase shares of Garnet Common Stock. Directors
are also reimbursed for expenses incurred in connection with attending meetings
of the Board. In 1997, an aggregate of 306,975 options were issued to
non-employee directors at an exercise price of $.428 per share, including an
aggregate of 230,000 options issued in exchange for outstanding stock options
held by them.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires officers,
directors and holders of more than 10% of Garnet's Common Stock (collectively,
"Reporting Persons") to file reports of ownership and changes in ownership of
the Common Stock with the Securities and Exchange Commission within certain time
periods and to furnish Garnet with copies of all such reports. Based solely on
its review of the copies of such reports furnished to Garnet by such Reporting
Persons or on the written representations of such Reporting Persons, Garnet
believes that, during the year ended December 31, 1997, all of the Reporting
Persons complied with their Section 16(a) filing requirements, except that a
Form 3 relating to Mr. Dyes, an executive officer, and a Form 3 relating to Mr.
Rodriguez, a director, were each filed late.
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Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information regarding compensation
earned in each of the last three fiscal years by the Chief Executive Officer,
the Chairman of the Board, and an additional executive officer of Garnet
(collectively, the "Named Executive Officer"):
Annual Compensation Long Term Compensation
------------------- -----------------------------
Awards Payouts
------------------- -------
Other
Annual Rest- All Other
Compen ricted Options/ LTIP Compen-
Fiscal Salary Bonus -sation Stock(s) SARs Payouts sation
Name and Principal Position Year ($) ($) ($) ($) (#)(1) ($) ($)
------ ------ ----- ------- -------- -------- ------- ------
Douglas W. Fry............. 1997 $152,500 none none none 258,202 none none
President and Chief 1996 $152,500 none none none 146,058 none none
Executive Officer(2) 1995 $152,500 none none none 30,000 none none
Edgar L. Dyes.............. 1997 $135,000 none none none 91,135 none $2,320
Vice President and 1996 $120,000 none none none 14,000 none $1,800
Treasurer(3) 1995 $120,000 none none none 15,000 none $1,500
- ----------
(1) The number of options issued in 1997 to Messrs. Fry and Dyes include 176,058
and 29,000 options deemed issued as a result of the reduction in the
exercise price of outstanding options held by such officers.
(2) Mr. Fry was elected President of Garnet in September 1995 and Chief
Executive Officer of Garnet in February 1996. Prior to September 1995, he
served as President of Argosy Energy Incorporated ("Argosy") a wholly-owned
subsidiary of Garnet. The amounts reported for 1995 reflect his compensation
for the full fiscal years, including that earned as President of Argosy.
(3) The amounts reported for all other compensation for Mr. Dyes represent the
premium paid on a term life insurance policy for his benefit.
Agreements with Executive Officers
In April 1997, Garnet entered into agreements with certain executive
officers and key employees, including Messrs. Fry and Dyes, providing for the
payment of severance benefits to such persons in the event of a termination of
their employment by Garnet (i) without Cause, as defined, (ii) upon death or
disability or (iii) following a Change of Control, as defined; provided,
however, that, in the event of a voluntary termination following a Change of
Control, such payments shall only be made if there is "Good Reason" as defined.
In the event of the termination of employment under such circumstance, Messrs.
Fry and Dyes would receive a severance benefit, payable in cash, equal to one
month's base salary for each year, or part thereof, of his employment by Garnet
or its predecessors, which amount was $204,000 and $135,000, respectively, as of
March 31, 1997. Messrs. Fry and Dyes would
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also receive medical insurance coverage for a period of 18 months following the
termination of his employment, life and disability insurance coverage for a
period of two years and one year, respectively, following such termination and
all stock options would vest and remain exercisable for a period of two years. A
Change of Control is defined to include a transaction or series of transactions
in which any person or group becomes the beneficial owner of outstanding voting
securities representing 40% or more of the combined voting power of the then
outstanding voting securities; the individuals constituting the Board of
Directors, or any individual within the definition of Continuing Directors,
cease to constitute at least a majority of the directors of Garnet; a merger of
consolidation in which Garnet is not the surviving entity or in which the voting
securities issued are entitled to cast, in the aggregate, in excess of 40% of
the number of votes entitled to be cast prior to the transaction; the issuance
of in excess of 4,596,865 shares in connection with a transaction or series of
transactions between Garnet and one or more Debenture holders; a sale, lease,
exchange or other transfer of all or substantially all of Garnet's assets; or
any other change of control which would be required to be reported under the
Securities Exchange Act of 1934.
Option Grants During 1997
The following table provides information related to options granted to the
Named Executive Officers during 1997. No stock appreciation rights have been
issued by Garnet.
Potential Realizable
% of Total Value at Assumed
Options Exercise Annual Rates of Stock
Granted or Price Appreciation for
to Base Option Term(2)
Options Employees in Price Expiration ----------------------
Name Granted(1) Fiscal Year ($/sh) Date 5% 10%
- ---- ---------- ------------ -------- ---------- --- --------
Douglas W. Fry... 30,000(3) 3.6% $0.5625 3/26/05 $ 6,870 $16,011
146,058(3) 17.8% $0.5625 4/17/06 $39,231 $93,959
50,000 6.0% $0.5625 4/13/07 $15,505 $38,190
19,634 2.4% $0.3750 6/16/07 $ 4,058 $ 9,998
12,510 1.5% $0.4375 9/13/07 $ 3,017 $ 7,432
Edgar L. Dyes.... 14,000(3) 1.7% $0.5625 3/26/05 $ 3,206 $ 7,472
15,000(3) 1.8% $0.5625 4/17/06 $ 4,029 $ 9,650
40,000 4.9% $0.5625 4/13/07 $12,404 $30,552
11,098 1.4% $0.3750 6/16/07 $ 2,294 $ 5,651
11,037 1.3% $0.4375 9/13/07 $ 2,662 $ 6,557
- ----------
(1) Each of these options were granted pursuant to either the 1990 Stock Option
Plan or the 1987 Stock Option Plan. The exercise price of the options was
equal to the fair market value of a share of Garnet's Common Stock on the
date of grant and may be paid in cash or by delivery of shares of Common
Stock which have a fair market value on the date of exercise equal to the
exercise price. The right to exercise each option vests over a four-year
period but will accelerate upon the occurrence of certain events, including
a change of control. The options are exercisable for a period of 10 years
and 30 days after the date
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of grant unless the optionee resigns, retires or dies, in which case the
right to exercise the option is limited.
(2) The values set forth in this column represent the gain which would be
realized by each Named Executive Officer assuming (i) the options granted in
1997 are exercised on their respective expiration dates, and (ii) the value
of a share of Garnet Common Stock has increased annually by a rate of 5% to
10%, respectively, during the term of the option. These growth rates are
prescribed by the rules of the Securities and Exchange Commission and are
not intended to forecast possible future appreciation for Garnet Common
Stock.
(3) Options deemed granted as a result of a decrease in the exercise price of
outstanding options issued under Garnet's stock option plans.
Option Exercises During 1997 and Year End Option Value
The following table provides information related to options exercised by
the Named Executive Officers during 1997 and the number and value of options
held by year-end. No stock appreciation rights have been issued by Garnet.
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at FY-End(#) at FY-End($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- --------------------------- ---------------------------
Douglas W. Fry........... none none 112,851 165,351 none none
Edgar L. Dyes............ none none 27,026 64,109 none none
- ----------
(1) Because the exercise price of all options exceed $.04, the market value of a
share of Garnet Common Stock at December 31, 1997, the value of unexercised
options was zero.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 1, 1998 as
to each person who, to the knowledge of Garnet, was the beneficial owner of more
than five percent of the outstanding Common Stock of Garnet.
Amount and Nature of Percent of
Name and Address of Beneficial Owner or Group Beneficial Ownership(1) Class(2)
- --------------------------------------------- ----------------------- --------
Wexford Management LLC.......................... 1,150,909(3) 9.1%
411 West Putnam Avenue
Greenwich, Connecticut 06830
Pecks Management Partners Ltd................... 1,090,910(4) 8.7%
One Rockefeller Plaza
New York, New York 10020
- ----------
(1) Except as set forth below, to the best knowledge of Garnet, each beneficial
owner has sole voting power and sole investment power.
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23
(2) Based on 11,492,162 shares of Garnet's Common Stock issued and outstanding
on March 1, 1998. Treated as outstanding for the purpose of computing the
percentage ownership of each beneficial owner or group are shares
("Convertible Debenture Shares") issuable to such beneficial owner or group
upon conversion of Garnet's 9 1/2% convertible subordinated debentures
("Debentures") and shares issuable upon exercise of vested stock options
issued pursuant to Garnet's stock option plans.
(3) According to a Schedule 13D dated April 23, 1997, the indicated number of
shares consists of Convertible Debenture Shares issuable upon conversion of
Debentures held by four investment funds. Wexford Management LLC ("Wexford
Management") serves as investment advisor to three of the funds and as
sub-investment advisor to the fourth fund which is organized as a
corporation. Wexford Advisors, LLC ("Wexford Advisors") serves as the
investment advisor to the corporate fund and as general partner to the
remaining funds which are organized as limited partnerships. Wexford
Management shares voting and dispositive power with respect to the
Convertible Debenture Shares with each of the funds, with Wexford Advisors,
and with Charles E. Davidson and Joseph M. Jacobs, each of whom is a
controlling person of Wexford Management and Wexford Advisors.
(4) According to Schedule 13G dated February 9, 1995 filed by Pecks Management
Partners Ltd. ("Pecks"), as a registered investment advisor, the indicated
number of shares consists of Convertible Debenture Shares issuable to three
investment advisory clients of Pecks upon conversion of Debentures owned by
such clients. One such client, Delaware State Employees' Retirement Fund,
would acquire more than 5% of Garnet's Common Stock, if its Debenture were
converted. Pecks has sole investment and dispositive power with respect to
the Convertible Debentures Shares issuable to its clients and the discretion
to convert the Debentures owned by them.
The following table sets forth certain information as of March 1, 1998
concerning the shares of Common Stock of Garnet owned beneficially by each
director, by each of the Named Executive Officers in the Summary Compensation
Table, and by directors and officers of Garnet as a group:
Amount and
Nature of
Beneficial Percent of
Name of Beneficial Owner or Group Ownership(1) Class (2)
--------------------------------- ------------ ---------
Robert J. Cresci.......................................... 62,950(3) *
Edgar L. Dyes............................................. 40,826(4) *
Douglas W. Fry............................................ 138,062(4) 1.2%
Montague H. Hackett, Jr................................... 191,690(4) 1.6%
Directors and officers of Garnet as a group (4 persons)... 433,528(4) 3.6%
- ----------
* Less than 1%
(1) Except as noted below, each beneficial owner has sole voting power and sole
investment power.
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(2) Based on 11,492,162 shares of Garnet's Common Stock issued and outstanding
on March 1, 1998. Treated as outstanding for the purpose of computing the
percentage ownership of each director, each executive officer and all
directors and executive officers as a group are shares issuable upon
exercise of vested stock options issued pursuant to Garnet's stock option
plans.
(3) Consists solely of shares issuable upon exercise of vested stock options
issued pursuant to Garnet's stock option plans. Does not include Convertible
Debenture Shares issuable to clients of Pecks, of which Mr. Cresci is a
managing director. For information with respect to such shares, see footnote
4 on page 20.
(4) Consists solely of shares issuable upon exercise of vested stock options
issued pursuant to Garnet's stock option plans.
Item 13. Certain Relationships and Related Transactions.
None
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. The following documents are filed as part of this report:
(1)-(2) Financial statements and financial statement schedules - see
the accompanying Index to Financial Statements and Financial
Statement Schedule.
(3) Exhibits - see the accompanying Index of Exhibits.
b. No Reports on Form 8-K were filed by Registrant during the three
months ended December 31, 1997.
22
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GARNET RESOURCES CORPORATION
(Registrant)
By: /s/ DOUGLAS W. FRY
--------------------------------
Douglas W. Fry
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ DOUGLAS W. FRY
- ---------------------------- President, Chief Executive March 31, 1998
Douglas W. Fry Officer and Director
(principal executive officer)
/s/ MONTAGUE H. HACKETT, JR. Chairman of the Board and March 31, 1998
- ---------------------------- Director
Montague H. Hackett, Jr.
/s/ ROBERT J. CRESCI
- ---------------------------- Director March 31, 1998
Robert J. Cresci
/s/ EDGAR L. DYES
- ---------------------------- Vice President, Treasurer and March 31, 1998
Edgar L. Dyes Secretary (principal financial
officer and principal accounting
officer)
23
26
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
Garnet Resources Corporation and Subsidiaries
Consolidated Financial Statements
Report of Independent Public Accountants F-2
Consolidated Balance Sheets, December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
Supplemental Oil and Gas Information F-22
Garnet Resources Corporation
Financial Statement Schedule
Schedule I - Condensed Financial Information of Registrant
Balance Sheets, December 31, 1997 and 1996 F-27
Statements of Operations for the years ended December 31,
1997, 1996 and 1995 F-29
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-30
F-1
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garnet Resources Corporation:
We have audited the accompanying consolidated balance sheets of Garnet
Resources Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Garnet
Resources Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the index to financial statements and financial statement schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
The financial statement schedule has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed further in Note 2 to the
consolidated financial statements, the Company incurred substantial losses in
1997 and has negative working capital and stockholders' equity at December 31,
1997. The Company's management believes that available working capital and
cash flows from operations will not be sufficient to make its required debt
principal and interest payments as they become due beginning March 31, 1998. As
a result, there is substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1998
F-2
28
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
ASSETS 1997 1996
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 425,019 $3,058,015
Restricted cash balances 1,699,231 1,049,349
Accounts receivable 1,476,485 3,541,223
Inventories 736,899 901,216
Prepaid expenses 108,577 132,199
------------ ------------
Total current assets 4,446,211 8,682,002
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties (full-cost
method)-
Proved 59,317,097 56,500,390
Unproved (excluded from 263,908 227,846
amortization) ------------ ------------
59,581,005 56,728,236
Other equipment 134,598 132,083
------------ ------------
59,715,603 56,860,319
Less - Accumulated depreciation, (48,213,229) (17,698,898)
depletion and amortization ------------ ------------
11,502,374 39,161,421
OTHER ASSETS 511,863 678,132
------------ ------------
$16,460,448 $48,521,555
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
29
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Continued
December 31,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt $22,641,480 $2,004,648
Accounts payable and accrued liabilities 1,123,104 3,323,214
------------ ------------
Total current liabilities 23,764,584 5,327,862
LONG-TERM DEBT, net of current portion -- 21,629,232
------------ ------------
DEFERRED INCOME TAXES -- 979,499
------------ ------------
OTHER LONG-TERM LIABILITIES 279,200 378,054
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
75,000,000 shares authorized,
11,492,162 shares issued and outstanding
as of December 31, 1997 and 1996 114,922 114,922
Capital in excess of par value 52,491,212 52,491,212
Retained earnings (deficit) (60,189,470) (32,399,226)
------------ ------------
Total stockholders' equity (7,583,336) 20,206,908
------------ ------------
$16,460,448 $48,521,555
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
30
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES:
Oil sales $8,982,008 $11,446,587 $8,635,570
Interest 199,775 262,640 245,563
------------ ------------ ------------
9,181,783 11,709,227 8,881,133
------------ ------------ ------------
COSTS AND EXPENSES:
Production 3,677,603 3,410,162 3,533,572
Exploration 8,792 40,112 1,547,278
Loss (gain) on net assets held for disposition -- 42,748 --
General and administrative 941,079 652,746 1,672,501
Interest 2,294,853 2,108,346 1,491,131
Depreciation, depletion and amortization 4,764,036 6,334,748 4,949,682
Write down of oil and gas properties 25,752,034 -- --
Foreign currency translation (gain) loss (181,049) (25,498) (741,557)
------------ ------------ ------------
37,257,348 12,563,364 12,452,607
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (28,075,565) (854,137) (3,571,474)
PROVISION (BENEFIT) FOR INCOME TAXES (285,321) 1,205,760 1,051,848
------------ ------------ ------------
NET LOSS $(27,790,244) $(2,059,897) $(4,623,322)
============ ============ ============
NET LOSS PER COMMON SHARE-BASIC AND DILUTED $(2.42) $(.18) $(.40)
============ ============ ============
WEIGHTED AVERAGE SHARES 11,492,162 11,492,162 11,416,828
OUTSTANDING ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
31
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
--------------------------- Capital in Retained Total
Number of Excess of Earnings Stockholders'
Shares Amount Par Value (Deficit) Equity
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1994 11,125,537 $111,255 $51,395,004 $(25,716,007) $25,790,252
Acquisition of partnership
interests in Argosy
Energy International 366,625 3,667 1,096,208 -- 1,099,875
Net loss -- -- -- (4,623,322) (4,623,322)
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1995 11,492,162 114,922 52,491,212 (30,339,329) 22,266,805
Net loss -- -- -- (2,059,897) (2,059,897)
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1996 11,492,162 114,922 52,491,212 (32,399,226) 20,206,908
Net loss -- -- -- (27,790,244) (27,790,244)
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1997 11,492,162 $114,922 $52,491,212 $(60,189,470) $(7,583,336)
============ ============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
32
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,790,244) $(2,059,897) $(4,623,322)
Adjustments to reconcile net loss to net cash provided
by operating activities -
Exploration costs 8,792 40,112 1,547,278
(Gain) loss on net assets held for disposition -- 42,748 --
(Gain) loss on sale of other equipment -- 1,918 (4,970)
Depreciation, depletion and amortization 4,764,036 6,334,748 4,949,682
Write down of oil and gas properties 25,752,034 -- --
Amortization of other assets 240,444 232,148 224,276
Deferred income taxes (979,499) 338,580 640,919
Change in assets and liabilities -
Decrease (increase) in accounts receivable 723,856 (144,757) (673,808)
Decrease in inventories 57,728 70,020 24,525
Decrease (increase) in prepaid expenses (3,205) 1,975 36,162
Increase (decrease) in accounts payable and
accrued liabilities 569,712 (751,538) (586,645)
Increase (decrease) in other long-term liabilities (44,522) (64,049) 134,013
Decrease (increase) in escrow account (649,882) 1,789,495 (2,838,844)
------------ ------------ ------------
Net cash provided (used) by operating activities 2,649,250 5,831,503 (1,170,734)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (5,685,717) (4,145,538) (9,331,942)
Additions to other equipment (4,254) (21,492) (6,880)
Proceeds from asset dispositions -- 292,244 5,000
(Increase) decrease in joint venture and
contractor advances 1,365,960 (1,298,843) 621,225
Decease in inventories 106,589 15,296 300,256
Decrease in net assets held for disposition 1,749 73,798 110,683
(Increase) decrease in other assets (50,390) 25,277 24,170
Acquisition of partnership interests in Argosy Energy
International, net of cash acquired -- -- (92,621)
------------ ------------ ------------
Net cash used for investing activities (4,266,063) (5,059,258) (8,370,109)
------------ ------------ ------------
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
33
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuances of debt $ -- $ -- $4,754,880
Repayments of debt (992,400) (560,998) (208,983)
Costs of debt issuances (23,783) (27,579) (121,312)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (1,016,183) (588,577) 4,424,585
----------- ----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,632,996) 183,668 (5,116,258)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,058,015 2,874,347 7,990,605
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 425,019 $3,058,015 $2,874,347
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid for -
Interest, net of amounts capitalized $2,186,208 $1,983,043 $1,334,676
Income taxes 486,296 582,047 490,624
F-8
34
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of operations and significant accounting policies-
Nature of operations-
Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its
subsidiaries (collectively referred to as the "Company") are engaged in the
exploration, development and production of oil and gas properties located
outside the United States. The Company operates primarily in Colombia and Papua
New Guinea.
Principles of consolidation-
The consolidated financial statements include the accounts of Garnet and
its majority-owned subsidiaries. Inter-company accounts and transactions have
been eliminated. The Company accounts for its investment in Argosy Energy
International, a limited partnership ("Argosy") in which Garnet is a limited
partner and a wholly owned subsidiary of Garnet is the general partner (see Note
3), using the proportionate consolidation method.
Cash equivalents-
Cash equivalents include highly liquid debt instruments with an initial
maturity of three months or less at the date of purchase. The Company had no
cash equivalents at December 31, 1997 and 1996.
Restricted cash-
Restricted cash includes amounts held in escrow as required by the
Company's finance agreement with Overseas Private Investment Corporation.
Reference is made to Note 5-Long-term Debt.
Inventories-
Inventories consist of oil field equipment, materials and supplies, and
crude oil. For presentation in the accompanying consolidated statements of cash
flows, changes in oil field equipment inventory are included as investing
activities because they relate to the Company's exploration and development
activities, while changes in other types of inventories are included as
operating activities.
Oil and gas properties-
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs incurred
in connection with the exploration and development of oil and gas reserves are
capitalized in separate cost centers for each country. Such capitalized costs
include contract and concession acquisition, geological, geophysical and other
exploration work, drilling, completing and equipping oil and gas wells,
constructing production facilities and pipelines, and other related costs. The
Company also capitalizes interest costs related to unevaluated oil and gas
properties. The Company incurred total interest costs of $2,321,613, $2,410,958,
and $2,252,483 in 1997, 1996 and 1995, respectively, of which $26,760, $302,612,
and $761,352 were capitalized as additional costs of oil and gas properties.
F-9
35
The capitalized costs of oil and gas properties in each cost center plus
future development costs are amortized on a composite unit-of-production method
based on future gross revenues from proved reserves. Sales or other dispositions
of oil and gas properties are normally accounted for as adjustments of
capitalized costs. Gain or loss is not recognized in income unless a significant
portion of a cost center's reserves is involved. Capitalized costs associated
with the acquisition and evaluation of unproved properties are excluded from
amortization until it is determined whether proved reserves can be assigned to
such properties or until the value of the properties is impaired. Unproved
properties are assessed at least annually to determine whether any impairment
has occurred. If the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of the present value of estimated
future net revenues from proved oil and gas reserves in the cost center and the
costs of properties not being amortized, both adjusted for income tax effects,
such excess is charged to expense. This process resulted in a $25.8 million
write down of oil and gas properties during 1997.
Revenue recognition-
Oil and gas revenues from producing wells are recognized when the oil or
gas is sold.
Stock-based compensation-
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages but does not require
companies to record compensation costs for stock-based employee plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of Garnet's common
stock at the date of grant over the amount an employee must pay to acquire the
stock.
Net loss per share-
Net loss per common share represents basic earnings per share ("EPS")
as defined in Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). Under SFAS No. 128, Basic EPS is calculated by
dividing the net loss, after consideration of preferred stock dividends paid or
accrued, by the weighted average number of common shares outstanding during
each period presented. Diluted EPS, as defined in SFAS No. 128, is not
presented separately as the effect of any potential common shares on reported
losses would be antidilutive. Potential common shares for the Company include
outstanding stock options.
Use of estimates-
The preparation of these financial statements requires the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Actual results may differ from these estimates.
Depreciation, depletion and amortization of oil and gas properties and the
impairment of oil and gas properties are determined using estimates of oil and
gas reserves. There are numerous uncertainties in estimating the quantity of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reference is made to the
F-10
36
Supplemental Oil and Gas Information for additional information regarding the
process of estimating proved reserve quantities and related cash flows.
(2) Resources and Liquidity
A decline in the price of oil in 1997 and a decline in the rate of
production commencing in the third quarter of 1997 resulted in a 73% decrease in
the Company's estimate of discounted future net cash flows from proved reserves
at December 31, 1997 and a 22% decrease in revenues from oil sales during 1997
compared to 1996. As a result, the Company recorded $25.8 million of write downs
of oil and gas properties during 1997, resulting in a significant net loss
during 1997 and negative stockholders' equity at December 31, 1997.
The Company is highly leveraged with $22.6 million in current debt
consisting of (i) $15 million of 9 1/2% Convertible Subordinated Debentures due
December 21, 1998 (the "Debentures") and (ii) $7.7 million ($7.6 million net to
Garnet) of an outstanding loan (the "OPIC Loan") to Argosy from Chase Bank of
Texas ("Chase") which is guaranteed by the Overseas Private Investment
Corporation ("OPIC") and secured by Argosy's assets in Colombia and Garnet's
direct and indirect interests in Argosy. Based on Argosy's year-end financial
statements, Argosy has determined that it is no longer in compliance with
certain covenants required by the finance agreement governing the OPIC Loan. In
the absence of a waiver of such covenants, either OPIC or Chase would have the
right to call a default under the OPIC Loan, accelerate payment of all
outstanding amounts due thereunder and realize upon the collateral securing the
OPIC Loan. Although Argosy intends to apply for a waiver, and such waivers have
been obtained in the past year, given the Company's financial position and
negative working capital balance at December 31, 1997, no assurance can be given
that such waiver will be granted or continued. Under the terms of the OPIC Loan,
the 75% of proceeds from Argosy's oil sales which are paid in U.S. dollars are
deposited into an escrow account with Chase to secure payment of the OPIC Loan.
Argosy is required to maintain a minimum balance in such escrow account equal to
six months of interest, principal and other fees due under the OPIC Loan. The
escrow account minimum required balance at March 15, 1998 was $1,700,000 and the
total account balance was $1,953,000. Any excess in the escrow account over the
minimum balance can be released to Argosy and used to pay operating expenses and
amounts due under the OPIC Loan. Even if OPIC grants a waiver of the loan
covenants with which Argosy is not in compliance, if the minimum balance
required in such escrow account increases, as a result of a change in the
amortization schedule or otherwise, sufficient funds may not be available to
fund the Company's operations.
The Company's financial forecasts indicate that, assuming no changes in
its capital structure, available working capital and cash flows from operations
will not be sufficient to make the interest payment due on the Debentures on
March 31, 1998, to pay principal and interest due under the OPIC Loan on June
15, 1998 and to maintain the minimum balance in the escrow account. The Company
also does not expect working capital and cash flow from operations to be
sufficient to repay the principal amount of the Debentures at maturity or
earlier if the Debenture holders call a default as a result of the non-payment
of interest. The Company must complete a restructuring transaction or
renegotiate the terms of the Debentures in order to avoid non-compliance with
its obligations to pay the Debentures. As a result, management believes there is
substantial doubt about the Company's ability to continue as a going concern. In
the absence of a business transaction or a restructuring of the Company's
indebtedness, the Company may seek protection form its creditors under the
Federal Bankruptcy Code.
In view of its operating losses and financial condition, the Company
initiated further cost containment programs in 1997 including a 28% reduction in
its Colombian personnel and the termination of all U.S. personnel other than
Douglas W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief
Financial Officer. The Company also engaged Rauscher Pierce Refsnes, Inc. as a
financial advisor to provide assistance in negotiating a business combination or
a debt restructuring transaction to address the Company's liquidity issues.
Although the Company engaged in comprehensive efforts, including extensive
negotiations with two separate candidates, the Company was not successful in
concluding a transaction. The Company is currently engaged in negotiations to
effect a business
F-11
37
combination, although no assurance can be given that such negotiations will
result in a definitive agreement or the consummation of a transaction.
(3) Colombian operations-
Through its ownership of interests in Argosy, the Company has an indirect
interest in a risk sharing contract in Colombia (the "Santana Contract") with
Empresa Colombiana de Petroleos, the Colombian national oil company
("Ecopetrol"). The Santana Contract currently entitles Argosy and its joint
venture partner to explore for oil and gas on approximately 52,000 acres located
in the Putumayo Region of Colombia (the "Santana Block"). The contract provided
for a ten-year exploration period, which expired in 1997 and for a production
period expiring in 2015. Argosy and its joint venture partner also have two
association contracts (the "Fragua Contract" and the "Yuruyaco Contract") with
Ecopetrol. The Fragua Contract covers an area of approximately 32,000 acres
contiguous to the northern boundary of the Santana Block (the "Fragua Block"),
while the Yuruyaco Contract covers an area of approximately 39,000 acres
contiguous to the eastern boundaries of the Santana Block and the Fragua Block
(the "Yuruyaco Block"). Work obligations under these two contracts have been met
and applications to relinquish the areas have been filed with Ecopetrol. Argosy
and its joint venture partner also have the right until 2003 to explore for and
produce oil and gas from approximately 77,000 acres located in the Putumayo
Region (the "Aporte Putumayo Block") pursuant to other agreements with
Ecopetrol. Argosy and its joint venture partner notified Ecopetrol in 1994 that
they intend to abandon the remaining wells and relinquish the Aporte Putumayo
Block because declining production rates have made continued operation
economically unattractive.
Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract provides that Ecopetrol will receive a
royalty equal to 20% of production on behalf of the Colombian government and, in
the event a discovery is deemed commercially feasible, Ecopetrol will acquire a
65% interest in the remaining production from the field, bear 50% of the
development costs, and reimburse the joint venture from Ecopetrol's share of
future production from each well, for 50% of the joint venture's costs of
successful exploratory wells in the field. In June 1996, cumulative oil
production from the Santana Contract exceeded seven million barrels. Under the
terms of the Santana Contract, Ecopetrol continued to bear 50% of development
costs, but its interest in production revenues and operating costs applicable to
wells on the Santana Block increased to 65%. If a discovery is made and is not
deemed by Ecopetrol to be commercially feasible, the joint venture may continue
to develop the field at its own expense and will recover 200% of the costs
thereof, at which time Ecopetrol will acquire a 65% interest therein at no cost
to Ecopetrol or further reimbursement by Ecopetrol to Argosy.
In March 1995, the Company increased its ownership in Argosy by exchanging
366,625 shares of Garnet's common stock with a value of $3.00 per share and cash
totalling $142,703 for the partnership interests held by certain of Argosy's
limited partners.
F-12
38
The Company's resulting net participation in revenues and costs for the
Santana Contract is as follows:
Production Operating Exploration Development
Revenues Costs Costs Costs
---------- --------- ----------- -----------
Santana Contract:
After seven million barrels of
accumulated production 15.3% 19.1% 38.2% 27.3%
The joint venture has completed its seismic acquisition and drilling
obligations for the ten-year exploration period of the Santana Contract,
resulting in the discovery of four oil fields, all of which have been declared
commercial by Ecopetrol. The joint venture has the right to continue to explore
for additional oil and gas deposits on the remaining acreage in the block, which
is held under the commercial production provisions of the Santana Contract.
Under the terms of a contract with Ecopetrol, all oil produced from the
Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the price paid
is the export price received by Ecopetrol, adjusted for quality differences,
less a handling and commercialization fee of $.515 per barrel, effective
February 1, 1997. If Ecopetrol does not export the oil, the price paid is based
on the price received from Ecopetrol's Cartagena refinery, adjusted for quality
differences, plus or minus a sales value differential to be determined by
independent analysis, less Ecopetrol's cost to transport the crude to Cartagena
and a handling and commercialization fee of $.415 per barrel, effective February
1, 1997. Under the terms of its contract with Ecopetrol, 25% of all revenues
from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized
in Colombia. To date, Argosy has experienced no difficulty in repatriating the
remaining 75% of such payments which are payable in United States dollars.
As general partner, the Company's subsidiary is contingently liable for
any obligations of Argosy and may be contingently liable for claims generally
related to the conduct of Argosy's business.
(4) Exploration licenses in Papua New Guinea-
Garnet PNG Corporation, a wholly owned subsidiary of Garnet ("Garnet
PNG"), owned a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting
License No. 181 ("PPL-181") which covered 952,000 acres (the "PPL-181 Area").
Garnet PNG also held a 7.73% interest in an adjoining license, Petroleum
Prospecting License No. 174, on which an exploratory dry hole was drilled in the
first quarter of 1996. This license was surrendered on April 25, 1997. In 1986,
oil was discovered approximately 10 miles from the northern border of the
PPL-181 Area in an adjoining license area.
Under the terms of an agreement pertaining to PPL-181, Occidental
International Exploration and Production Company ("Occidental") agreed to drill
and complete at its cost, a test well on the PPL-181 Area by September 1997.
PPL-181 was owned by Occidental (88%), Garnet PNG (6%)
F-13
39
and Niugini Energy Pty. Limited (6%). The test well, Turama-1, was drilled in
the first quarter of 1997, reaching a total depth of 9,652 feet. The well
encountered the objective sands in the Jurassic-Cretaceous Imburu formation, but
evaluations of samples and electric logs indicated that the sands were water
bearing; therefore, the well was abandoned as a dry hole.
In an agreement dated November 24, 1997, among Occidental Kanau Ltd.
("Kanau"), Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos
Niugini Exploration Pty. Limited ("Santos"), Niugini Energy, Inc. ("Niugini")
and Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet,
Garnet PNG agreed to exchange its 6% interest (the "PPL-181 Interest") in
Petroleum Prospecting License No. 181 ("PPL-181 Area"), for a 4% interest in a
newly applied for but not yet issued, petroleum prospecting license ("New PPL")
covering the PPL-181 Area and Petroleum Prospecting License No. 158 ("PPL-158")
held by Occidental PNG and Santos.
Upon presentation of a tax clearance certificate evidencing Garnet PNG's
compliance with the relevant provisions of Papua New Guinea's income tax laws,
profits, dividends and certain other payments, if any, up to an amount of
500,000 kina (approximately US$ 290,000) per year may be fully remitted out of
Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted,
subject to clearance from the Bank of Papua New Guinea.
(5) Long-term debt-
Long-term debt at December 31, 1997 and 1996 consisted of the following:
1997 1996
------------ ------------
9 1/2% convertible subordinated debentures $15,000,000 $15,000,000
Notes payable by Argosy to a U.S. bank 7,641,480 8,633,880
------------ ------------
22,641,480 23,633,880
Less - Current portion (22,641,480) (2,004,648)
------------ ------------
$ -- $21,629,232
============ ============
In December 1993, Garnet issued $15,000,000 of Convertible Subordinated
Debentures (the "Debentures") due December 21, 1998. The Debentures bear
interest at 9 1/2% per annum payable quarterly and are convertible at the option
of the holders into Garnet common stock at $5.50 per share. If the Company
elects to prepay the Debentures under certain circumstances, it will issue
warrants under the same economic terms as the Debentures. At the option of a
holder, in the event of a change of control of the Company, the Company will be
required to prepay such holder's Debenture at a 30% premium. The Debentures are
secured by a pledge of all of the common stock of Garnet's wholly owned
subsidiary which serves as the general partner of Argosy (see Note 3).
F-14
40
Under the terms of an agreement with the holders of its Debentures, Garnet has
agreed that it will not pay dividends or make distributions to the holders of
its common stock. The Debentures mature December 21, 1998; therefore, the entire
balance has been classified as current in the accompanying consolidated balance
sheet. As of December 31, 1997, Garnet was not in compliance with the minimum
net worth covenant required by the Debentures. Additionally, the Company does
not expect working capital and cash flow from operations to be sufficient to
repay the principal amount of the Debentures at maturity, therefore the Company
must consummate a restructuring transaction prior to their maturity date in
order to avoid non-compliance with its obligation to pay the Debentures. If no
restructuring transaction is consummated the Company will be required to
re-negotiate the terms of the Debentures. In such event, the Company would
explore the advantages and disadvantages in seeking protection from its
creditors under Federal Bankruptcy Code.
In 1994, Argosy entered into a finance agreement with Overseas Private
Investment Corporation, an agency of the United States government ("OPIC"),
pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to
Argosy. The loans were funded in two stages of $4,400,000 in August 1994 and
$4,800,000 in October 1995. The Company used these funds to drill development
wells and construct pipelines and production facilities in Colombia. OPIC's
guaranty is secured by Argosy's interest in the Santana Contract and related
assets, as well as the pledge of Garnet's direct and indirect interests in
Argosy. The terms of the guaranty agreement also restrict Argosy's ability to
make distributions to its partners prior to the repayment of the guaranteed
loans. The maximum term of the loans is not to exceed seven years, and the
principal amortization schedule is based on projected cash flows from wells on
the Santana Block. The loans bear interest at the lender's Eurodollar deposit
rate plus .25% per annum for periods of two, three or six months as selected by
Argosy. The interest rate at December 31, 1997 was 6.125%. In consideration for
OPIC's guaranty, Argosy pays OPIC a guaranty fee of 2.4% per annum on the
outstanding balance of the loans guaranteed. Argosy is no longer in compliance
with certain covenants required by the finance agreement governing the OPIC
Loan. See Note 2, Resources and Liquidity, for additional information.
(6) Stock option plans-
Garnet has adopted stock option plans (the "Employee Plans") pursuant to
which an aggregate of 1,473,000 shares of Garnet's common stock is authorized to
be issued upon exercise of options granted to officers, employees and certain
other persons or entities performing substantial services for or on behalf of
Garnet or its subsidiaries.
The Stock Option and Compensation Committee of Garnet's Board of Directors
(the "Committee") is vested with authority to administer and interpret the
Employees' Plan, to determine the terms upon which options may be granted, to
prescribe, amend and rescind such interpretations and determinations and to
grant options. Current Committee members are not eligible to receive options
under the Employees' Plan.
The employee stock options are generally exercisable for a period of 10
years and 30 days from the date of grant. The purchase price of shares issuable
upon exercise of an option may be paid in cash or by delivery of shares with a
value equal to the exercise price of the option. The committee has generally
determined that the right to exercise non-incentive options issued to
F-15
41
employees vests over a period of four years, so that 20% of the options become
exercisable on each anniversary from the date of grant.
On May 22, 1997, Garnet adopted the 1997 Directors' Stock Option Plan (the
"1997 Directors' Plan") pursuant to which an aggregate of 470,000 shares of
Garnet's common stock is authorized to be issued upon exercise of options
granted to non-employee directors. An aggregate of 306,975 shares was issuable
as of December 31, 1997 upon exercise of options granted thereunder in exchange,
among other things, for the surrender of 265,000 options previously granted to
such directors under the 1990 Directors' Stock Option Plan that has since been
terminated. Director's stock options are exercisable for a period of 5 years
from the date of grant. The purchase price of shares issuable upon exercise of a
director's stock option must be paid in cash.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly no compensation cost has been recognized for the Employee Plans and
the Directors' Plan. Had compensation cost for these plans been determined based
on the fair value at the grant date for awards in 1997, 1996 and 1995 consistent
with the provisions of SFAS 123, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below.
1997 1996 1995
--------- --------- ---------
Pro forma net loss $(27,903,082) $(2,101,716) $(5,102,286)
Pro forma net loss per share $(2.43) $(.18) $(.45)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
----- ----- -----
Expected life (years) 5.0 5.0 4.3
Risk-free interest rate 5.89% 6.17% 6.62%
Volatility 63.65% 57.00% 44.40%
Dividend 0.00% 0.00% 0.00%
F-16
42
The following is a summary of stock option activity and related
information for 1997, 1996 and 1995.
1997 1996 1995
------------------- -------------------- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares
Options outstanding,
beginning of year 1,178,726 $2.86 1,329,102 $4.72 1,369,500
Options granted 698,956 .46 480,000 1.19 618,000
Options forfeited (451,080) 5.09 (336,102) 7.44 --
Options expired (85,372) 1.19 (294,274) 3.31 (658,398)
---------- ----- ---------- ----- ----------
Options outstanding,
end of year 1,341,230 $.83 1,178,726 $2.86 1,329,102
========== ===== ========== ===== =========
Option price range $.38 to $1.19 to $2.50 to
at end of year $2.50 $13.83 $13.83
Options available for
grant at end of year 448,270 410,774 470,398
======= ======= =======
Weighted average fair
value of options
granted during the year $.24 $.66 $1.19
======= ======= =======
The following table summarizes information about stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------ -------------------
Number
Number Average Weighted Exercisable Weighted
Outstanding Remaining Average at Average
Range of at December Contractual Exercise December Exercise
Exercise Prices 31, 1997 Life Price 31, 1997 Price
- --------------- ----------- ----------- -------- ----------- --------
$0.375-40.438 490,956 4.3 years $0.42 391,766 $0.43
$0.5625 630,274 7.0 years $0.56 259,606 $0.56
$2.50 220,000 0.5 years $2.50 220,000 $2.50
--------- ----- -------
$0.375-42.50 1,341,230 $0.83 871,372
========= ===== =======
F-17
43
(7) Income taxes-
Income (loss) before income taxes and the provision for income taxes
consisted of the following:
Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Income (loss) before
income taxes -
Domestic $ (5,613,734) $ (1,847,919) $ (2,340,158)
Foreign (22,461,831) 993,782 $ (1,231,316)
------------ ------------ ------------
$(28,075,565) $ (854,137) $ (3,571,474)
============ ============ ============
Provision (benefit) for
income taxes -
Foreign -
Current $ 694,178 $ 868,344 $ 410,929
Deferred (979,499) 337,416 640,919
------------ ------------ ------------
$ (285,321) $ 1,205,760 $ 1,051,848
============ ============ ============
The provisions for income taxes and deferred income taxes payable relate
to the Colombian activities of Argosy. No deferred taxes were provided in 1997
because the tax bases of the Company's assets exceed the financial statement
bases, resulting in a deferred tax asset, which the Company has determined is
not presently realizable.
The Company's net deferred income tax liabilities as of December 31, 1997
and 1996 were as follows:
1997 1996
------------ ------------
Deferred tax liability $ 27,198 $ 2,109,649
Deferred tax asset (12,677,641) (11,061,573)
Valuation allowance 12,650,443 9,931,423
------------ ------------
Net deferred tax liability $ -- $ 979,499
============ ============
Temporary differences included in the deferred tax liabilities related
primarily to property and equipment. Deferred tax assets principally consisted
of net operating loss carryforwards. The Colombian deferred tax liability was
eliminated due to a write down of oil and gas properties during 1997, totaling
$25.8 million.
F-18
44
As of December 31, 1997, the Company had a regular U.S. tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $30,900,000 and $30,600,000 respectively. These loss
carryforwards will expire beginning in 2001 if not utilized to reduce U.S.
income taxes otherwise payable in future years, and are limited as to
utilization because of the occurrences of "ownership changes" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in 1991 and
earlier years. Such loss carryforwards also exclude regular tax net operating
loss carryforwards aggregating approximately $4,500,000 attributable to certain
of Garnet's subsidiaries, which can be used in certain circumstances to offset
taxable income generated by such subsidiaries.
(8) Fair value of financial instruments-
The carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable and accrued liabilities approximate fair value because of
the short maturity of these items. The carrying amounts of notes payable by
Argosy to U.S. banks approximate fair value because the interest rates on these
instruments change with market interest rates. There are no quoted market prices
for the Debentures. Because the Debentures are convertible into shares of
Garnet's common stock, the fair value of the Debentures is contingent on market
prices for the common stock, the value of the Company's assets, and the results
of its operations. In addition the Debentures contain unique terms, conditions,
covenants and restrictions. Consequently the Company is unable to estimate the
fair value of the Debentures.
(9) Concentration of credit risk-
During the years ended December 31, 1997, 1996 and 1995, all of the
Company's oil production was purchased by Ecopetrol. As of December 31, 1997 and
1996, accounts receivable included approximately $1,134,812 and $2,866,000
respectively, from Ecopetrol. The Company believes that its oil production could
be sold to other purchasers at similar prices in lieu of sales to Ecopetrol.
(10) Operations by geographic area-
The Company operates in one industry segment. Information about the
Company's operations for the years ended December 31, 1997, 1996 and 1995 by
different geographic areas is shown below.
F-19
45
Other
United Foreign
1997 States Colombia Areas Total
- ---- -------- ------------ -------- ------------
Oil and gas sales $ -- $ 8,982,008 $ -- $ 8,982,008
======== ============ ======== ============
Operating profit
(loss) $ -- $(25,211,665) $ (8,792) $(25,220,457)
======== ============ ========
General corporate income and expenses, net (2,855,108)
------------
Income (loss) before income taxes $(28,075,565)
============
Identifiable
assets $349,612 $ 13,985,826 $ 760 $ 14,336,198
======== ============ ========
Corporate assets:
Cash and cash equivalents 2,124,250
------------
Total assets $ 16,460,448
============
Other
United Foreign
1996 States Colombia Areas Total
- ---- -------- ------------ -------- ------------
Oil and gas sales $ -- $ 11,446,587 $ -- $ 11,446,587
======== ============ ======== ============
Operating profit
(loss) $(42,748) $ 1,701,677 $(40,112) $ 1,618,817
======== ============ ========
General corporate income and expenses, net (2,472,954)
------------
Income (loss) before income taxes $ (854,137)
============
Identifiable
assets $633,606 $ 43,780,585 $ -- $ 44,414,191
======== ============ ========
Corporate assets:
Cash and cash equivalents 4,107,364
------------
Total assets $ 48,521,555
============
F-20
46
United Other Foreign
1995 States Colombia Areas Total
- ---- -------- ------------ ------------- ------------
Oil and gas
sales $ -- $ 8,635,570 $ -- $ 8,635,570
======== ============ ============ ============
Operating
profit (loss) $ (6,476) $ 158,792 $ (1,547,278) $ (1,394,962)
========= ============ ============
General corporate income and expenses, net (2,176,512)
------------
Income (loss) before income taxes $ (3,571,474)
============
Identifiable
assets $937,359 $ 43,303,637 $ 4,841 $ 44,245,837
======== ============ ============
Corporate assets:
Cash and cash equivalents 5,713,191
------------
Total assets $ 49,959,028
============
The operating loss in other foreign areas represents oil and gas
acquisition and exploration costs charged to expense, of which $674,554 was in
Papua New Guinea, $798,263 was in France and $74,461 was in other countries.
F-21
47
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The following tables set forth information about the Company's oil and gas
producing activities pursuant to the requirements of SFAS No. 69 "Disclosures
About Oil and Gas Producing Activities".
Capitalized Costs December 31,
----------------- ---------------------------------
1997 1996
------------ ------------
Proved properties $ 59,317,097 $ 56,500,390
Unproved properties 263,908 227,846
------------ ------------
59,581,005 56,728,236
Accumulated depreciation,
depletion and amortization (48,115,622) (17,610,628)
------------ ------------
Net capitalized costs $ 11,465,383 $ 39,117,608
============ ============
As of December 31, 1997 and 1996, all capitalized costs pertained to oil
and gas properties in Colombia.
The Company's investment in oil and gas properties as of December 31, 1997
includes $263,908 in unevaluated properties which have been excluded from
amortization. Such costs will be evaluated in future periods based on
management's assessment of exploration activities, expiration dates of licenses,
permits and concessions, changes in economic conditions and other factors.
Costs Incurred
Other
Year Ended Foreign
December 31, 1997 Colombia Areas Total
- ----------------- ---------- ---------- ----------
Property acquisition-
Proved properties $ -- $ -- $ --
Unproved properties -- 760 760
Exploration 308,239 -- 308,239
Development 2,543,770 -- 2,543,770
---------- ---------- ----------
Total costs incurred $2,852,009 $ 760 $2,852,769
========== ========== ==========
F-22
48
Other
Year Ended Foreign
December 31, 1996 Colombia Areas Total
- ----------------- ---------- ---------- ----------
Property acquisition-
Proved properties $ -- $ -- $ --
Unproved properties -- 5,258 5,258
Exploration 1,257,150 34,854 1,292,004
Development 4,829,074 -- 4,829,074
---------- ---------- ----------
Total costs incurred $6,086,224 $ 40,112 $6,126,336
========== ========== ==========
Year Ended
December 31, 1995
- -----------------
Property acquisition-
Proved properties $1,590,943 $ -- $1,590,943
Unproved properties -- 61,361 61,361
Exploration 1,439,406 502,544 1,941,950
Development 6,229,286 -- 6,229,286
---------- ---------- ----------
Total costs incurred $9,259,635 $ 563,905 $9,823,540
========== ========== ==========
Results of Operations Year Ended December 31,
--------------------- -----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Revenues $ 8,982,008 $ 11,446,587 $ 8,635,570
Expenses-
Production costs 3,677,603 3,410,162 3,533,572
Depreciation, depletion and amortization 4,764,036 6,323,999 4,936,955
Write down of oil and gas properties 25,752,034
------------ ------------ ------------
34,193,673 9,734,161 8,470,527
------------ ------------ ------------
Results of operations before income taxes (25,211,665) 1,712,426 165,043
Provision for income taxes -- 710,657 70,638
------------ ------------ ------------
Results of operations from oil and gas $(25,211,665) $ 1,001,769 $ 94,405
producing activities ============ ============ ============
Sales price per barrel $17.39 $19.82 $16.39
Production costs per barrel 7.12 5.91 6.71
Depreciation, depletion and amortization
per dollar of oil and gas revenues
(excluding write down of oil and gas
properties) .53 .55 .57
F-23
49
During the years ended December 31, 1997, 1996 and 1995, all of the
Company's oil and gas producing operations were located in Colombia.
During 1997, 1996 and 1995 the Company also charged to expense a total of
$8,792, $40,112 and $1,547,278 respectively, of acquisition and exploration
costs pertaining to its activities in other foreign areas.
Oil and Gas Reserve Quantities
Proved reserves represent estimated quantities of crude oil and natural
gas which geological and engineering data demonstrate to be reasonably
recoverable in the future from known reservoirs under existing economic and
operating conditions. Proved developed reserves can be expected to be recovered
through existing wells with existing equipment and operating methods.
Estimates of proved and proved developed oil and gas reserves are subject
to numerous uncertainties inherent in the process of developing the estimates
including the estimation of the reserve quantities and estimated future rates of
production and timing of development expenditures. The accuracy of any reserve
estimate is a function of the quantity and quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate. Additionally, the estimated volumes to be
commercially recoverable may fluctuate with changes in prices of oil and natural
gas.
Estimates of the Company's proved reserves and related valuations, as
shown in the following tables were developed pursuant to SFAS No. 69. Huddleston
& Co., Inc. provided estimates of future recoverable oil reserves and projected
future net revenues. The Company's proved reserves were comprised entirely of
crude oil in Colombia, and are stated in barrels.
December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
Proved developed and undeveloped reserves:
Beginning of year 3,415,909 3,942,231 4,626,883
Revisions of previous estimates (1,109,268) 51,106 (377,493)
Production (516,543) (577,428) (526,834)
Purchases of reserves in place -- -- 219,675
--------- --------- ---------
End of year 1,790,098 3,415,909 3,942,231
========= ========= =========
Proved undeveloped reserves at end of year -- 980,824 2,002,811
Proved developed reserves at end of year 1,790,098 2,435,085 1,939,420
The following tables present the standardized measure of discounted future
net cash flows relating to proved oil and gas reserves and the changes in the
standardized measure of discounted future net cash flows. Future cash inflows
and costs were computed using prices and costs in effect at the end of the
applicable year without escalation. Future income taxes were computed by
applying the appropriate statutory income tax rate to the pretax future net cash
flows reduced by future tax deductions and net operating loss carryforwards.
F-24
50
Standardized Measure of Discounted Future Net Cash Flows
As of December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Future cash inflows $25,617,420 $77,207,720 $69,343,840
Future costs-
Production 9,348,337 13,778,938 18,021,679
Development 395,643 3,513,309 5,264,508
----------- ----------- -----------
Future net cash flows
before income taxes 15,873,440 59,915,473 46,057,653
Future income taxes 961,636 6,010,111 4,232,095
----------- ----------- -----------
Future net cash flows 14,911,804 53,905,362 41,825,558
10% discount factor 3,430,104 10,755,572 11,151,677
----------- ----------- -----------
Standardized measure of
discounted future net
cash flows $11,481,700 $43,149,790 $30,673,881
=========== =========== ===========
Changes In Standardized Measure of Discounted Future Net Cash Flows
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Standardized measure,
beginning of year $ 43,149,790 $ 30,673,881 $ 32,434,723
Increases (decreases)
Sales, net of production costs (5,304,405) (8,036,425) (5,101,998)
Net change in sales prices,
net of production costs (25,277,345) 14,139,910 1,578,689
Changes in estimated future
development costs 1,346,106 (1,111,112) (1,749,979)
Development costs incurred during
the year that reduced future
development costs 1,751,409 3,310,248 4,994,019
Revisions of quantity estimates (9,310,817) 2,540,160 (9,003,192)
Accretion of discount 4,808,672 3,359,280 3,702,993
Net change in income taxes 4,116,800 (2,018,011) 1,676,288
Purchases of reserves in place -- -- 1,758,109
Changes in production rates
(timing) and other (3,798,510) 291,859 384,229
------------ ------------ ------------
Standardized measure
end of year $ 11,481,700 $ 43,149,790 $ 30,673,881
============ ============ ============
F-25
51
The standardized measure of discounted future net cash flows does not
purport to present the fair market value of the Company's proved reserves. An
estimate of fair value would also take into account, among other things, the
recovery of reserves in excess of proved reserves, anticipated future changes in
prices and costs and a discount factor more representative of the time value of
money and the risks inherent in reserve estimates.
F-26
52
SCHEDULE I
GARNET RESOURCES CORPORATION
Condensed Financial Information of Registrant
Balance Sheets
December 31,
------------------------------
ASSETS 1997 1996
------ ------------ ------------
CURRENT ASSETS:
Cash $ 164,092 $ 86,119
Accounts receivable 28,116 494,261
Prepaid expenses 27,330 24,124
------------ ------------
Total current assets 219,538 604,504
------------ ------------
INVESTMENTS IN AND ADVANCES TO 6,988,613 34,427,950
SUBSIDIARIES ------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment 72,255 69,928
Less - Accumulated depreciation (47,116) (41,731)
------------ ------------
25,139 28,197
------------ ------------
OTHER ASSETS 205,784 309,497
------------ ------------
$ 7,439,074 $ 35,370,148
============ ============
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-27
53
SCHEDULE I
GARNET RESOURCES CORPORATION
Condensed Financial Information of Registrant
Balance Sheets
(Continued)
December 31,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Current portion of Long-term debt $ 15,000,000 --
Accounts payable and accrued liabilities 22,410 163,240
------------ ------------
15,022,410 163,240
LONG-TERM DEBT -- 15,000,000
------------ ------------
OTHER LONG-TERM LIABILITIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000
shares authorized, 11,492,162 shares issued
and outstanding as of December 31, 1997
and 1996 114,922 114,922
Capital in excess of par value 52,491,212 52,491,212
Retained earnings (deficit) (60,189,470) (32,399,226)
------------ ------------
Total stockholders' equity (7,583,336) 20,206,908
------------ ------------
$ 7,439,074 $ 35,370,148
============ ============
These financial statements should be read in, conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-28
54
SCHEDULE I
GARNET RESOURCES CORPORATION
Condensed Financial Information of Registrant
Statements of Operations
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
INTEREST INCOME $ 6,378 $ 140,732 $ 519,630
------------ ------------ ------------
COSTS AND EXPENSES:
Exploration -- 1,775 798,263
General and administrative 1,256,948 1,134,107 1,953,436
Interest 1,712,745 1,243,668 819,134
Depreciation 7,114 8,273 5,874
------------ ------------ ------------
2,976,807 2,387,823 3,576,707
------------ ------------ ------------
INCOME (LOSS) BEFORE EQUITY IN (2,970,429) (2,247,091) (3,057,077)
EARNINGS (LOSSES) OF SUBSIDIARIES
EQUITY IN EARNINGS (LOSSES) OF (24,819,815) 187,194 (1,566,245)
SUBSIDIARIES ------------ ------------ ------------
NET LOSS $(27,790,244) $ (2,059,897) $ (4,623,322)
============ ============ ============
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-29
55
SCHEDULE I
GARNET RESOURCES CORPORATION
Condensed Financial Information of Registrant
Statements of Cash Flows
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,790,244) $ (2,059,897) $ (4,623,322)
Equity in (earnings) loss of subsidiaries 24,819,815 (187,194) 1,566,245
Exploration costs -- 1,775 798,263
Depreciation 7,114 8,273 5,874
Changes in components of working capital 99,923 (378,881) 159,500
Other 154,103 89,927 213,309
------------ ------------ ------------
Net cash used for operating activities (2,709,289) (2,525,997) (1,880,131)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances from (to) subsidiaries 2,619,522 (161,156) (6,131,388)
Capital expenditures (54,446) (25,929) (132,902)
Loans repaid by Argosy Energy International 222,186 1,710,518 2,353,784
------------ ------------ ------------
Net cash provided by
(used for) investing activities 2,787,262 1,523,433 (3,910,506)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used for financing activities -- -- --
------------ ------------ ------------
NET (DECREASE) INCREASE CASH 77,973 (1,002,564) (5,790,637)
CASH AT BEGINNING OF PERIOD 86,119 1,088,683 6,879,320
------------ ------------ ------------
CASH AT END OF PERIOD $ 164,092 $ 86,119 $ 1,088,683
============ ============ ============
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-30
56
INDEX OF EXHIBITS
Item No. Item Title Exhibit No.
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession: Not applicable.
(3) Articles of Incorporation and By-Laws:
(A) Restated Certificate of Incorporation filed on April
3, 1987, as amended. 3(A)
(B) By-Laws, as amended, incorporated by reference to
Exhibit 3(B) to Registrant's Form 10-K for the
fiscal year ended December 31, 1994. *
(4) Instruments defining the rights of security holders, including
indentures:
(A) Excerpts from Restated Certificate of Incorpora-
tion, as amended. 4(A)
(B) Excerpts from By-Laws, as amended, incorporated by
reference to Exhibit 4(B) to Form S-1 Registration
Statement No. 33-16426. *
(C) Specimen Certificate for Common Stock of Garnet
Resources Corporation, par value $.01 per share,
incorporated by reference to Exhibit 4(C) to
Amendment No. 1 to Form S-1 Registration Statement
No. 33-16426. *
(D) Form of 9 1/2% convertible subordinated debenture,
incorporated by reference to Exhibit 4 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1993. *
(9) Voting trust agreement: Not applicable.
(10) Material contracts:
(A) Risk Sharing Contract by and between Empresa
Colombiana de Petroleos, on the one part, and Argosy
Energy International and Neo Energy, Inc., on the
other part, incorporated by reference
57
Item No. Item Title Exhibit No.
to Exhibit 10(I) to Form S-1 Registration Statement
No. 33-16426. *
(B) Amendment dated March 6, 1990 to the Risk Sharing
Contract by and between Empresa Colombiana de
Petroleos, on the one part, and Argosy Energy
International and Neo Energy, Inc. on the other
part, incorporated by reference to Exhibit 10(EE) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1989. *
(C) Operating Agreement for the Santana Area dated as of
September 16, 1987 by and between Argosy Energy
International and Neo Energy, Inc., incorporated by
reference to Exhibit 10(W) to Amendment No. 1 to
Form S-1 Registration Statement No. 33-16426. *
(D) Contract for Sale of Santana Crude dated March 6,
1995 by and among Empresa Colombiana de Petroleos,
Argosy Energy International and Neo Energy, Inc.,
incorporated by reference to Exhibit 10(E) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1994. *
(E) Contract for Sale of Santana Crude dated February
10, 1997 by and among Empresa Colombiana de
Petroleos, Argosy Energy International and Neo
Energy, Inc., incorporated by reference to Exhibit
10(D) to Registrant's Form 10-K for the fiscal year
ended December 31, 1996.
(F) Extension of Contract of Sale of Santana Crude dated
February 10, 1997 by and among Empresa Colombiana de
Petroleos, Argosy Energy International and Neo
Energy, Inc. 10(F)
(G) Association Contract for the Fragua Area effective
June 1, 1992 by and between Empresa Colombiana de
Petroleos, on the one part, and Argosy Energy
International and Neo Energy, Inc., on the other
part, incorporated by reference to Exhibit 10(JJ) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1992 *
58
Item No. Item Title Exhibit No.
(H) Operating Agreement for the Fragua Area dated as of
April 15, 1992 by and between Argosy Energy
International and Neo Energy, Inc., incorporated by
reference to Exhibit 10(KK) to Registrant's Form
10-K for the fiscal year ended December 31, 1992. *
(I) Association Contract for the Yuruyaco Area effective
November 19, 1995 by and between Empresa Colombiana
de Petroleos, on the one part, and Argosy Energy
International and Neo Energy, Inc., on the other
part incorporated by reference to Exhibit (G) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995.
(J) Operating Agreement for the Yuruyaco Area dated as
of November 7, 1995 by and between Argosy Energy
International and Neo Energy, Inc., incorporated by
reference to Exhibit 10(A) to Registrant's Form 10-Q
for the quarterly period ended March 31, 1996. *
(K) Second Amended and Restated Limited Partnership
Agreement of Argosy Energy International dated as of
January 11, 1991, incorporated by reference to
Exhibit 10(GG) to Form S-4 Registration Statement
No. 33-43533. *
(L) Amendment to Second Amended and Restated Limited
Partnership Agreement of Argosy Energy International
dated as of January 13, 1994, incorporated by
reference to Exhibit 10(BB) to Registrant's Form
10-K for the fiscal year ended December 31, 1993. *
(M) Second Amendment to Second Amended and Restated
Limited Partnership Agreement of Argosy Energy
International dated as of July 1, 1994 incorporated
by reference to Exhibit 10(J) to Registrant's Form
10-K for the fiscal year ended December 31, 1994. *
(N) Petroleum Prospecting License No. 181, Incorporated
by reference to Exhibit 10(A) to
59
Item No. Item Title Exhibit No.
Registrant's Form 10-Q for the quarterly period
ended September 30, 1995. *
(O) Papua New Guinea PPL-77 Agreement dated April 27,
1995 among Garnet PNG Corporation, Niugini Energy
Pty. Limited and Occidental International
Exploration and Production Company, incorporated by
reference to Exhibit 10(B) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995. *
(P) Purchase Agreement dated as of December 21, 1993
among Garnet Resources Corporation and the Investors
purchasing Registrant's 9 1/2% Convertible
Subordinated Debentures, incorporated by reference
to Exhibit 10(Y) to Registrant's Form 10-K for the
fiscal year ended December 31, 1993. *
(Q) Pledge Agreement dated as of December 21, 1993 made
by Garnet Resources Corporation in favor of Pecks
Management Partners Ltd., incorporated by reference
to Exhibit 10(Z) to Registrant's Form 10-K for the
fiscal year ended December 31, 1993. *
(R) Noteholders' and Stockholders' Agreement dated as of
December 21, 1993 among Garnet Resources
Corporation, the Investors purchasing Registrant's 9
1/2% Convertible Subordinated Debentures, and
certain existing stockholders of Registrant,
incorporated by reference to Exhibit 10(AA) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1993. *
(S) Finance Agreement dated May 2, 1994 between Argosy
Energy International and overseas Private Investment
Corporation, incorporated by reference to Exhibit
10(A) to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994 *
(T) Amendment No. 1 dated July 28, 1994 to Finance
Agreement between Argosy Energy International and
Overseas Private Investment
60
Item No. Item Title Exhibit No.
Corporation, incorporated by reference to Exhibit
10(B) to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994. *
(U) Amendment No. 2 dated March 24, 1995 to the Finance
Agreement between Argosy Energy International and
Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(C) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1995. *
(V) Amendment No. 3 dated September 26, 1995 to Finance
Agreement between Argosy Energy International and
Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(D) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1995. *
(W) Loan Agreement dated August 3, 1994 by and between
Texas Commerce Bank National Association and Argosy
Energy International, incorporated by reference to
Exhibit 10(C) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1994. *
(X) Stage I Promissory Note dated August 3, 1994 from
Argosy Energy International to Texas Commerce Bank
National Association in the principal amount of
$4,400,000, incorporated by reference to Exhibit
10(D) to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994. *
(Y) Stage II Promissory Note dated October 25, 1995 from
Argosy Energy International to Texas Commerce Bank
National Association in the principal amount of
$4,800,000, incorporated by reference to Exhibit
10(E) to Registrant's Form 10-Q for the quarterly
period ended September 30, 1995. *
(Z) Guaranty dated July 26, 1994 from Overseas Private
Investment Corporation to Texas Commerce Bank
National Association, incorporated by reference to
Exhibit 10(E) to
61
Item No. Item Title Exhibit No.
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(AA) Project Support Agreement dated August 3, 1994 among
Garnet Resources Corporation, Argosy Energy
International and Overseas Private Investment
Corporation, incorporated by reference to Exhibit
10(F) to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994. *
(BB) Security Agreement dated August 3, 1994 made by
Argosy Energy International to Overseas Private
Investment Corporation, incorporated by reference to
Exhibit 10(G) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1994. *
(CC) Escrow Agreement dated August 3, 1994 among Argosy
Energy International, Overseas Private Investment
Corporation, Texas Commerce Bank National
Association, as Lender, and Texas Commerce Bank
National Association, as Escrow Agent, incorporated
by reference to Exhibit 10(H) to Registrant's Form
10-Q for the quarterly period ended September 30,
1994. *
(DD) Conditional Assignment Agreement dated August 3,
1994 made by Argosy Energy International in favor of
Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(J) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(EE) Subordination Agreement dated August 3, 1994 made by
Garnet Resources Corporation in favor of Overseas
Private Investment Corporation, incorporated by
reference to Exhibit 10(K) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1994. *
(FF) Subordination Agreement dated August 3, 1994 made by
Argosy Energy Incorporated in favor of Overseas
Private Investment Corporation,
62
Item No. Item Title Exhibit No.
incorporated by reference to Exhibit 10(L) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(GG) Pledge Agreement dated August 3, 1994 made by Garnet
Resources Corporation and Argosy Energy Incorporated
to Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(M) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(HH) 1987 Stock Option Plan of Garnet Resources
Corporation, incorporated by reference to Exhibit
10(F) to Form S-1 Registration Statement No.
33-16426. *
(II) 1990 Stock Option Plan of Garnet Resources
Corporation, as amended, incorporated by reference
to Appendix A to Garnet Resources Corporation's
Notice of Annual Meeting and Proxy Statement for its
Annual Meeting of Shareholders held on June 21,
1995. *
(JJ) Form of Garnet Resources Corporation Non-Incentive
Stock Option Agreement for employees, incorporated
by reference to Exhibit 10(G) to Form S-1
Registration Statement No. 33-16426. *
(KK) Form of Garnet Resources Corporation Non-Incentive
Stock Option Agreement for non-employees,
incorporated by reference to Exhibit 10(H) to Form
S-1 Registration Statement No. 33-16426. *
(LL) 1997 Directors' Stock Option Plan of Garnet
Resources Corporation, as amended, incorporated by
reference to Appendix A to Garnet Resources
Corporation's Notice of Annual Meeting and Proxy
Statement for its Annual Meeting of Shareholders
held on May 22, 1997. *
63
Item No. Item Title Exhibit No.
(MM) Letter Agreement dated June 28, 1995 between George
M. Nevers and Garnet Resources Corporation,
incorporated by reference to Exhibit 10(F) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1995. *
(11) Statement re computation of per share earnings is not required
because the relevant computations can be clearly determined from
the material contained in the financial statements included
herein.
(12) Statements re computation of ratios: Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report
to security holders: Not applicable.
(16) Letter re change in certifying accountant: Not applicable.
(18) Letter re change in accounting principles: Not applicable.
(21) Subsidiaries of the registrant. 21
(22) Published report regarding matters submitted to vote of security
holders: Not applicable.
(23) Consents of experts and counsel. 23
(24) Power of attorney: Not applicable.
(27) Financial Data Schedule. 27
(99) Additional exhibits: Not applicable.
* Incorporated by reference