U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1998
Commission File Number 1-12322
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SABA PETROLEUM COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 47-0617589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 347-8700
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the 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_____
At November 19, 1998, 11,052,393 shares of Common Stock, $.001 par value, were
outstanding.
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SABA PETROLEUM COMPANY
CONTENTS
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Page(s)
PART I.-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations for the nine
and three month periods ended September 30, 1998 and
1997 (Unaudited) 4
CondensedConsolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-25
PART II.-OTHER INFORMATION
Item 1. Legal Proceedings 25-26
Item 4. Submission of Matters to a Vote of Security Holders 26-27
Item 5. Other Information 27-28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
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5
The accompanying notes are an integral part of
these financial statements.
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PART I - FINANCIAL INFORMATION
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
September 30, December 31,
1998 1997
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,186,671 $ 1,507,641
Accounts receivable, net of allowance for doubtful
accounts of $78,000 (1998) and $69,000 (1997) 5,386,432 6,459,074
Other current assets 2,750,105 4,589,501
-------------------- ----------------------
-------------------- ----------------------
Total current assets 9,323,208 12,556,216
-------------------- ----------------------
-------------------- ----------------------
Property and equipment (Note 4):
Oil and gas properties (full cost method) 79,717,781 76,562,279
Land, plant and equipment 9,174,553 8,368,405
-------------------- ----------------------
-------------------- ----------------------
88,892,334 84,930,684
Less accumulated depletion and depreciation (45,470,788) (22,325,276)
-------------------- ----------------------
-------------------- ----------------------
Total property and equipment 43,421,546 62,605,408
-------------------- ----------------------
-------------------- ----------------------
Other assets 1,176,320 2,495,322
-------------------- ----------------------
==================== ======================
$ 53,921,074 $ 77,656,946
==================== ======================
==================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 12,488,875 $ 10,104,519
Income taxes payable 1,413,494 733,887
Current portion of long-term debt 25,172,694 13,441,542
-------------------- ----------------------
-------------------- ----------------------
Total current liabilities 39,075,063 24,279,948
Long-term debt, net of current portion (Note 4) 5,347,411 19,609,855
Other liabilities and deferred taxes 1,677,974 862,999
Minority interest in consolidated subsidiary 621,366 752,570
Preferred stock - $.001 par value, authorized
50,000,000 shares; issued and oustanding 8,000
shares (1998) and 10,000 (1997) 7,169,170 8,511,450
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock - $.001 par value, authorized
150,000,000 shares; issued and outstanding
11,052,393 (1998) and 10,883,908 (1997) shares
11,052 10,884
Capital in excess of par value 16,971,131 17,321,680
Retained earnings (deficit) (16,709,302) 7,200,292
Unearned compensation (803,000)
-
Cumulative translation adjustment (242,791)
(89,732)
-------------------- ----------------------
-------------------- ----------------------
Total stockholders' equity 30,090 23,640,124
-------------------- ----------------------
-------------------- ----------------------
$ 53,921,074 $ 77,656,946
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SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C> <C> <C>
Nine Months Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
----- ----- ----- ----
Revenues:
Oil and gas sales $ 15,768,650 $25,282,361 $ 4,155,325 $ 7,918,697
Other 2,914,512 1,495,839 1,648,592 1,024,076
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Total revenues 18,683,162 26,778,200 5,803,917 8,942,773
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Expenses:
Production costs 10,139,965 12,249,901 3,141,751 3,816,812
General and administrative 4,973,828 3,467,984 1,260,534 1,369,451
Depletion, depreciation and amortization 5,500,339 5,011,562 1,645,799 1,778,275
Writedown of oil and gas properties 17,852,367 - 57,342 -
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Total expenses 38,466,499 20,729,447 6,105,426 6,964,538
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Operating income (loss) (19,783,337) 6,048,753 (301,509) 1,978,235
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Other income (expense):
Other (1,124,837) (190,308) (588,251) (463,848)
Interest expense (2,518,573) (1,421,144) (1,003,240) (590,359)
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Total other income (expense) (3,643,410) (1,611,452) (1,591,491) (1,054,207)
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Income (loss) before income taxes (23,426,747) 4,437,301 (1,893,000) 924,028
Provision (benefit) for taxes on income 149,356 1,799,807 40,898 329,807
Minority interest in earnings (loss) of
consolidated subsidiary (77,886) 89,994 (29,346) (4,397)
-------------------- ------------------- ------------------- -----------
-------------------- ------------------- ------------------- -----------
Net income (loss) $(23,498,217) $ 2,547,500 $(1,904,552) $ 598,618
==================== =================== =================== ===========
==================== =================== =================== ===========
Comprehensive income $(23,651,276) $ 2,530,365 $(1,995,691) $ 599,950
==================== =================== =================== ===========
==================== =================== =================== ===========
Net earnings (loss) per common share:
Basic ($2.17) $0.24 ($0.18) $0.06
==================== =================== =================== ===========
==================== =================== =================== ===========
Diluted ($2.17) $0.23 ($0.18) $0.05
==================== =================== =================== ===========
==================== =================== =================== ===========
Weighted average common shares outstanding:
Basic 10,993,524 10,595,598 11,052,393 10,690,893
==================== =================== =================== ===========
==================== =================== =================== ===========
Diluted 10,993,524 12,011,912 11,052,393 12,012,517
==================== =================== =================== ===========
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SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<S> <C> <C>
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $(23,498,217) $ 2,547,500
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depletion, depreciation and amortization 5,500,339 5,011,562
Writedown of oil and gas properties 17,852,367
-
Deferred tax provision (benefit) (616,263) 654,000
Compensation expense attributable to issuance of Common
Stock options and shares of Common Stock
349,227 -
Minority interest in earnings (loss) of consolidated subsidiary
(77,886) 89,994
Gain on issuance of shares of subsidiary
- (5,533)
Changes in:
Accounts receivable (3,260,779)
510,358
Other assets 723,463
5,204
Accounts payable and accrued liabilities 3,939,970 6,934,575
-------------------- ------------------
-------------------- ------------------
Net cash provided by operating activities 4,683,358 11,976,523
-------------------- ------------------
-------------------- ------------------
Cash flows from investing activities:
Expenditures for property and equipment (6,219,268) (29,074,023)
Proceeds from sale of oil and gas properties 5,254,066
-
Decrease (increase) in notes receivable (1,738,513)
366,146
-------------------- ------------------
-------------------- ------------------
Net cash used in investing activities (599,056) (30,812,536)
-------------------- ------------------
-------------------- ------------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 4,241,925 28,649,983
Principal payments on notes payable and long-term debt (6,968,048) (10,546,557)
Redemption of Preferred Stock (1,702,280)
-
Preferred Stock dividends paid
(51,288) -
Net proceeds from exercise of Common Stock options 227,500
82,500
-------------------- ------------------
-------------------- ------------------
Net cash provided by (used in) financing activities (4,397,191) 18,330,926
-------------------- ------------------
-------------------- ------------------
Effect of exchange rate changes on cash and cash equivalents
(8,081) (1,553)
-------------------- ------------------
-------------------- ------------------
Net decrease in cash (320,970) (506,640)
Cash at beginning of period 1,507,641 734,036
-------------------- ------------------
-------------------- ------------------
Cash at end of period $ 1,186,671 $ 227,396
==================== ==================
==================== ==================
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SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis consistent with the accounting principles and policies
reflected in the financial statements for the year ended December 31, 1997 and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1997 Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which, except as otherwise disclosed herein,
consist of normal recurring accruals only) necessary to present fairly the
Company's consolidated financial position as of September 30, 1998, and the
consolidated results of operations for the nine and three month periods ended
September 30, 1998 and 1997 and the consolidated cash flows for the nine month
periods ended September 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." FAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires that interim financial reports issued
to shareholders include selected information about reporting segments. The
statement also established standards for related disclosures about products and
services, geographic areas and major customers. The statement is effective for
fiscal years beginning after December 15, 1997. The Company considers that its
operations are principally in one industry segment: acquisition, exploration,
development and production of oil and gas reserves This information and
information about major customers historically has been disclosed in the
Company's annual financial statements.
2. Statements of Cash Flows
Following is certain supplemental information regarding cash flows for the nine
month periods ended September 30, 1998 and 1997:
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1998 1997
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Interest paid $ 2,086,100 $ 1,429,000
============= =============
Income taxes paid $ 42,700 $ 2,480,000
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Non-cash investing and financing transactions:
Debentures in the principal amount of $24,000, less related costs of $3,108,
were converted into 5,485 shares of Common Stock during the nine months ended
September 30, 1998.
The Company incurred credits to Stockholders' Equity in the amounts of $22,600
and $288,750 resulting from the issuance of fully vested stock options and
performance shares of Common Stock, respectively, during the nine months ended
September 30, 1998.
Quarterly dividend obligations on the Series A Preferred Stock ("Preferred
Stock") that were due and payable on March 31, June 30, and September 30, 1998,
in the total amount of $360,000 were settled by an increase to that issue's
Conversion Amount.
Options to acquire 125,000 shares of Common Stock issued to a consultant in May
1997 resulted in deferred compensation expense of $909,000. Of this amount,
$106,000 was reported as compensation expense during the year ended December 31,
1997. The options were cancelled in March 1998, resulting in a reduction of
deferred compensation expense in the amount of $803,000 during the nine months
ended September 30, 1998.
The acquisition of two producing oil and gas properties in April 1998, at a
total cost of $3,239,835, was partially funded by the assumption of accounts and
notes receivable due to the Company in the amount of $2,390,354, and the
issuance of a stock subscription payable recorded at a cost of $750,000.
The Company incurred a capital lease obligation in the amount of $90,637 to
acquire equipment during the nine months ended September 30, 1998. Fee interest
in an oil property owned by the Company was acquired in February 1998 by
seller-provided financing in the amount of
$375,000.
Debentures in the principal amount of $2,363,000, less related costs of
$179,123, were converted into 540,089 shares of Common Stock during the nine
months ended September 30, 1997.
The Company realized a gain of $5,533 during the nine months ended September 30,
1997, as a result of the issuance of common stock by a subsidiary.
The Company incurred capital lease obligations in the amount of $484,075 to
acquire equipment during the nine months ended September 30, 1997.
Cumulative foreign currency translation losses in the amount of $198,297 and
$17,620 were recorded during the nine month periods ended September 30, 1998 and
1997, respectively.
3. Oil and Gas Properties
The Company periodically reviews the carrying value of its oil and gas
properties in accordance with requirements of the full cost method of
accounting. Under these rules, capitalized costs of oil and gas properties may
not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%, plus the lower of cost or fair market value of
unproved properties ("ceiling"). Application of this ceiling test generally
requires pricing future revenue at the unescalated prices in effect as of the
end of each fiscal quarter and requires a writedown for accounting purposes if
the ceiling is exceeded. Due to the decline in oil prices in the first and
second quarters of 1998, the capitalized costs for the Company's United States
cost center exceeded the calculated ceiling amounts at each quarter end by
approximately $10.7 million and $6.5 million, respectively, resulting in charges
against operations in the respective periods.
Capitalized costs attributable to foreign operations in the amount of $652,400
and $57,300 were also charged to operations during the nine and three month
periods ended September 30, 1998, respectively.
4. Long-Term Debt
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Long-term debt consists of the following at September 30, 1998:
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9% convertible senior subordinated debentures - due 2005 $ 3,575,000
Revolving loan agreement with a bank 15,600,000
Term loan agreements with a bank 4,501,769
Demand loan agreement with a bank 1,461,433
Capital lease obligations 515,766
Promissory note 345,290
Term loan with a bank 369,559
Promissory note-Omimex 4,151,288
-------------------
30,520,105
Less current portion 25,172,694
===================
$ 5,347,411
===================
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On December 26, 1995, the Company issued $11,000,000 of 9% convertible senior
subordinated debentures ("Debentures") due December 15, 2005. On February 7,
1996, the Company issued an additional $1,650,000 of Debentures pursuant to the
exercise of an over-allotment option by the underwriting group. The Debentures
are convertible into Common Stock of the Company, at the option of the holders
of the Debentures, at any time prior to maturity at a conversion price of $4.38
per share, subject to adjustment in certain events. The Company has reserved
3,000,000 shares of its Common Stock for the conversion of the Debentures. The
principal use of proceeds from the sale of the Debentures was to retire
short-term indebtedness incurred by the Company in connection with its
acquisitions of producing oil and gas properties in Colombia. A portion of the
proceeds was used to reduce the balance outstanding under the Company's
revolving credit agreement.
Debentures in the amount of $9,051,000 had been converted into 2,068,728 shares
of Common Stock as of December 31, 1997. An additional $24,000 of Debentures
were converted into 5,485 shares of Common Stock during the nine months ended
September 30, 1998.
The revolving loan ("Agreement") is subject to semi-annual redeterminations and
is presently scheduled to convert to a three-year term loan on July 1, 1999.
Funds advanced under the facility are collateralized by substantially all of the
Company's U.S. oil and gas producing properties and the common stock of its
principal subsidiaries. The Agreement also provides for a second borrowing base
term loan of which $3.4 million was borrowed for the purpose of development of
oil and gas properties in California, with the outstanding balance ($814,000) at
September 30, 1998, due July 31, 1998. At September 30, 1998, the borrowing base
for the two loans was $13.4 million. The borrowing base reduces at the rate of
$300,000 per month. Interest on the two loans is payable at the prime rate plus
0.25%, or LIBOR rate pricing options plus 2.25%. The weighted average interest
rate for borrowings outstanding under the loans at September 30, 1998, was 8.0%.
The Agreement requires, among other things, that the Company maintain at least a
1 to 1 working capital ratio (exclusive of the current maturities, if any, of
the outstanding loans), stockholders' equity of $18.0 million, a ratio of cash
flow to debt service of not less than 1.25 to 1.0 and general and administrative
expenses at a level not greater than 20% of revenue, all as defined in the
Agreement. Additionally, the Company is restricted from paying dividends and
advancing funds in excess of specified limits to affiliates. The Company was not
in compliance with the financial covenants at September 30, 1998.
In September 1997, the Company borrowed $9.7 million from its principal
commercial lender to finance the acquisition cost of a producing oil and gas
property. Interest is payable at the prime rate (8.25% at September 30, 1998)
plus 3.0%. Principal payments of $7.0 million on December 31, 1997, and $2.0
million on June 5, 1998, reduced the outstanding balance to $688,000 due July
31, 1998. Payment of this loan is personally guaranteed by the Company's former
Chief Executive Officer.
In November 1997 the Company established a term loan ($3.0 million) with its
principal commercial lender. Interest is payable at the prime rate (8.25% at
September 30, 1998) plus 3.0%, with the outstanding balance of $3.0 million due
July 31, 1998. Payment of this loan is personally guaranteed by the Company's
former Chief Executive Officer.
Loans in the aggregate principal amount of $4.5 million that matured on July 31,
1998, have not been paid nor extended, and the borrowing base deficit of $2.2
million on the revolving loan has not been satisfied, either by providing
additional collateral to the bank, or reducing the outstanding principal
balance. Based on the events described above, the entire principal indebtedness
to the bank ($20.1 million) has been classified as currently payable at
September 30, 1998.
The Company's Canadian subsidiary has available a demand revolving reducing loan
with a borrowing base of $1.5 million. Interest is payable at a variable rate
equal to the Canadian prime rate plus 0.75% per annum (8.0% at September 30,
1998). The loan is collateralized by the subsidiary's oil and gas producing
properties, and a first and fixed floating charge debenture in the principal
amount of $3.6 million over all assets of the company. The borrowing base
reduces at the rate of $32,800 per month. In accordance with the terms of the
loan agreement, $393,000 of the total loan balance of $1.5 million is classified
as currently payable at September 30, 1998. Although the bank can demand payment
in full of the loan at any time, it has provided a written commitment not to do
so except in the event of default.
The Company leases certain equipment under agreements that are classified as
capital leases. Lease payments vary from three to five years. The effective
interest rate on the total amount of capitalized leases at September 30, 1998
was 8.3%.
The promissory note ($345,290) is due to the seller of an oil and gas property,
which was acquired by the Company in December 1997. The note bears interest at
the rate of 13.5%, and is classified as a current liability.
The promissory note ($369,559) is due to the seller of a fee interest in
property in which the Company owns mineral interests. The note bears interest at
the rate of 9.5%, is scheduled for repayment in monthly installments to a
maturity date of February 2001, and is collateralized by the fee interest
acquired by the Company.
In June 1998, the Company borrowed $4.2 million from Omimex Resources, Inc.
("Omimex"), of which $2.0 million was paid to the Company's principal commercial
lender to reduce indebtedness under one of the Company's short-term loans, and
the balance was used for a partial redemption of Preferred Stock in the face
amount of $2.0 million, plus accrued dividends. Interest is payable at the prime
rate (8.25% at September 30, 1998). Due to termination of merger negotiations
with Omimex, the loan is due to be repaid no later than December 14, 1998. The
loan is collateralized by the Company's 50% interest in the Velasquez-Galan
pipeline in Colombia.
5. Preferred Stock
In June 1998, the Company redeemed 2,000 shares of Preferred Stock in the face
amount of $2.0 million at a total cost of $2.15 million, which included a 5%
redemption premium of $100,000 and accrued dividends of $51,000. The Company
incurred a charge to operations in the amount of $398,000 in connection with the
redemption. Accrued dividends for the nine months ended September 30, 1998, in
the amount of $360,000 on the remaining outstanding issue were deemed paid by an
increase to the Preferred Stock's conversion amount.
Under the terms of the Preferred Stock offering (as amended), the Company was
required to register with the Securities and Exchange Commission the Common
Stock underlying the issue no later than May 15, 1998. Failure to do so would
result in a penalty of $20,000 per month for each $1 million of Preferred Stock
that remained outstanding. At September 30, 1998, a registration statement
covering the shares of Common Stock underlying the Preferred Stock had not been
declared effective; accordingly, the Company's results of operations include a
charge of $742,000. RGC International Investors, LDC ("RGC"), holder of 7,310
shares of Preferred Stock, has agreed to waive, subject to certain provisions,
substantially all of the accrued penalty under the terms of the pending
transaction with Horizontal Ventures, Inc. ("HVI") (see Subsequent Events).
6. Common Stock and Stock Options
In March 1998, the Company issued options to acquire 30,000 shares of Common
Stock to a consultant. The options have an exercise price equal to the market
value at date of grant and are fully vested. The Company recognized compensation
expense of $22,600 in the nine months ended September 30, 1998, attributable to
the option grant.
In March 1998, the Company issued 20,000 performance shares of Common Stock to a
consultant and recognized compensation expense of $61,000 in the nine months
ended September 30, 1998.
In May 1998, the Company issued 85,000 performance shares to employees and
consultants and recognized compensation expense of $228,000 in the nine months
ended September 30, 1998.
As of September 30, 1998, the Company had outstanding options to acquire 480,000
shares of Common Stock to certain employees of the Company. These options, which
are not covered by the Incentive Equity Plan, become exercisable ratably over a
period of five years from the date of issue. The exercise price of the options,
which ranges from $1.25 to $4.38, is the fair market value of the Common Stock
at the date of grant. There is no contractual expiration date for exercise of a
portion of these options. Options to acquire 58,000 shares of Common Stock were
exercised during the nine months ended September 30, 1998. Options to acquire
380,000 shares of Common Stock were exercisable at September 30, 1998.
On May 30, 1997, the Company issued options to acquire 470,000 and 125,000
shares of Common Stock to certain employees and a consultant, respectively, in
accordance with the provisions of the 1996 Incentive Equity Plan. Options to
acquire 42,000 shares of Common Stock granted to certain employees were
subsequently cancelled. On August 28,1998, the Company issued an option to
acquire 15,000 shares of Common Stock to an employee. The options have an
exercise price equal to the market value at date of grant and become exercisable
over various periods ranging from two to five years from the date of grant. No
options were exercised as of September 30, 1998. Options to acquire 104,000
shares of Common Stock were exercisable at September 30, 1998. The Company
recognized deferred compensation expense of $909,000 in the year ended December
31, 1997, resulting from the grant to the consultant. Of this amount, $106,000
was reported as compensation expense during the year ended December 31, 1997,
and an additional $37,877 was reported as compensation expense during the nine
months ended September 30, 1998. The option grant was cancelled in March 1998,
and the unamortized portion of deferred compensation expense was reversed from
the applicable accounts.
In May 1997, the Company's stockholders approved the Company's 1997 Stock Option
Plan for Non-Employee Directors (the "Directors Plan"), which provided that each
non-employee director shall be granted, as of the date such person first becomes
a director and automatically on the first day of each year thereafter for so
long as he continues to serve as a non-employee director, an option to acquire
3,000 shares of the Company's Common Stock at fair market value at the date of
grant. For as long as the director continues to serve, the option shall vest
over five years at the rate of 20% per year on the first anniversary of the date
of grant. On August 28, 1998, the Company's stockholders approved an increase in
the number of shares of the Company's Common Stock subject to option from 3,000
to 15,000 vesting 20% per year. Subject to certain adjustments, a maximum of
250,000 options to purchase shares (or shares transferred upon exercise of
options received) may be outstanding under the Directors Plan. At September 30,
1998, options to acquire a total of 90,000 shares of Common Stock had been
granted under the Directors Plan. Options to acquire 12,000 shares of Common
Stock were cancelled in July 1998 due to the resignation of a director. Options
to acquire 9,000 shares of Common Stock were exercisable at September 30, 1998.
7. Contingencies
The Company is subject to extensive Federal, state, and local environmental laws
and regulations. These requirements, which change frequently, regulate the
discharge of materials into the environment. The oil and gas industry is also
subject to environmental hazards, such as oil spills, oil and gas leaks,
ruptures and discharges of oil and toxic gases, which could expose the Company
to substantial liability for remediation costs, environmental damages and claims
by third parties for personal injury and property damage. From time to time in
the course of operations, the Company has violated various administrative
environmental rules. The Company rectifies the violations after they become
known to the Company. In many cases, the Company has been required to pay fines
as a result of these violations. Because of the nature of oil and gas producing
operations, it is unlikely that operations will be totally violation-free.
Environmental Contingencies
The party who sold the asphalt refinery in Santa Maria, California, to the
Company agreed to remediate portions of the refinery property in a five-year
period ending June 1999. Prior to the acquisition of the refinery, the Company
had an independent consultant perform an environmental compliance survey for the
refinery. The survey did not disclose required remediation in areas other than
those where the seller is responsible for remediation, but did disclose that it
was possible that all of the required remediation may not be completed in the
five-year period. The Company, however, believes that either all required
remediation will be completed by the seller within the five-year period or the
Company will attempt to negotiate with the seller for additional time to
complete the remediation. Should the seller not complete the work during the
five year period, because of uncertainties in the language of the agreement,
there is a risk that a court could interpret the agreement to shift the burden
of remediation to the Company.
In addition, the Company had been advised in June 1998 by the seller's
consulting engineers that groundwater monitoring conducted in May 1998 had
revealed unacceptable levels of light hydrocarbons contamination. Groundwater
monitoring wells have not shown evidence of groundwater contamination, with the
exceptions of monitoring conducted in May 1998. The May 1998 results indicated
the presence of benzene in all four monitoring wells which exceeds allowable
limits. In addition, detectable amounts of toluene, ethylbenzene and xylenes
were reported. Historically, BTEX compounds have not been detected in
groundwater samples obtained since 1992. At the request of the Regional Water
Quality Control Board (RWQCB), the wells were resampled in July 1998. Consistent
with the historical analytical results, petroleum hydrocarbons were not detected
in the July 1998 samples. The environmental contractor, who has used the same
sampling protocol since 1992, could not identify any specific reason for the
apparent inconsistency found in the May 1998 samples. The RWQCB has requested
additional monitoring wells to be placed on site and on property directly west
of the refinery perimeter. Four additional monitoring wells were installed in
October 1998 within or immediately downgradient of areas of known soil
contamination on and adjacent to the refinery. Preliminary sampling results
indicate the presence of heavy hydrocarbons in the groundwater samples from two
of the wells, at concentrations 2 to 4 times above typical regulatory action
levels. Benzene was also detected in these same wells at concentrations equal to
or slightly above drinking water limits. At the hydrocarbon concentrations
detected in the two groundwater samples, the Company expects that continued
monitoring will be required but that active groundwater remediation will not be
necessary. Additional groundwater sampling to confirm the preliminary results
will be conducted in December 1998. The Company believes that the contamination
is attributable to its predecessor's operations, since the Company does not
produce the particular contaminates at the refinery and such was produced by the
Company's predecessor. Appropriate authorities have been notified of this
condition. In November 1998, the RWQCB advised the Company that it is preparing
a Cleanup or Abandonment Order to establish soil and groundwater investigation,
cleanup, monitoring and a time schedule at the refinery required to address
pollution resulting from past refinery operations. In its notification, the
RWQCB stated that its perspective of the site has changed and its water quality
concerns are increased since the groundwater table elevation has risen to be
proximate to the base of the hydrocarbon contaminated soil.
Ultimate responsibility for remediation of the foregoing condition depends upon
an interpretation of the contract of purchase and factual matters. The Company
is in contact with its predecessor about the foregoing; however, no agreement
has been reached on responsibility nor has the cost of remediation been
estimated. Further, the owner of land adjoining the refinery, and the seller in
August 1998 of said property to an affiliate of the Company, had advised the
Company that his property had been contaminated by underground emissions from
the refinery. This condition also creates an uncertainty as to whether
remediation is the responsibility of the Company or its predecessor in interest.
The Company is also in contact with its predecessor about this matter. Should
the foregoing matters not be resolved satisfactorily, they may result in
litigation. It is also possible that a failure to resolve the matters could
result in significant liability to the Company. While the seller of the subject
property retains a mortgaged interest in the property, the Company's subsidiary
that operates the refinery has agreed to toll the statute of limitations for any
claims by the seller against the subsidiary and to obtain the seller's prior
consent prior to entering into any agreement with respect to hazardous materials
on the property.
In accordance with the Articles of Association for the Cocorna Concession in
Colombia, the Concession expired in February 1997, and the property interest
reverted to Ecopetrol. The property is presently under operation by Ecopetrol.
Under the terms of the acquisition of the Concession, the Company and the
operator were required to perform various environmental remedial operations,
which the operator advises have been substantially, if not wholly, completed.
The Company and the operator are awaiting an inspection of the Concession area
by Colombian officials to determine whether the government concurs with the
operator's conclusions. Based upon the advice of the operator, the Company does
not anticipate any significant future expenditures associated with the
environmental requirements for the Cocorna Concession.
In 1993, the Company acquired a producing mineral interest in California from a
major oil company ("Seller"). At the time of acquisition, the Company's
investigation revealed that the Seller had suffered a discharge of diluent (a
light oil based fluid which is often mixed with heavier grade crudes). The
purchase agreement required the Seller to remediate the area of the diluent
spill. After the Company assumed operation of the property, the Company became
aware of the fact that diluent was seeping into a drainage area, which traverses
the property. The Company took action to eliminate the fluvial contamination and
requested that the Seller bear the cost of remediation. The Seller has taken the
position that its obligation is limited to the specified contaminated area and
that the source of the contamination is not within the area that the Seller has
agreed to remediate. The Company has commenced an investigation into the source
of the contamination to ascertain whether it is physically part of the area
which the Seller agreed to remediate or is a separate spill area. Investigation
and discussions with the Seller are ongoing. Should the Company be required to
remediate the area itself, the cost to the Company could be significant. The
Company has spent approximately $240,000 to date in remediation activities, and
present estimates are that the cost of complete remediation could approach
$750,000. Since the investigation is not complete, an accurate estimate of cost
cannot be made.
In 1995, the Company agreed to acquire, for less than $50,000, an oil and gas
interest in California on which a number of oil wells had been drilled by the
seller. None of the wells were in production at the time of acquisition. The
acquisition agreement required that the Company assume the obligation to abandon
any wells that the Company did not return to production, irrespective of whether
certain consents of third parties necessary to transfer the property to the
Company would be obtained. The Company was unable to secure all of the requisite
consents to transfer the property but nevertheless may have the obligation to
abandon the wells. The leases have expired and the Company has been unable to
determine its exposure to third parties if the Company elects not to plug and
abandon such wells. A preliminary estimate of the cost of abandoning the wells
and restoring the well sites is approximately $1.5 million.
The Company, as is customary in the industry, is required to plug and abandon
wells and remediate facility sites on its properties after production operations
are completed. There can be no assurance that material costs for remediation or
other environmental compliance will not be incurred in the future. The
incurrence of such environmental compliance costs could be materially adverse to
the Company.
8. Subsequent Events
Approximately $4.5 million in principal amount of bank debt that matured for
payment on July 31, 1998, has not been paid nor extended, and the borrowing base
deficit of $2.2 million on the revolving loan at September 30, 1998, has not
been satisfied, either by providing additional collateral to the bank or
reducing the principal balance that was outstanding at September 30, 1998.
Additionally, the Company was not in compliance with the loan agreement's
financial covenants at September 30, 1998. The Company and its bank are in
discussions to address such non-compliance.
The Company has negotiated, and continues to pursue, the sale of certain
producing oil and gas assets and real estate assets. In September 1998, the
Company listed certain of its California real estate properties with a broker,
and in October 1998, the Company listed its domestic non-California producing
oil and gas properties with a broker. Proceeds from the sale of such properties
will be used to reduce bank indebtedness and provide working capital.
On October 8, 1998, HVI disclosed that, acting in concert with International
Publishing Holding, S.A., its largest shareholder, it had acquired over five
percent of the Company's outstanding Common Stock, with the intent to gain
control of the Company. On October 14, 1998, a Schedule 13D was filed by HVI. On
October 8, 1998, the Company and HVI entered into a Common Stock Purchase
Agreement pursuant to which HVI agreed to purchase by December 4, 1998, 2.5
million shares of the Company's Common Stock in exchange for cash in the amount
of $7.5 million. In addition, the Company consented to the Preferred Stock
Transfer Agreement dated October 6, 1998, between HVI and RGC, pursuant to which
HVI acquired from RGC 690 shares of the Company's Preferred Stock in exchange
for $750,000 in cash with the exclusive right until November 5, 1998, to acquire
a minimum of 6,310 shares of the remaining 7,310 shares of Preferred Stock held
by RGC in exchange for approximately $6.9 million in cash. The Company
understands that the exclusive right was extended for thirty days pursuant to
HVI's non-refundable payment to RGC of an additional $500,000 to be applied to
the purchase price. HVI has agreed to convert the Preferred Stock and accrued
dividends to Common Stock at the rate of $2.50 per share of Common Stock
(approximately 3,040,000 shares). On October 23, 1998, the Company filed a
report on Form 8-K describing the pending transactions with HVI.
Upon closing and pursuant to the terms of the Preferred Stock Transfer
Agreement, RGC agreed to waive any default of the Company occurring prior to the
closing under any provisions of the Securities Purchase Agreement dated December
31, 1997, as amended June 1, 1998, with respect to the Preferred Stock, provided
that such waiver shall not apply to any defaults thereunder after the date of
closing or which are in existence as of closing and continue thereafter.
On November 16, 1998, it was announced that HVI had met the interim closing
requirements and had paid an aggregate of $2.25 million collectively to the
Company and RGC toward the private placement of 2.5 million shares of the
Company's Common Stock under the Common Stock Purchase Agreement and toward
acquiring from RGC as much as 7,000 shares of the Company's Preferred Stock. Of
this amount, the Company received $1.0 million in exchange for 333,333 shares of
Common Stock that are to be issued to HVI under the Common Stock Purchase
Agreement.
In October 1998, the Company executed a letter presented by the operator of the
North Nare Association in Colombia whereby the Company confirmed its agreement
to pay up to $500,000 in January 1999 if the operator is successful in procuring
an extension from Ecopetrol of the North Nare contract for twenty-two years
beyond the year 2008, the time at which the areas under the terms of the
Association Agreement revert back to Ecopetrol.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the condensed
consolidated financial statements of the Company and notes thereto, included
elsewhere herein.
Overview
The Company is an independent energy company engaged in the acquisition,
exploration and development of oil and gas properties. To date, the Company has
grown primarily through the acquisition of producing properties with significant
exploration and development potential in the United States, Colombia and Canada.
This strategy has enabled the Company to assemble a significant inventory of
properties over the past five years. The Company's strategy has expanded to
emphasize growth through exploration and development drilling.
The Company's revenues are primarily comprised of oil and gas sales attributable
to properties in which the Company owns a majority or substantial interest. The
Company accounts for its oil and gas producing activities under the full cost
method of accounting. Accordingly, the Company capitalizes, in separate cost
centers, all costs incurred in connection with the acquisition of oil and gas
properties and the exploration for and development of oil and gas reserves. The
Company's financial statements have been consolidated to reflect the operations
of its subsidiaries, including the Company's approximate 74% ownership interest
in Beaver Lake Resources Corporation, a Canadian public company.
The Company's operating performance is influenced by several factors, the most
significant of which are the price received for its oil and gas and the
Company's production volumes. The price received by the Company for its oil
produced in North America is influenced by the world price for crude oil, as
adjusted for the particular grade of oil. The oil produced from the Company's
California properties is predominantly a heavy grade of oil, which is typically
sold at a discount to lighter oil. The oil produced from the Company's Colombian
properties is predominantly a heavy grade of oil. The prices received by the
Company for its Colombian produced oil are determined based on formulas set by
Ecopetrol. Additional factors influencing operating performance include
production expenses, overhead requirements, the Company's method of depleting
reserves, and cost of capital.
The Company's auditors included an explanatory paragraph in their opinion on the
Company's 1997 financial statements to state that there is substantial doubt as
to the Company's ability to continue as a going concern. The cause for inclusion
of the explanatory paragraph in their opinion is the apparent lack of the
Company's current ability to service its bank debt as it comes due (see Note 4
to Condensed Consolidated Financial Statements). In the past, the Company has
demonstrated ability to secure capital through debt and equity placements, and
believes that, if given sufficient time, it will be able to obtain the capital
required to continue its operations. The Company plans to divest itself of
certain other producing oil and gas assets and possibly its real estate assets,
with the proceeds of such divestitures to be applied to reduction of its bank
debt. There can be no assurance that the Company will be successful in obtaining
capital on favorable terms, if at all. Additionally, there can be no assurance
that the assets which are the present object of the Company's divestitures
efforts will be sold at prices sufficient to reduce the bank debt to levels
acceptable to the bank in order to allow for a restructuring resulting in the
elimination of the "Going Concern" opinion.
Possible Business Combination
In March 1998, the Company achieved a preliminary agreement with Omimex
Resources, Inc., a privately held Fort Worth, Texas oil and gas company
("Omimex") which operates a substantial portion of the Company's producing
properties, to enter into a business combination. In June 1998, the Company
entered into the Merger Agreement with Omimex pursuant to which Omimex would
acquire the Company in a reverse acquisition. During August 1998, Omimex
requested an extension of the October 31, 1998, termination date of the Merger
Agreement. Both the Company and Omimex were of the view that it was highly
unlikely that a Proxy Statement could be prepared, filed with the Securities and
Exchange Commission and circulated to shareholders in time to meet the
termination date. The delay in filing the Proxy materials was occasioned by the
unavailability to the Company in a timely manner of information required for
preparation of the Proxy materials. The Company declined to extend the
termination date, and in September 1998, announced that the proposed merger was
terminated by mutual consent.
On October 8, 1998, the Company entered into a Common Stock Purchase Agreement
with HVI (see Subsequent Events).
Acquisition, Exploration and Development
Drilling activity during the quarter ended September 30, 1998, consisted of
drilling two locations on the Southwest Tatum Prospect in Lea County, New
Mexico. One gross (0.5 net) oil well was drilled and completed for production
from the Cisco formation during the period; the second oil well (0.5 net) was
also drilled to the Cisco formation and was awaiting completion at quarter-end.
Divestitures
As part of its announced plan to reduce indebtedness and provide working capital
the Company closed on the sale of several properties during the quarter ended
September 30, 1998. The Company sold most of its producing properties in the
state of Michigan in July, realizing cash proceeds of approximately $3.7
million, and in September closed the sale of two producing gas wells in Alabama,
that provided cash proceeds of $581,000. Approximately $3.1 million of the
proceeds were used to reduce bank indebtedness with the Company's principal
lender; the balance was retained by the Company for working capital.
The Company's majority-owned subsidiary in Canada also disposed of property
interests during the quarter, realizing cash proceeds in the amount of $613,000.
Of this amount, $458,700 was used to reduce long-term debt; the balance was
retained by the subsidiary for working capital. As a result of the reduction in
long-term debt, the monthly payment obligation for the remaining balance
outstanding was decreased from $54,500 to $32,800.
Results of Oil and Gas Producing Operations
Results of the Company's oil and gas producing activities for the nine and three
month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oil and gas sales:
Oil $ 12,594,061 $ 6,760,966 $ 572,609 $ 5,260,486
Gas $ 3,174,589 $ 2,717,636 $ 456,953 $ -
Total oil and gas sales $ 15,768,650 $ 9,478,602 $ 1,029,562 $ 5,260,486
Production costs $ 10,139,965 $ 6,523,956 $ 630,957 $ 2,985,052
Depletion $ 4,958,031 $ 4,134,996 $ 264,635 $ 558,400
General and administrative expenses $ 4,638,455 $ 4,021,743 $ 451,094 $ 165,618
Oil volume (Bbls) 1,431,257 744,467 58,434 628,356
Gas volume (Mcf) 1,830,693 1,370,578 460,115 -
Barrels of oil equivalent (BOE) 1,736,373 972,897 135,120 628,356
Average per unit:
Sales price-oil (Bbls) $ 8.80 $ 9.08 $ 9.80 $ 8.37
Sales price-gas (Mcf) $ 1.73 $ 1.98 $ 0.99 $ -
Production costs (BOE) $ 5.84 $ 6.71 $ 4.67 $ 4.75
Depletion (BOE) $ 2.86 $ 4.25 $ 1.96 $ 0.89
General and administrative expenses (BOE) $ 2.67 $ 4.13 $ 3.34 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1997 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $ 21,836,721 $ 12,683,913 $ 1,192,388 $ 7,960,420
Gas $ 3,445,640 $ 2,900,862 $ 544,778 $ -
Total oil and gas sales $ 25,282,361 $ 15,584,775 $ 1,737,166 $ 7,960,420
Production costs $ 12,249,901 $ 7,702,619 $ 792,507 $ 3,754,775
Depletion $ 4,541,631 $ 2,868,000 $ 236,471 $ 1,437,160
General and administrative expenses $ 3,317,972 $ 2,796,882 $ 348,419 $ 172,671
Oil volume (Bbls) 1,580,981 838,662 76,824 665,495
Gas volume (Mcf) 1,766,538 1,219,945 546,593 -
Barrels of oil equivalent (BOE) 1,875,404 1,041,986 167,923 665,495
Average per unit:
Sales price-oil (Bbls) $ 13.81 $ 15.12 $ 15.52 $ 11.96
Sales price-gas (Mcf) $ 1.95 $ 2.38 $ 1.00 $ -
Production costs (BOE) $ 6.53 $ 7.39 $ 4.72 $ 5.64
Depletion (BOE) $ 2.42 $ 2.75 $ 1.41 $ 2.16
General and administrative expenses (BOE) $ 1.77 $ 2.68 $ 2.07 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $ 3,482,401 $ 1,852,966 $ 156,832 $ 1,472,603
Gas $ 672,924 $ 555,734 $ 117,190 $ -
Total oil and gas sales $ 4,155,325 $ 2,408,700 $ 274,022 $ 1,472,603
Production costs $ 3,141,751 $ 1,896,537 $ 247,341 $ 997,873
Depletion $ 1,458,490 $ 1,239,425 $ 40,665 $ 178,400
General and administrative expenses $ 1,118,761 $ 912,591 $ 158,128 $ 48,042
Oil volume (Bbls) 434,430 219,996 18,915 195,519
Gas volume (Mcf) 446,334 312,143 134,191 -
Barrels of oil equivalent (BOE) 508,819 272,020 41,280 195,519
Average per unit:
Sales price-oil (Bbls) $ 8.02 $ 8.42 $ 8.29 $ 7.53
Sales price-gas (Mcf) $ 1.51 $ 1.78 $ 0.87 $ -
Production costs (BOE) $ 6.17 $ 6.97 $ 5.99 $ 5.10
Depletion (BOE) $ 2.87 $ 4.56 $ 0.99 $ 0.91
General and administrative expenses (BOE) $ 2.20 $ 3.35 $ 3.83 $ 0.25
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1997 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $ 6,619,509 $ 3,897,299 $ 321,387 $ 2,400,823
Gas $ 1,299,188 $ 1,132,520 $ 166,668 $ -
Total oil and gas sales $ 7,918,697 $ 5,029,819 $ 488,055 $ 2,400,823
Production costs $ 3,816,812 $ 2,621,107 $ 288,890 $ 906,815
Depletion $ 1,603,491 $ 1,076,000 $ 80,666 $ 446,825
General and administrative expenses $ 1,279,247 $ 1,073,904 $ 131,631 $ 73,712
Oil volume (Bbls) 514,574 282,878 22,002 209,694
Gas volume (Mcf) 669,909 487,723 182,186 -
Barrels of oil equivalent (BOE) 626,226 364,165 52,366 209,694
Average per unit:
Sales price-oil (Bbls) $ 12.86 $ 13.78 $ 14.61 $ 11.45
Sales price-gas (Mcf) $ 1.94 $ 2.32 $ 0.91 $ -
Production costs (BOE) $ 6.09 $ 7.19 $ 5.51 $ 4.32
Depletion (BOE) $ 2.56 $ 2.95 $ 1.54 $ 2.13
General and administrative expenses (BOE) $ 2.04 $ 2.95 $ 2.51 $ 0.35
</TABLE>
Results of Refining Operations
In June 1995, the Company entered into a processing agreement with an
unaffiliated company pursuant to which the latter company purchases crude oil
(including that produced by the Company), delivers the crude oil to the
Company's refinery, reimburses the Company's out of pocket costs for refining,
then markets the asphalt and other refinery products. Profits from the refinery
operations (computed after recovery of crude oil costs and other costs of
operations) are generally shared equally by the Company and the unaffiliated
company. The processing agreement has a term that ends December 31, 1998. The
Company is evaluating various strategies with respect to the foregoing.
Processing operations for the nine and three month periods ended September 30,
1998 and 1997 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Nine Months Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
----- ----- ----- ----
Crude oil throughput (Bbls) 1,142,232 1,074,114 422,645 414,225
Production:
Asphalt (tons) 122,236 120,268 44,811 47,413
Other products (Bbls) 451,310 397,890 169,394 148,410
Sales:
Asphalt (tons) 122,992 135,491 63,036 64,645
Other products (Bbls) 435,541 381,437 158,119 154,504
Processing fee income $ 1,768,829 $ 871,279 $ 1,222,411 $ 658,476
</TABLE>
The asphalt refining business is seasonal in nature, and is influenced by
several factors, including weather conditions in the marketing area. A majority
of the Company's processing fee income is attributable to asphalt sales which
are recorded during the period April to October.
The variances in processing fee income realized during the periods are due
principally to the prices paid for crude oil during the respective periods.
1998 compared to 1997
Oil and Gas Sales
Oil and gas sales decreased 37.5% to $15.8 million and 46.8% to $4.2 million for
the nine and three month periods ended September 30, 1998, from $25.3 million
and $7.9 million for the same periods of 1997. Average sales price per BOE
decreased 32.6% to $9.08 and 35.4% to $8.17 for the nine and three month periods
ended September 30, 1998, from $13.48 per BOE and $12.65 per BOE for the same
periods of 1997.
In the United States, production from the Company's mid-continent properties
increased 33.7% to 289,500 BOE and decreased 15.2% to 70,100 BOE for the nine
and three month periods ended September 30, 1998, from 216,500 BOE and 82,700
BOE for the same periods of 1997. The increase for the nine month period was
primarily attributable to the Company's property acquisition in Louisiana in
September 1997, augmented by the additional working interest acquired in April
1998, and the first two wells drilled and completed in the Southwest Tatum
Prospect in New Mexico during the year 1997. The production decrease experienced
in the third quarter 1998 was principally due to the deferral of maintenance
operations as a result of the oil prices realized by the Company during that
time. Average sales price per BOE decreased 31.9% to $12.24 and 30.3% to $11.25
for the nine and three month periods ended September 30, 1998, from $17.97 and
$16.14 for the same periods of 1997. As a result of the production variances and
the price decreases, oil and gas sales from these properties decreased 10.3% to
$3.5 million and 39.3% to $789,000 for the nine and three month periods ended
September 30, 1998, from $3.9 million and $1.3 million for the same periods of
1997. As a result of the property divestiture in July, production volumes from
the Company's Michigan properties decreased 26.7% to 79,700 BOE and 81.4% to
5,900 BOE for the nine and three month periods ended September 30, 1998, from
108,700 BOE and 31,800 BOE for the same periods of 1997. Average sales price per
BOE decreased 24.3% to $13.54 and 32.9% to $12.45 for the nine and three month
periods ended September 30, 1998, from $17.88 and $18.55 for the same periods of
1997. The decreases in production and sales price per BOE resulted in decreases
in oil and gas sales of 42.1% to $1.1 million and 87.5% to $73,500 for the nine
and three month periods ended September 30, 1998, from $1.9 million and $589,600
for the same periods of 1997. Production from the Company's California
properties decreased 14.3% to 584,800 BOE and 19.9% to 190,300 BOE for the nine
and three month periods ended September 30, 1998, from 682,200 BOE and 237,500
BOE for the same periods of 1997. Severe weather conditions resulting in
flooding and loss of electrical power hampered production during the first
quarter of 1998, resulting in a decrease in production of approximately 29,000
BOE. The production decrease experienced in the third quarter 1998 was
principally due to the deferral of maintenance operations as a result of the oil
prices realized by the Company during that time. Average sales price per BOE
decreased 41.7% to $7.94 and 37.4% to $7.80 for the nine and three month periods
ended September 30, 1998, from $13.62 and $12.47 for the same periods of 1997.
The decreases in production and sales price per BOE resulted in decreases in oil
and gas sales of 50.5% to $4.6 million and 50.0% to $1.5 million for the nine
and three month periods ended September 30, 1998, from $9.3 million and $3.0
million for the same periods of 1997.
In Canada, production decreased 19.5% to 135,100 BOE and 21.2% to 41,300 BOE for
the nine and three month periods ended September 30, 1998, from 167,900 BOE and
52,400 BOE for the same periods of 1997, and sales price per BOE decreased 26.4%
to $7.62 and 28.8% to $6.64 for the nine and three month periods ended September
30, 1998, from $10.35 and $9.32 for the same periods of 1997, resulting in
decreases in oil and gas sales of 41.2% to $1.0 million and 43.9% to $274,000
for the nine and three month periods ended September 30, 1998, from $1.7 million
and $488,100 for the same periods of 1997. The production decreases were due
principally to normal declines in production rates and wells that were shut-in
either to await remedial operations to increase production or due to high
operating expenses in relation to the current price of oil.
Production from the Company's Colombia properties decreased 5.6% to 628,400 BOE
and 6.8% to 195,500 BOE for the nine and three month periods ended September 30,
1998, from 665,500 BOE and 209,700 BOE for the same periods of 1997.
Approximately 20,000 BOE of the decrease for the nine month period was
attributable to reversion of the Cocorna Concession property in February 1997.
The decrease in the third quarter was attributed to production declines. Sales
price per BOE decreased 30.0% to $8.37 and 34.2% to $7.53 for the nine and three
month periods ended September 30, 1998, from $11.96 and $11.44 for the same
periods of 1997. The decreases in production and sales price per BOE resulted in
decreases in oil and gas sales of 33.8% to $5.3 million and 37.5% to $1.5
million for the nine and three month periods ended September 30, 1998, from $8.0
million and $2.4 million for the same periods of 1997.
Other Revenues
Other revenues increased 93.3% to $2.9 million and 60.0% to $1.6 million for the
nine and three month periods ended September 30, 1998, from $1.5 million and
$1.0 million for the same periods of 1997. The increase for the nine month
period was due primarily to an increase in processing fee income of $897,600
from the Company's asphalt refinery, and an increase in net pipeline revenues in
Colombia due to non-recurring pipeline operating expenses in the amount of
$414,000 which were invoiced to the Company by the facility's operator in the
first quarter of the year 1997. The increase for the three month period was due
primarily to an increase in processing fee income of $564,600 from the Company's
asphalt refinery.
Production Costs
Production costs decreased 17.2% to $10.1 million and 18.4% to $3.1 million for
the nine and three month periods ended September 30, 1998, from $12.2 million
and $3.8 million for the same periods of 1997. Average production costs per BOE
decreased 10.6% to $5.84 and increased 1.3% to $6.17 for the nine and three
month periods ended September 30, 1998, from $6.53 and $6.09 for the same
periods of 1997.
In the United States, production decreased 6.6% to 972,900 BOE and 25.3% to
272,000 for the nine and three month periods ended September 30, 1998, from
1,042,000 BOE and 364,200 BOE for the same periods of 1997. Production costs per
BOE decreased 9.2% to $6.71 and 3.1% to $6.97 for the nine and three month
periods ended September 30, 1998, from $7.39 and $7.19 for the same periods of
1997. The decreases in production volume and production costs per BOE resulted
in decreases in production costs of 15.6% to $6.5 million and 26.9% to $1.9
million for the nine and three month periods ended September 30, 1998, from $7.7
million and $2.6 million for the same periods of 1997.
In Canada, production decreased 19.5% to 135,100 BOE and 21.2% to 41,300 BOE for
the nine and three month periods ended September 30, 1998, from 167,900 BOE and
52,400 BOE for the same periods of 1997. Production costs per BOE decreased 1.1%
to $4.67 and increased 8.7% to $5.99 for the nine and three month periods ended
September 30, 1998, from $4.72 and $5.51 for the same periods of 1997. The
variances in production volume and production costs per BOE resulted in
decreases in production costs of 20.4% to $631,000 and 14.4% to $247,300 for the
nine and three month periods ended September 30, 1998, from $792,500 and
$288,900 for the same periods of 1997.
In Colombia, production decreased 5.6% to 628,400 BOE and 6.8% to 195,500 BOE
for the nine and three month periods ended September 30, 1998, from 665,500 BOE
and 209,700 BOE for the same periods of 1997. Production costs per BOE decreased
15.8% to $4.75 and increased 18.1% to $5.10 for the nine and three month periods
ended September 30, 1998, from $5.64 and $4.32 for the same periods of 1997. The
variances in production volume and production costs per BOE resulted in a 21.1%
decrease to $3.0 million and a 10.0% increase to $997,900 of production costs
for the nine and three month periods ended September 30, 1998, from $3.8 million
and $906,800 for the same periods of 1997.
General and Administrative Expenses
General and administrative expenses increased 42.9% to $5.0 million and
decreased 7.1% to $1.3 million for the nine and three month periods ended
September 30, 1998, from $3.5 million and $1.4 million for the same periods of
1997. The increase in general and administrative expenses for the nine months
ended September 30, 1998, was due, in part, to the increase in employment levels
to administer planned acquisitions and the Company's drilling programs. In
addition, the Company incurred approximately $500,000 in expenses during the
nine month period in connection with its efforts to restructure its commercial
credit facilities and provide for additional financing and capitalization,
including a planned merger with Omimex Resources, Inc. The Company also incurred
non-cash expenses in the amount of $349,200 in the nine month period
attributable to the issuance of stock options and Common Stock. The decrease in
general and administrative expenses for the three month period ended September
30, 1998, was due principally to state franchise tax credits recorded during the
period.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased 10.0% to $5.5
million and decreased 11.1% to $1.6 million for the nine and three month periods
ended September 30, 1998, from $5.0 million and $1.8 million for the same
periods of 1997. Depletion expense increased 8.7% to $5.0 million and decreased
6.3% to $1.5 million for the nine and three month periods ended September 30,
1998, from $4.6 million and $1.6 million for the same periods of 1997. The
increase for the nine month period was primarily attributable to a decline in
estimated recoverable proved reserves in 1998 based on current prices and
capital costs recorded by the Company in its full cost pools. The decrease for
the three month period was attributable to reduced capitalized costs for oil and
gas properties resulting from writedowns of oil and gas properties in the first
and second quarters of 1998. Depreciation and amortization expenses increased
20.4%, to $542,300 and 6.8% to $182,000 for the nine and three month periods
ended September 30, 1998, from $450,300 and $170,400 for the same periods of
1997.
Writedown of Oil and Gas Properties
The Company incurred cost center ceiling writedowns in the total amount of $17.2
million during the first two quarters of 1998 in its United States cost center.
During that period, the price of West Texas Intermediate crude oil decreased
25.8% to $11.50 per barrel at June 30, 1998, from $15.50 per barrel at December
31, 1997. Application of quarter ending oil prices to the Company's
predominantly heavy oil reserves, which sell at a discount to higher gravity
oil, resulted in significant reductions to the present value of future net
revenues at each quarter ending date. Capitalized costs attributable to foreign
operations in the amount of $652,400 and $57,300 were also charged to operations
during the nine and three month periods ended September 30, 1998, respectively.
Other Income (Expense)
Other income (expense) increased 478.0% to expense of $1.1 million and 26.8% to
expense of $588,300 for the nine and three month periods ended September 30,
1998, from expense of $190,300 and $463,800 for the same periods of 1997. The
change for the nine month period was primarily due to charges incurred by the
Company attributable to the partial redemption of its Preferred Stock ($397,700)
and the accrual of a penalty ($742,000) for failing to cause to have declared
effective a registration statement covering the Common Stock underlying the
Preferred Stock. The change for the three month period was a result of the
Preferred Stock penalty accrual for that period ($480,000), reduced by a foreign
currency translation loss realized by the Company's Colombia operations in the
third quarter of 1997.
Interest Expense
Interest expense increased 78.6% to $2.5 million and 69.4% to $1.0 million for
the nine and three month periods ended September 30, 1998, from $1.4 million and
$590,400 for the same periods of 1997. Interest expense attributable to the
Company's primary credit facility increased $738,400 and $164,800 for the nine
and three month periods ended September 30, 1998, from the same periods of 1997.
The average debt balance outstanding under this credit facility increased 68.5%
to $24.6 million and 12.8% to $22.9 million for the nine and three month periods
ended September 30, 1998, from $14.6 million and $20.3 million for the same
periods of 1997, due principally to the use of loan proceeds to fund property
acquisitions and drilling activities. The weighted average interest rate for
such indebtedness increased 56 basis points, to 9.30%, and 105 basis points, to
9.40%, for the nine and three month periods ended September 30, 1998, from 8.74%
and 8.35% for the same periods of 1997. The Company's Colombia operations
incurred interest expense of $357,600 and $262,500 for the nine and three month
periods ended September 30, 1998.
Provision (Benefit) for Taxes on Income (Loss)
The Company recorded net tax provisions of $149,400 and $40,900 for the nine and
three month periods ended September 30, 1998, due to foreign taxable income for
those periods. The provisions were reduced by deferred tax benefits in the
amount of $616,400 and $35,200 resulting from losses on domestic operations for
the nine and three month periods ended September 30, 1998. Tax provisions of
$1.8 million and $329,800 were recorded for the same periods of 1997.
Net Income (Loss)
Net income (loss) decreased to losses of $23.5 million and $1.9 million for the
nine and three month periods ended September 30, 1998, from net income of $2.5
million and $598,600 for the same periods of 1997. The decreases reflect the
changes in oil and gas sales, other revenues, production costs, general and
administrative expenses, depletion, depreciation and amortization expenses,
writedown of oil and gas properties, interest expense, other income (expense)
and provision (benefit) for taxes on income (loss) discussed above.
The Company's oil and gas producing business is not seasonal in nature.
Liquidity and Capital Resources
Since 1991, the Company's strategy has emphasized growth through the acquisition
of producing properties with significant exploration and development potential.
In 1996, the Company expanded its focus to emphasize drilling, enhanced recovery
methods and increased production efficiencies. During the past five years, the
Company financed its acquisitions and other capital expenditures primarily
through secured bank financing, the creation of joint interest operations and
production payment obligations, and sales of Common Stock, Preferred Stock and
the Debentures. During 1997, the Company's capital expenditures did not produce
expected increases in reserves, which, when coupled with the decline in oil and
gas prices, reduced the amount of reserves against which the Company could
borrow and cash flow with which to service debt and fund its ongoing operations.
The Company has a working capital deficit due principally to this condition and
the reclassification as a current liability of the entire indebtedness with its
principal commercial lender. The Company has negotiated the sale of certain
producing oil and gas assets, the proceeds of which were used to reduce bank
indebtedness and provide working capital. In September 1998, the Company listed
certain of its California real estate properties with a broker, and in October
1998, the Company listed its domestic non-California producing oil and gas
properties with a broker. Proceeds from the sale of such properties will be used
to reduce bank indebtedness and provide working capital. The consummation of the
Common Stock Purchase Agreement between the Company and HVI will result in a
cash infusion into the Company of $7.5 million.
The Company ordinarily creates budgets for short and long term capital
expenditures, and had initially budgeted a minimum of $12.0 million and a
maximum of $18.3 million for 1998 capital expenditures. In the Company's present
financial condition, it is budgeting, on a current basis, only absolutely
essential capital expenditures. The Company currently is budgeting one year at a
time and has deferred any long term capital expenditure program. The Company has
deferred certain capital expenditures in the following areas: (I) Coalinga
exploration project in California, (ii) other California projects, where the
Company is actively seeking a farmout for some of its properties and where
development work has been delayed, (iii) Indonesia, where spending has been
significantly reduced, and (iv) Louisiana, where a seismic study and other
developmental work has been delayed. Those deferments may have an adverse effect
on the Company's growth rate. The Company may elect to make further deferrals of
capital expenditures if oil prices remain at current levels. Capital
expenditures beyond 1998 will depend upon 1998 drilling results, improved oil
prices and the availability of external financing.
Summary cash flow information for the nine month periods ended September 30,
1998 and 1997 is as follows:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Net cash provided by operating activities $ 4,683,400 $ 11,976,500
Net cash used in investing activities $ (599,100) $(30,812,500)
Net cash provided by (used in) financing activities $ (4,397,200) $ 18,330,900
</TABLE>
Working Capital
The Company's working capital deficit increased $18.1 million to a deficit of
$29.8 million at September 30, 1998, from a deficit of $11.7 million at December
31, 1997. This decrease was due in part to the classification of $10.8 million
(net of payments during the year 1998) of the Company's revolving long-term debt
with its principal commercial lender as a current liability. A net increase of
$6.3 million in accounts payable, accrued liabilities and income taxes payable
over accounts receivable, cash balances and other current assets during the nine
months ended September 30, 1998, was due primarily to costs incurred for the
Company's drilling and development activities and contributed to the increase in
the working capital deficit.
In addition, the Company borrowed $4.2 million from Omimex Resources, Inc. in
June 1998 to fund a partial redemption of outstanding Preferred Stock and to
reduce indebtedness under one of the Company's short-term bank loans. The
indebtedness is classified as a current liability.
During the third quarter of 1998, the Company realized proceeds of approximately
$4.9 million from the sale of producing oil and gas properties in Michigan,
Alabama and Canada. Of this amount, $3.6 million was used to reduce long-term
debt; the balance of approximately $1.3 million was utilized as working capital.
The Company is taking actions to address the working capital deficit. As
discussed previously, the consummation of the pending transaction with HVI will
provide a cash infusion into the Company of $7.5 million.
In conjunction with the Company's intention to divest itself of several
producing properties in the mid-continent area, the Company had downsized its
Edmond, OK office in October, 1998, and is negotiating for new, smaller leased
premises. Employment levels in California have also been reduced as a result of
the Company's decision to postpone additional development drilling in the Santa
Maria Valley ("SMV") area, pending an increase in product prices and further
evaluation of production performance from wells previously drilled in 1996 and
1997. In June 1998, the Company renegotiated the pricing structure for oil
produced in the SMV and sold to its asphalt refinery. Such oil will now be sold
at a minimum of $7.00 per barrel. Current postings are approximately $6.04 per
barrel of oil. The Company produces approximately 1,610 barrels of oil per day
in the SMV area.
Operating Activities
The Company's operating activities during 1998 provided net cash flow of $4.7
million. The net loss for the period of $23.5 million, adjusted for non-cash
charges and credits, was responsible for a cash outflow of $540,400. Changes in
other assets and liabilities provided $5.2 million of cash inflow.
Operating activities provided net cash flow of $12.0 million in 1997. Net income
of $2.5 million, adjusted for non-cash charges and credits, provided cash inflow
of $8.3 million. Changes in other asset and liabilities provided $3.7 million of
cash inflow.
The decrease in cash flow from operations in 1998 was due principally to a
decrease in oil and gas sales from $25.3 million in 1997 to $15.8 million in
1998. A 32.6% decrease in average sales price per BOE from $13.48 to $9.08, and
a 10.5% decrease in production from 1.9 MMBOE to 1.7 MMBOE resulted in the $9.5
million decrease in oil and gas sales.
Investing Activities
Investing activities during 1998 resulted in a net cash outflow of $599,100.
Approximately $5.7 million was expended for oil and gas property acquisition,
exploration and development activities. Expenditures for domestic activities,
including the drilling of a noncommercial exploratory well in California and two
oil wells in New Mexico, amounted to approximately $3.5 million, while foreign
activities, including an unsuccessful exploratory well in the United Kingdom and
the drilling and completion of seven oil wells in Colombia, resulted in
expenditures of approximately $2.2 million. An additional $507,000 was incurred
for other capital expenditures. The Company realized proceeds in the total
amount of $5.3 million from the sale of producing oil and gas properties in
Michigan, Alabama and Canada, and $366,100 was collected on notes receivable.
Investing activities during 1997 resulted in a net cash outflow of $30.8
million. Approximately $26.7 million was expended for oil and gas property
acquisition, exploration and development activities. Expenditures for domestic
activities, including the drilling of eight horizontal wells and a pair of SAGD
wells in California, two oil wells in New Mexico, and acquisitions in Michigan
and Louisiana in the total amount of $8.4 million, amounted to approximately
$22.4 million. Foreign activities, including an acquisition in Canada, the
drilling of three wells in Canada, and the drilling and completion of seven
wells in Colombia, resulted in expenditures of approximately $4.3 million. In
addition, the Company expended approximately $2.4 million in connection with
expansion of office facilities and in connection with its real estate, asphalt
refining and pipeline operations. Notes receivable increased by approximately
$1.7 million due principally to the issuance of a note to a joint interest
partner in connection with the acquisition of a producing oil and gas property
during the period.
Financing Activities
Financing activities during 1998 resulted in net cash outflow of $4.4 million.
Borrowings from Omimex Resources, Inc. provided $4.2 million in cash inflow.
Cash outflow during the period was attributed to payments of $7.0 million to
reduce outstanding balances on the Company's credit facilities and $1.7 million
to redeem a portion of Preferred Stock. Such payments were funded by the loan
from Omimex, $3.5 million of proceeds from the sales of producing oil and gas
properties, and $1.4 million from operations.
Financing activities during 1997 resulted in net cash inflow of $18.3 million.
Transactions under the Company's principal credit facilities, including a loan
of approximately $9.7 million to fund a property acquisition in Louisiana,
resulted in net borrowings of approximately $18.6 million. Activities under
other credit arrangements resulted in a net cash outflow of approximately
$535,400. Proceeds from the exercise of Common Stock options provided a cash
inflow of $227,500.
Credit Facilities
In September 1993, the Company established a reducing, revolving line of credit
with Bank One, Texas, N.A. to provide funds for the retirement of a production
note payable, the retirement of other short-term fixed rate indebtedness and for
working capital. At September 30, 1998, the borrowing base under the revolving
loan was $13.4 million subject to a monthly reduction of $300,000, of which
$15.6 million was outstanding.
The Company has a second borrowing base credit facility that provided funding
for development projects in California. At September 30, 1998, $814,000 was
outstanding that matured for payment on July 31, 1998. The payment was not made
and the note maturity was not extended. In September 1997, the Company borrowed
$9.7 million from Bank One, Texas, N.A. to fund the acquisition cost of the
Potash Field property. Principal payments of $7.0 million on December 31, 1997,
and $2.0 million on June 5, 1998, reduced the outstanding balance to $688,000,
due on July 31, 1998. The payment was not made and the note maturity was not
extended.
In November, 1997, the Company secured a short term loan in the face amount of
$3.0 million with Bank One, Texas, N.A. that was advanced in a series of
tranches as needed to fund working capital requirements. The outstanding loan
balance of $3.0 million at September 30, 1998, bears interest at the rate of
prime plus 3% and matured for payment on July 31, 1998. The payment was not made
and the note maturity was not extended.
Loans in the aggregate principal amount of $4.5 million that matured on July 31,
1998, have not been paid nor extended, and the borrowing base deficit of $2.2
million on the revolving loan has not been satisfied either by providing
additional collateral to the bank, or reducing the outstanding principal
balance. Based on the events described above, the entire principal indebtedness
to the bank of $20.1 million has been classified as currently payable at
September 30, 1998.
The Company's Canadian subsidiary has a demand revolving reducing loan with a
borrowing base of $1.5 million, that reduces at the rate of $32,800 per month.
At September 30, 1998, the loan was fully advanced with an outstanding balance
of $1.5 million.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." FAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires that interim financial reports issued
to shareholders include selected information about reporting segments. The
statement also established standards for related disclosures about products and
services, geographic areas and major customers. The statement is effective for
fiscal years beginning after December 15, 1997. The Company considers that its
operations are principally in one industry segment: acquisition, exploration,
development and production of oil and gas reserves. This information and
information about major customers historically has been disclosed in the
Company's annual financial statements.
Impact of Inflation
The price the Company receives for its oil and gas has been impacted
primarily by the world oil market and the domestic market for natural gas,
respectively, rather than by any measure of general inflation. Because of the
relatively low rates of inflation experienced in the United States in recent
years, the Company's production costs and general and administrative expenses
have not been impacted significantly by inflation.
Information Systems for the Year 2000
Year 2000 issues may arise if computer programs have been written using two
digits (rather than four) to define the applicable year. In such case, programs
that have time-sensitive logic may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations or system
failures.
The Company has not completed its assessment of the Year 2000 issue, but
currently believes that costs of addressing the issue will not have a material
adverse impact on the Company's financial position. The Company has not
automated many of its operations with information technology ("IT") systems and
non-IT systems, and presently believes that the Company's existing computer
systems and software will not need to be upgraded to mitigate the Year 2000
issues except that the Company must replace its current integrated accounting
software in order to accurately process data beginning with the year 2000.
Should it not do so, the Company would be unable to properly process and report
upon its own operating data, as well as information provided to it by outside
sources that are "Year 2000" compliant. The Company's third-party accounting
software vendor has modified the current operating system utilized by the
Company and expects to provide the modified system to the Company in the first
quarter of 1999. The cost of this modification was included in the vendor's
system support contract and will not be a significant additional expense to the
Company.
The Company has not incurred material costs associated with its assessment of
the Year 2000 problem. In the event that Year 2000 issues impact the Company's
accounting operations and other operations aided by its computer system, the
Company believes, as part of a contingency plan, that it has adequate personnel
to perform those functions manually until such time that any Year 2000 issues
are resolved.
The Company believes that some of the third parties with whom the Company has
material relationships will not materially be affected by the Year 2000 issues
as those third parties are relatively small entities which do not rely heavily
on IT systems for their operations. The Company does not know whether the other
third parties with whom the Company has material relationships will be affected
by the Year 2000 issues. If the Company and third parties upon which it relies
are unable to address any Year 2000 issues in a timely manner, it could result
in a material financial risk to the Company, including loss of revenue and
substantial unanticipated costs. Accordingly, the Company plans to devote all
resources required to resolve any significant Year 2000 issues in a timely
manner.
Safe Harbor for Forward-Looking Statements
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. These risks and uncertainties include, among
other things, volatility of oil prices, product demand, market competition,
risks inherent in the Company's international operations, including future
prices paid for oil produced at the Colombian oil properties, imprecision of
reserve estimates, and the Company's ability to replace and expand oil and gas
reserves. These and other risks are described elsewhere herein and in the
Company's other filings with the Securities and Exchange Commission.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Gitte-Ten v. Saba Petroleum Company (Case No. CV 980202 Superior and
Municipal Courts of the State of California, County of San Luis Obispo, March
1998). There has been no development in this matter subsequent to its initial
disclosure by the Company as reported in Form 10-K/A for the period ending
December 31, 1997.
Orleans Levee Board v. Saba Energy of Texas, Inc., et al. (Docket No.
98-14233 Civil District Court, Parish of Orleans, State of Louisiana, August
1998). With respect to its interest in the Potash Field, Louisiana, The
Company's subsidiary had suspended approximately $380,000 through January 1998
of royalties for unknown royalty owners who have since been identified. One of
the parties, Orleans Levee Board, had instituted legal proceedings against the
Company for all of the royalties suspended and double said amount for damages
and for the dissolution of the subject leases. The Levee Board has agreed to an
extension for the Company to respond pending a resolution with all identified
royalty owners and/or their geologists in an attempt to reach an agreement
regarding their respective allocations of said suspended royalties and to create
a voluntary unit. The approximate amount of the suspended royalties upon the
Company's acquisition of the subject property was approximately $372,000 which
the Company had applied as an adjustment to the purchase price. The Company
and/or its subsidiary bears the obligation to pay the royalties upon resolution.
Failure to pay timely or a judgement for the Levee Board may result in the
Company losing its interest in the leases and incurring a payment obligation for
the royalties, interest, attorney's fees, and damages sought at double the
amount of royalties.
Land Use Matters. In early 1997, the Company received a letter from the
office of the District Attorney of Santa Barbara County, which threatened
commencement of legal proceedings based upon the Company's failure to respond to
demands that it observe requirements of a land use permit previously issued to
it authorizing the transportation of natural gas produced from its Cat Canyon
properties to its Santa Maria refinery through a pipeline system owned in part
by the Company. The Company has responded to the letter and has had discussions
with representatives of the District Attorneys office and the concerned local
agencies and believes that it is in the process of resolving the outstanding
issues. The matter has been quiescent for several months.
Statutory Liens. Statutory liens have been recorded against the Louisiana
and New Mexico properties owned by the Company for the Company's failure to pay
trade payables. Actions have been taken to proceed with foreclosure on some of
these liens. Further, lawsuits have been filed and served upon the Company's
subsidiaries for the payment of trade payables. The Company has contacted such
categorical claims with respect to Louisiana known by it as of September 30,
1998 in the approximate amount of $800,000 to propose and agree upon a payment
plan with the vendors in exchange for their forbearance on any further action.
The Company has entered, is entering or plans to enter into payment plans agreed
upon with such vendors and any additional vendors so required. The principal
amount of a particular claim for which a lien was filed in Louisiana was paid by
the Company to the vendor; the vendor agreed to forbear any further action on
the lien until such time as the Company paid vendor's attorney's fees, said
amount which vendor was to supply to the Company. While the Company was awaiting
the advised amount of attorney's fees, the liens were foreclosed upon in October
1998, inadvertently according to the vendor. Vendor has agreed to release the
foreclosure upon payment by the Company of attorney's fees in the approximate
amount of $4,600.
Chase v. Saba Petroleum, Inc. (Case No. SM108977, Superior Court of the
State of California, County of Santa Barbara-Cook Division, July 1998). In July,
1998, the Company was served with a lawsuit filed by an individual alleging
personal injury in the amount of $515,000 resulting from general negligence
premises liability on one of the oil leases that the Company operates and which
he claims occurred while supervising the installation of a pump into a well
operated by the Company and on a drilling rig owned by a co-defendant. The
Company is represented by counsel appointed by the Company's insurance carrier
pursuant to a claim submitted under the Company's general liability policy.
Saba Energy of Texas, Inc. v. Marks & Garner Production Ltd. Co., et al.
(Case No. CV-97-106 FR District Court Lea County, State of New Mexico, March
1997). The Company instituted an action for declaratory judgment for the
validity of the Company's oil, gas and mineral lease as being superior to the
prior lease covering the subject lands, said prior lease, as the Company
asserts, having expired pursuant to cessation of production. If the Company
prevails, it will be obligated to pay consideration of approximately $55,000 to
the Company's predecessor, the seller of the lease interest.
Property Matters. See Environmental Contingencies.
From time to time, the Company is a party to certain litigation that has arisen
in the normal course of its business and that of its subsidiaries. In the
opinion of management, none of this litigation is likely to have a material
adverse effect on the Company's financial condition or results of operations.
ITEM 4: SUBMISSION OF A MATTER TO A VOTE OF SECURITY HOLDERS
(a) On August 28, 1998, the Company held its annual meeting of shareholders.
(b) The annual meeting involved the election of directors of the Company
for a one-year term to expire at the Company's 1999 annual meeting of
shareholders, or until the successors to the directors have been
elected and qualified. At such meeting the entire Board of Directors
was elected and the persons listed in (c) were elected directors of the
Company for the term stated above.
(c) The following shows the matters voted upon at the annual meeting, and the
results of such voting:
1. Amendment of the Bylaws of the Company to provide up to seven members to
serve as directors of the Company:
<TABLE>
<S> <C> <C> <C>
------------------------ ---------------------- -------------------------------- -------------------------
Votes For Votes Against Withheld / Abstentions Broker Nonvotes
------------------------ ---------------------- -------------------------------- -------------------------
------------------------ ---------------------- -------------------------------- -------------------------
9,429,790 178,487 61,168
------------------------ ---------------------- -------------------------------- -------------------------
</TABLE>
<PAGE>
2. Election of Directors:
<TABLE>
<S> <C> <C> <C> <C>
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
Nominee Votes For Votes Against Withheld / Abstentions Broker Nonvotes
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
Ilyas Chaudhary 9,466,151 64,806 138,488
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
Alex Cathcart 9,478,741 54,116 136,588
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
William Hagler 9,487,001 45,856 136,588
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
Charles Kohlhaas 9,504,971 27,886 136,588
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
Faysal Sohail 9,459,761 72,096 137,588
------------------------------ ---------------- ------------------- ---------------------------- ---------------------
</TABLE>
3. Amendment of the Company's 1997 Stock Option Plan For The Non-Employee
Directors providing for a grant of an option to acquire 15,000 shares of
Common Stock at the fair market value on the date of the grant and vesting
pro rata over five years:
<TABLE>
<S> <C> <C> <C>
---------------------- ----------------------- --------------------------- ----------------------
Votes For Votes Against Withheld / Abstentions Broker Nonvotes
---------------------- ----------------------- --------------------------- ----------------------
---------------------- ----------------------- --------------------------- ----------------------
9,245,125 368,406 55,864
---------------------- ----------------------- --------------------------- ----------------------
</TABLE>
4. Ratification of the selection of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the year 1998:
<TABLE>
<S> <C> <C> <C>
---------------------- ----------------------- --------------------------- ----------------------
Votes For Votes Against Withheld / Abstentions Broker Nonvotes
---------------------- ----------------------- --------------------------- ----------------------
---------------------- ----------------------- --------------------------- ----------------------
9,537,010 58,564 73,871
---------------------- ----------------------- --------------------------- ----------------------
</TABLE>
ITEM 5: OTHER INFORMATION
Office Locations
In August, 1998, the Company elected to postpone the closure of its Edmond,
Oklahoma office until such time as the Company divested itself of the properties
managed by that office, and is negotiating for new, smaller leased premises. In
September 1998, the Company moved its accounting offices from Irvine,
California, to the executive office location in Santa Maria, California.
Directors and Officers
In July 1998, Ronald Ormand resigned as a member of the Company's Board of
Directors.
In July 1998, Walton C. Vance resigned as Vice President, Chief Financial
Officer, Treasurer and Secretary of the Company. In August, 1998, Ilyas
Chaudhary's appointment as Chief Executive Officer and President of the Company
was reinstated pursuant to the terminated employment of Dr. Kohlhaas and Imran
Jattala was appointed as the Company's Principal Accounting Officer.
At the Company's annual meeting of shareholders in August 1998, an amendment to
the Company's Bylaws to provide up to seven members to serve as directors of the
Company was approved, and the Board of Directors had determined the number of
directors to serve on the Company's Board for a one-year term to expire at the
1999 annual meeting of shareholders to be five. Further at the annual meeting of
shareholders in August 1998, the following members were elected to serve on the
Company's Board of Directors: Ilyas Chaudhary, Alex Cathcart, William Hagler,
Faysal Sohail, and Charles Kohlhaas.
Under the Common Stock Purchase Agreement, the Company appointed Randeep S.
Grewal, Chairman and Chief Executive Officer of HVI, to the Board of Directors
in October 1998. In addition, the Company agreed to upon the closing of the
Common Stock Purchase Agreement appoint a second designee of HVI to the Board of
Directors. Further, the consent letter to the Preferred Stock Transfer Agreement
signed by the Company provides that upon that closing, a third designee of HVI
shall be appointed to the Board of Directors. In connection with the foregoing,
the Company agreed to obtain the resignations of three of its current directors,
which will result in the three HVI designees representing a majority of seats on
the Company's five-member Board of Directors.
In November 1998, Bradley Katzung's appointment as Vice President of
Mid-Continent Operations terminated upon expiration of his employment agreement,
Faysal Sohail resigned as a member of the Company's Board of Directors, and
Ilyas Chaudhary resigned as a director, Chairman of the Board, Chief Executive
Officer, President, and Principal Executive Officer of the Company and of each
of the subsidiaries of the Company to facilitate the pending transaction with
HVI. Upon Mr. Chaudhary's resignation, Mr. Hagler was appointed by the Company's
Board of Directors as Chairman of the Board to serve through the closing of the
transaction pending with HVI, and a management committee composed of Messrs.
Hagler, Jattala and Grewal has been established by the Company's Board of
Directors to manage the day-to-day affairs of the Company with the powers and
duties generally prescribed in the Bylaws to the President continuing up to the
closing of the transaction with HVI.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
o Exhibits filed for the quarter ended September 30, 1998.
EXHIBIT NUMBER DESCRIPTION
<TABLE>
<S> <C>
10.1 Mutual Termination and Release
Agreement dated September 15, 1998, by
and among the Company, Saba
Acquisition, Inc., Omimex Resources,
Inc., the Omimex Resources, Inc.
stockholders and Ilyas Chaudhary.
10.2 Employment Agreement with Imran Jattala dated July 23, 1998.
11.1 Computation of Earnings per Common Share
27.1 Financial Data Schedule
</TABLE>
o No reports were filed on Form 8-K during the quarter ended September 30, 1998.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SABA PETROLEUM COMPANY
November 19, 1998 /s/ Imran Jattala
Date: ______________ By: ___________________
Imran Jattala
Executive Vice President and
Chief Operating Officer
November 19, 1998 /s/ Imran Jattala
Date: _______________ By: __________________
Imran Jattala
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
Exhibit 10.1 Mutual Termination and Release
Agreement dated September 15, 1998, by
and among the Company, Saba
Acquisition, Inc., Omimex Resources,
Inc., the Omimex Resources, Inc.
stockholders and Ilyas Chaudhary.
MUTUAL TERMINATION AND RELEASE AGREEMENT
This Mutual Termination and Release Agreement (this "Agreement") is
made and entered into this 15th day of September, 1998, by and among Saba
Petroleum Company, a Delaware corporation ("Saba"), Saba Acquisition, Inc., a
Delaware corporation and a wholly owned subsidiary of Saba ("Acquisition"),
Omimex Resources, Inc., a Delaware corporation ("Omimex"), the holders of all of
Omimex's outstanding common stock identified on the signature pages hereto (the
"Stockholders") and Mr. Ilyas Chaudhary (the "Saba Major Stockholder").
WITNESSETH:
WHEREAS, Saba, Acquisition, Omimex, the Stockholders and the Saba Major
Stockholder(collectively the "Contract Parties") entered into that certain
Agreement and Plan of Reorganization dated as of June 1, 1998 (the "Merger
Agreement");
WHEREAS, pursuant to Section 11. 1 of the Merger Agreement, Saba and Omimex
desire to terminate the Merger Agreement;
WHEREAS, in connection with such termination of the Merger Agreement,
each of the Contract Parties desires to be released from, and to release each of
the other Contract Parties from, any liability under the Merger Agreement and
the Rose Glen Agreement (herein defined as that certain Letter Agreement dated
June 1, 1998, by and among Saba, Omimex and RCG International Investors, LDC);
and
WHEREAS, in connection with such termination of the Merger Agreement,
pursuant to the terms of Section 1.7 of the Merger Agreement, Saba and Omimex
desire to establish the procedures for securing the loan from Omimex to Saba, as
evidenced by that certain Promissory Note dated June5, 1998 in the original
principal amount of $4,190,000 (respectively, the "Loan" and the "Note").
NOW, THEREFORE, for and in consideration of the premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agreed as follows:
<PAGE>
10Q Sept 1998.doc
1. Termination of the Merger Agreement. Effective as of the date of this
Agreement, the Merger Agreement and all rights and obligations of the
Contract Parties thereunder including those pursuant to Article 12 and
Sections 11.3, 11.4 and 13.13 thereof will terminate without liability
to any of the Contract Parties, and will be of no further force or
effect.
2. Assignment of the Rose Glen Agreement. Effective as of the date of this
Agreement, all of Omimex's rights, duties, liabilities and obligations
under the Rose Glen Agreement will be assigned to Saba
<PAGE>
10Q Sept 1998.doc
3. Amendment to the Note. Saba's obligations to repay and secure the Loan
shall continue in accordance with the terms of the Note. Effective as of
the date of the Note, the interest rate on the Loan shall be reduced
from prime plus 2% to prime.
3. Security for the Loan.
a. To secure payment and performance of the Loan, Saba hereby agrees to:
<PAGE>
10Q Sept 1998.doc
i. execute, through Sabacol's legal representative in
Colombia, but not present for notarial inscription, a
Public Deed to transfer to Omimex all right, title
and interest of Sabacol, Inc., a Delaware corporation
and a wholly owned subsidiary of Saba ("Sabacol"), in
and to the Velasquez-Galan Pipeline (the "Pipeline");
<PAGE>
10Q Sept 1998.doc
ii provide Sabacol's legal representative in Colombia
with an irrevocable letter of authority authorizing
the completion of the execution of the Public Deed
for the Pipeline before a Colombian notary public;
and
<PAGE>
10Q Sept 1998.doc
ii enter into a trust agreement with Omimex and a
trustee mutually acceptable to Saba and Omimex
providing for the Public Deed for the Pipeline and
their revocable letter of authority to be held in
trust in accordance with the terms of the trust
agreement.
bb. The trust agreement shall provide that, pursuant to the Loan, repayment
of$4,151,288 principal plus accrued interest shall be made to Omimex and
delivered to the trustee within ninety (90) days of the date of termination,
which shall be the date first stated herein. In the event payment in full is
delivered within said 90 day period, then the trustee shall immediately deliver
to Omimex the payment and to Saba the Public Deed for the Pipeline and the
irrevocable letter of authority relatingt hereto for cancellation. In the event
payment in full is not delivered within said 90day period, then the trustee
shall immediately deliver to Omimex the Public Deed for the Pipeline and the
irrevocable letter of authority relating thereto. Thereafter, Omimex shall
deliver the Public Deed for the Pipeline and the irrevocable letter of authority
to Omimex de Colombia, Ltd., a Delaware corporation and a wholly owned
subsidiary of Omimex ("Omimex Colombia"), for completion of the execution of the
Public Deed for the Pipeline ---------------- before a Colombian notary public
by Sabacol's legal representative. Saba shall cause Sabacol and Sabacol's legal
representative to complete execution of the Public Deed for the Pipeline before
a Colombian notary public in accordance with the terms of the irrevocable letter
of authority.
<PAGE>
10Q Sept 1998.doc
c. The Public Deed for the Pipeline, the irrevocable letter of
authority authorizing the completion of the execution thereof
and the trust agreement relating thereto shall be in form and
substance reasonably satisfactory to Saba and Omimex. At any
time and from time to time, upon request of the other party,
Saba and Omimex shall do, execute, acknowledge and deliver or
shall cause to be done, executed, acknowledged and delivered
such further acts, deeds, assignments, transfers, conveyances
and assurances as may be reasonably required in order to
consummate the transactions contemplated hereby.
5. Termination of Confidential Agreements. The Confidentiality Agreements
dated April 21,1998 between Saba and Omimex and Omimex and Saba shall
terminate, except as to any obligations to disclose or return data, upon
execution of this Agreement.
<PAGE>
10Q Sept 1998.doc
6. Releases.
a. Subject to the Contract Parties' full and complete compliance with the
aforementioned terms of this Agreement, for the purposes and consideration
set forth herein, each Contracting Party, for itself and its divisions,
affiliates, parents, subsidiaries, stockholders, officers, directors,
agents, attorneys, employees, trustees, independent contractors, successors
and assigns does hereby expressly, voluntarily, knowingly and irrevocably
release, relinquish, acquit and discharge the other Contract Parties and
their respective divisions, affiliates, parents, subsidiaries,
stockholders, officers, directors, agents, attorneys, employees, trustees,
independent contractors, successors and assigns of and from any and all
charges, complaints, liabilities, obligations (including those pursuant to
Article 12 and Sections 11.3, 11.4and 13.13 of the Merger Agreement),
promises, agreements, controversies, damages, actions, losses, expenses
(including attorneys' fees and costs), claims, rights, demands, causes of
action or suits in equity, of any and every kind or character, in contract
or tort, whether known or unknown, whether heretofore or hereafter
occurring, arising under, or in connection with the negotiation, execution,
performance or termination of the Merger Agreement or in connection with
the negotiation, execution or performance of the Rose Glen Agreement,
including claims for breach of contract, fraud, negligent
misrepresentation, omission, fraud in the inducement and deceptive trade
practices or for any other loss, expense and/or detriment, of any kind or
character whatsoever, growing out of or in any way connected with or in any
way resulting from the acts, actions or omissions of the other Contract
Parties released herein relating to the Merger Agreement or the Rose Glen
Agreement.
a. It is the intent of the Contract Parties that the foregoing
general mutual release shall be effective as a bar to all
actions, causes of actions, suits in equity, obligations,
costs, expenses, attorneys' fees, damages, losses, claims or
liabilities, known or unknown, to the extent set forth above,
and in furtherance of this intention, the Contract Parties
expressly waive any and all rights and benefits conferred upon
them by the following provision of ss. 1542 of the California
Civil Code:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his
favor at the time of executing the release which, if
known by him, must have materially affected his
settlement with the debtor.
The Contract Parties, being aware of said code section, hereby
expressly waive any rights they may have thereunder, as well
as under any other statute or common law principle of similar
effect.
7. Entire Agreement. This Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and
oral, among the parties hereto with respect to the subject matter
hereof.
<PAGE>
10Q Sept 1998.doc
8. Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and permitted assigns. Neither this
Agreement nor any rights, interests or obligations hereunder may be
assigned by any party hereto without the prior written consent of all
other parties hereto, and any purported assignment in violation of this
Section shall be null and void.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument.
<PAGE>
10Q Sept 1998.doc
10. Headlines. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
<PAGE>
10. Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party which is
entitled to the benefits thereof, and this Agreement may be modified or
amended by a written instrument executed by Saba, Acquisition, Omimex
and the Stockholders. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by all of the
parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
10. Notices. Any notice, request, instruction, document or other
communication to be given hereunder by any party hereto to any other
party hereto shall be in writing and validly given if (a) delivered
personally, (b) sent by telecopy, (c) delivered by overnight express or
(d) sent by registered or certified mail, postage prepaid, as follows:
<TABLE>
<S> <C>
If to Saba or Acquisition, to: If to Omimex, to:
Saba Petroleum Company Omimex Resources, Inc.
3201 Skyway Drive 5608 Malvey, Penthouse Suite
Santa Maria, California 93455 Ft. Worth, Texas 76107
Telecopier: (805) 347-1072 Telecopier: (817) 735-8033
Attention: Ilyas Chaudhary Attention: Naresh K. Vashisht
with a copy to: with a copy to:
Rodney Hill, Esq. Don Glendenning, Esq,
2010 Birnam Wood Drive Locke Purnell Rain Harrell
Montecito, California 93018-2206 2200 Ross Avenue, Suite 2200
Telecopier: (805) 565-5893 Dallas, Texas 75201-6776
Telecopier: (214) 740-8800
</TABLE>
or at such other address for a party as shall be specified by like
notice. Any notice which is delivered personally, or sent by telecopy
or overnight express in the manner provided herein shall be deemed to
have been duly given to the party to whom it is directed upon actual
receipt by such party. Any notice which is addressed and mailed in the
manner herein provided shall be conclusively presumed to have been
given to the party to whom it is addressed at the close of business,
local time of the recipient, on the third day after the day it is so
placed in the mail.
13. GOVERNING LAW; CHOICE OF FORUM. THIS AGREEMENT SHALL BE
CONSTRUED, ENFORCED, AND GOVERNED BY THE INTERNAL LAWS OF THESTATE OF
CALIFORNIA (WITHOUT REGARD TO ITS CHOICE OF LAWPRINCIPLES), EXCEPT THAT
THE LAWS OF THE STATE OF DELAWARE SHALLAPPLY AS TO MATTERS OF ORGAN IC
CORPORATE LAW.
AS PART OF THE CONSIDERATION FOR VALUE RECEIVED PURSUANT TO
THISAGREEMENT, AND REGARDLESS OF THE LOCATION OF ANY PRESENT ORFUTURE
DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF THE PARTIES, EACHPARTY
HEREBY IRREVOCABLY CONSENTS AND AGREES TO THE EXCLUSIVEJURISDICTION OF
ANY FEDERAL OR STATE COURT SITTING IN THE SOUTHERNDISTRICT OF
CALIFORNIA OR THE COUNTY OF SANTA BARBARA IN ANY SUIT,ACTION OR
PROCEEDING BROUGHT AGAINST SUCH PARTY BY ANY OTHERPARTY AND PERTAINING
TO THIS AGREEMENT OR TO ANY MATTER ARISINGOUT OF OR RELATED TO THIS
AGREEMENT AND AGREES THAT EITHER OFTHE AFORESAID COURTS SHALL BE AN
APPROPRIATE FORUM FOR SUCHACTION.
<PAGE>
14. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, orunenforceable under present or future laws, such
provision shall be fully severable, this Agreement shall be construed
and enforced as if such illegal, invalid or unenforceable provision had
never comprised a part of this Agreement, and the remaining provisions
of this Agreement shall remain in full force and effect and shall not
be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
14. Number and Gender of Words. Whenever the singular number is used, the
same shall include the plural where appropriate, and words of any
gender shall include each other gender where appropriate.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date first above written.
SABA PETROLEUM COMPANY
By: /s/ Ilyas Chaudhary
Ilyas Chaudhary
President
SABA ACQUISITION, INC.
By: /s/ Ilyas Chaudhary
Ilyas Chaudhary
President
SABA PETROLEUM, INC.
By: /s/ Ilyas Chaudhary
Ilyas Chaudhary
President
OMIMEX RESOURCES, INC.
By: /s/ Naresh K. Vashisht
Naresh K. Vashisht
President
STOCKHOLDERS OF OMIMEX
RESOURCES, INC.
/s/ Naresh K. Vashisht
Naresh K. Vashisht
/s/ Jogesh Kumar
Jogesh Kumar
/s/ Romesh Sharma
Romesh Sharma
Neha Vashisht Trust
By: /s/ Jogesh Kumar
Jogesh Kumar
Trustee
Niti Vashisht Trust
By: /s/ Jogesh Kumar
Jogesh Kumar
Trustee
SABA MAJOR STOCKHOLDER
/s/ Ilyas Chaudhary
Ilyas Chaudhary
10.2 Employment Agreement with Imran Jattala dated July 23, 1998.
EMPLOYMENT AGREEMENT
If accepted in writing by Mr. Imran Jattala and Saba Petroleum Company (the
"Company"), the following term and conditions will govern the continued
employment of Mr. Jattala with the Company.
<PAGE>
<TABLE>
<S> <C>
1. Scope of Responsibilities and Title: a. To carryout duties and responsibilities as Executive
Vice President and Chief Operating officer of the Company.
b. To carryout duties and responsibilities as President and
Chief Operating Officer of Saba Petroleum, Inc., a subsidiary of
Saba Petroleum Company.
c.
2. Employment Status: Full
time, Original hire date
of January 1, 1992.
Continuing for the term
specified below.
3. Location of Employment: Santa Maria, California
4. Term: Three years
commencing from the date
of acceptance of this
letter agreement.
5. Compensation: a. Annual Salary : U.S. $ 72,000 to be paid in equal
monthly installments.
b. Vacation and Sick Time: Whatever is accrued to-date plus
continuation with current company policy.
c. Salary increases: A 10% increase at next employment
anniversary date and 5% thereafter at each employment anniversary
date.
d. Other Benefits: Continued participation in the
Company401K plan and the Company paid health benefits. Other
stock options and bonuses as approved by the Company.
e. Company provided automobile.
f.
6. Termination Either party may terminate the employment with or without cause
upon 30 days' written notice to the other, and upon such
termination neither party shall have any further rights or
obligations hereunder; provided, however, that upon termination
by the company, the Company shall pay all accrued vacation / sick
time and as a severance allowance an amount equal to six months
of salary plus one month of salary for each year of employment
with the Company.
Saba Petroleum Company Accepted this ______ day of ____________, 1998
Ilyas Chaudhary _______________________
President & Chief Executive Office Imran U. Jattala
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1 Computation of Earnings per Common Share
SABA PETROLEUM COMPANY
Exhibit 11.1
Computation of Earnings (Loss) Per Common Share
For the Nine and Three Months Ended September 30, 1998 and 1997
<S> <C> <C> <C> <C>
Nine Months Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic Earnings
Net income (loss) before minority interest
in earnings (loss) of consolidated
subsidiary (23,576,103) 2,457,506 (1,933,898) 603,015
Minority interest in earnings (loss) of
consolidated subsidiary (77,886) 89,994 (29,346) (4,397)
Preferred Stock dividends (411,287) 0 (119,999) 0
-----------------------------------------------------------
===========================================================
Net income (loss) available to Common (23,909,504) 2,547,500 (2,024,551) 598,618
===========================================================
===========================================================
Basic Shares
Weighted average number of Common
--------------------------------------------------------------------------------------------------------------
===========================================================
Shares outstanding 10,993,524 10,595,598 11,052,393 10,690,893
===========================================================
===========================================================
Basic Earnings per Common Share
-----------------------------------------------------------
===========================================================
Net income (loss) available to Common $ (2.17) $ 0.24 $ (0.18) $ 0.06
===========================================================
===========================================================
Diluted Earnings
Net income (loss) before minority interest
in earnings (loss) of consolidated
subsidiary (23,576,103) 2,457,506 (1,933,898) 603,015
Minority interest in earnings (loss) of
consolidated subsidiary (77,886) 89,994 (29,346) (4,397)
Preferred stock dividends (411,287) 0 (119,999)
0
Plus interest expense attributable
to Debentures, net of related income
taxes 0 0 51,879
157,788
-----------------------------------------------------------
===========================================================
Net income (loss) available to Common (23,909,504) 2,705,288 (2,024,551) 650,497
===========================================================
===========================================================
Diluted Shares
Weighted average number of Common
Shares outstanding 10,993,524 10,595,598 11,052,393 10,690,893
Effect of dilutive securities:
Of shares underlying options 370,242
- 379,244 -
Of shares underlying convertible
Debentures 951,382
- 1,037,070 -
-----------------------------------------------------------
===========================================================
Diluted Shares 10,993,524 12,011,912 11,052,393 12,012,517
===========================================================
===========================================================
Diluted Earnings per Common Share
-----------------------------------------------------------
===========================================================
Net income (loss) $ (2.17) $0.23 $ (0.18) $ 0.05
===========================================================
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
27.1 Financial Data Schedule
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
Company's condensed consolidated balance sheet at September 30, 1998, and
condensed statement of operations for the nine months ended September 30, 1998,
and is qualified in its entirety by reference to such (B) financial statements
presented in quarterly report Form 10-Q for the quarterly period ended September
30, 1998.
</LEGEND>
<CIK> 0000312340
<NAME> Saba Petroleum Company
<MULTIPLIER> 1000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,187
<SECURITIES> 0
<RECEIVABLES> 5,464
<ALLOWANCES> (78)
<INVENTORY> 0
<CURRENT-ASSETS> 9,323
<PP&E> 88,892
<DEPRECIATION> (45,471)
<TOTAL-ASSETS> 53,921
<CURRENT-LIABILITIES> 39,075
<BONDS> 5,347
0
7,169
<COMMON> 16,982
<OTHER-SE> (16,952)
<TOTAL-LIABILITY-AND-EQUITY> 53,921
<SALES> 0
<TOTAL-REVENUES> 18,683
<CGS> 0
<TOTAL-COSTS> 38,466
<OTHER-EXPENSES> 1,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,519
<INCOME-PRETAX> (23,349)
<INCOME-TAX> 149
<INCOME-CONTINUING> (23,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,498)
<EPS-PRIMARY> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
