As filed with the Securities and Exchange Commission on December 23, 1998
Registration No. 333-45023
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
Amendment No. 2
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________________
SABA PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1311 47-0617589
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
____________________
3201 Airpark Drive, Suite 201
Santa Maria, California 93455
(805) 347-8700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
______________________________
Susan M. Whalen, Esquire
Saba Petroleum Company
3201 Airpark Drive, Suite 201
Santa Maria, California 93455
(805) 347-8700
(Name, address and telephone number, including area code, of agent for
service)
With Copies to:
Roger V. Davidson, Esq.
Cohen Brame & Smith
Professional Corporation
1700 Lincoln Street, Suite 1800
Denver, CO 80203
______________________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Amount to be Proposed Proposed Amount of
Class of Registered (1) Maximum Maximum Registration
Securities Offering Aggregate Fee
to be Registered Per Share (2) Offering Price (2)
<S> <C> <C> <C> <C>
Common Stock 2,153,344 shares $6.75 $14,535,072 $4,288
Common Stock 602,996 shares $1.00 602,996 $168
TOTAL 2,756,340 shares $15,138,068 $4,456
</TABLE>
(1) Shares of Common Stock which may be offered pursuant to this
Registration Statement includes shares issuable upon conversion of
shares of Series A Convertible Preferred Stock and exercise of
the Warrants and the Redemption Warrants as defined herein. In
addition to the shares set forth in the table, the amount to be
registered includes an indeterminate number of shares issuable upon
conversion of or in respect to the Series A Convertible Preferred
Stock and the Warrants, as such number may be adjusted as a result
of stock splits, stock dividends and antidilution provisions
(including floating rate conversion prices) in accordance with Rule
416.
(2) Estimated solely for the purpose of calculating the registration fee
based on the average of the high and low reported sales prices per
share of the Company's Common Stock on the American Stock Exchange on
January 23,1998 for the 2,153,344 shares as set forth in the initial
Registration Statement and December 17, 1998 for the 602,996 shares.
(3) A Registration fee was previously paid with respect to $4,288 of this
fee.
______________________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
_________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION DATED December __, 1998
SABA PETROLEUM COMPANY
2,756,340 Shares of Common Stock
All of the shares of common stock (the "Common Stock") of Saba Petroleum
Company ("Saba" or the "Company") offered hereby (the "Offering") are being
sold by the selling stockholders identified herein (the "Selling
Stockholders"). The Company's Common Stock is listed on the American Stock
Exchange ("AMEX") under the symbol "SAB." On December 17, 1998, the last
reported sale price of the Common Stock on AMEX was $1.00 per share. See
"Price Range of Common Stock and Dividend Policy." The registration of the
shares of Common Stock hereunder does not necessarily mean that any of the
shares will be offered or sold by the holder thereof. See "Use of Proceeds."
This Prospectus covers up to 2,756,340 shares of Common Stock, and in
accordance with Rule 416 of the Securities Act of 1933, as amended (the
"Securities Act"), such indeterminate number of additional shares of Common
Stock which may become issuable upon the conversion of the shares of the
Company's Series A Preferred Stock and exercise of warrants of the Company by
reason of the floating rate conversion price mechanism or other adjustment
mechanisms applicable to such securities or by reason of any stock splits,
stock dividends, or similar transactions involving the Common Stock in order
to prevent dilution which may be sold from time to time by the Selling
Stockholders (collectively, the "Shares"). The Shares being offered pursuant
to this Prospectus include 2,153,344 shares of Common Stock issuable upon the
conversion of part of the Company's Series A Preferred Stock, 269,663 shares
of Common Stock issuable upon the conversion of warrants of the Company, and
333,333 shares of Common Stock issued to a certain Selling Stockholder. For
additional information concerning the Shares offered pursuant to this
Prospectus see "Principal and Selling Stockholders."
The Selling Stockholders or their respective pledgees, donees,
transferees or other successors in interest from time to time may offer and
sell the shares held by them directly or through agents, broker-dealers or
underwriters on terms to be determined at the time of sale. Those transactions
(which may involve block transactions) may be effected on AMEX (or any other
national securities exchange or United States inter-dealer quotation system of
a registered national securities association, on which the Shares are then
listed) in sales occurring in the public market or such exchange, in privately
negotiated transactions, or in a combination of such methods of sale. Such
methods of sale may be conducted at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. An agent, underwriter or broker-dealer may receive compensation in the
form of commissions or discounts from a Selling Stockholder and/or purchasers
of the Shares for whom they may act as agent or to whom they sell Shares as
principal or both (which commissions or discounts are not anticipated to
exceed those customary in the types of transactions involved).
To the extent required, the names of any agent, underwriter or broker-
dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." The Selling
Stockholders reserve the right to accept or reject, in whole or in part, any
proposed purchase of the Shares to be made directly or through agents.
The Selling Stockholders and any agents or broker-dealers that
participate with the Selling Stockholders in the distribution of Shares may be
deemed to be "underwriters" within the meaning of the Securities Act, and any
commissions received by them and any profit on the resale of the Shares may be
deemed to be underwriting commissions or discounts under the Securities Act.
The Company will not receive any of the proceeds of the Offering. The
Company will bear all of the expenses of the Offering except any underwriting
discounts, selling commissions, stock transfer taxes, and fees and
disbursements of counsel for a Selling Stockholder. The expenses paid by the
Company are expected to be approximately $154,828.
The Common Stock offered hereby involves a high degree of risk. See
"Risk Factors" beginning on page 15.
________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
________________________
The date of this Prospectus is __________________ , 1998.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith,
files reports, proxy statements and other information with the Commission. The
Registration Statement, of which this Prospectus is a part, as well as such
reports and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices at
7 World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission also maintains a worldwide web site (address:
http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The Common Stock is listed on the American Stock Exchange and such
reports and other information concerning the Company also can be obtained at
the offices of the American Stock Exchange at 86 Trinity Place, New York, New
York 10006-1881.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act with respect to the Common Stock. This
Prospectus, which constitutes part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits thereto which are on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract, agreement or
other documents filed as an exhibit to the Registration Statement for a more
complete description of the matter involved, each such statement being
qualified in all respects by such reference.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. References to "Saba" or the "Company" are to
Saba Petroleum Company and its subsidiaries unless the context otherwise
requires. All share information included herein has been adjusted to reflect a
two-for-one stock split in the form of a stock dividend paid in December 1996.
Certain terms, including several technical terms commonly used in the oil and
gas industry, are defined in the "Glossary" included as Appendix A to this
Prospectus. Investors should carefully consider the information set forth
under "Risk Factors." The principal executive offices of the Company are
located at 3201 Airpark Drive, Suite 201, Santa Maria, California 93455, and
the Company's telephone number at this location is (805) 347-8700.
THE COMPANY
Saba Petroleum Company is an independent energy company engaged in the
acquisition, development and exploration of oil and gas properties in the
United States and internationally. The Company has grown primarily through the
acquisition and exploitation of producing properties in California, Louisiana
and Colombia. The Company has assembled a portfolio of over 200 potential
development drilling locations. Based on current drilling forecasts, the
Company estimates that such locations represent a five-year drilling
inventory. The preponderance of those drilling locations are in Colombia's
Middle Magdalena Basin. The Company also has drilling locations in California,
New Mexico and Louisiana. The Company uses advanced drilling and production
technologies to enhance the returns from its drilling programs. On its
California properties, the Company has used horizontal drilling and high-
efficiency cavitation pumps, and drilled its first steam assisted gravity
drainage ("SAGD") pair of wells in California in 1997, on which producing
operations have been held in abeyance awaiting a permit and oil price
increases. In 1998, the Company initiated exploration projects in California,
Indonesia and Great Britain.
At December 31, 1997, the Company had estimated proved reserves of 29.1
MMBOE, consisting of 23.9 MMBbls of oil and 31.3 Bcf of gas (5.2 MMBOE), with
a PV-10 Value of $118.6 million. Since quantities of oil and gas recoverable
from a property are price sensitive, declines in oil and gas prices from
December 31, 1997 postings may be expected to result in a reduction of the
quantities of oil and gas included in the Company's proved reserves and the
PV-10 value of such reserves. See "Properties - Reserve Estimates."
The Company also owns an asphalt refinery in Santa Maria, California,
where it currently processes approximately 4,000 Bopd. See "Description of
Property Asphalt Refinery". Incident to its gas and oil operations, the
Company has acquired fee interests in real estate. See "Description of
Property Real Estate Activities". In Colombia the Company holds a 50% interest
in a 118-mile pipeline. See "Description of Property-Principal Properties-
Colombian Properties".
Recent Developments
Going Concern Status
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 8 to Consolidated Financial Statements). While the Company is
attempting to address funding the current deficit, there is no assurance that
it will be able to do so timely. Further, while the Company is in discussion
with its primary lender to address the Company's non-compliance with the loan
agreement's financial covenants at September 30, 1998, there is no assurance
that the preconditions to the resolved discussions will be met or a
satisfactory restructuring accomplished. Finally, as discussed below, the
Company has terminated a definitive agreement that it had previously entered
into with Omimex Resources, Inc. ("Omimex") to conclude a business
combination. As a result of this termination, the Company's obligation to
repay the principal sum of approximately $4.2 million, plus interest, as
evidenced by a promissory note secured by a 50% interest in a 118-mile
pipeline in Colombia owned by Sabacol, Inc., a wholly owned subsidiary of the
Company ("Sabacol"), became due and payable in its entirety on or before
December 14, 1998. There is no assurance that such promissory note will be
paid in full by December 14, 1998. On December 11, 1998, Sabacol filed for
protection of its assets under Chapter 11 of the United States Bankruptcy
Code. (see "The Company - Recent Developments - Bankruptcy of Sabacol, Inc.")
Terminated Business Combination
In early 1998, the Board of Directors of the Company engaged CIBC-
Oppenheimer, Inc. ("Oppenheimer"), an investment banking firm, to explore ways
to enhance shareholder value. This engagement was prompted by several factors,
predominately the declining price of Common Stock of the Company and the lack
of working capital available to the Company. In March 1998, Oppenheimer
presented the Board with its recommendations, which included exploring a
possible business combination of the Company with another oil and gas company.
In March 1998, the Company entered into a preliminary agreement with Omimex, a
privately held Fort Worth, Texas oil and gas company which operates a
substantial portion of the Company's producing properties, to enter into a
business combination (the "Merger"). Subsequent to the execution of the
preliminary agreement, the Company negotiated a required consent from the
holders ("Holders") of its Series A Convertible Preferred Stock ("Series A
Preferred Stock"). In the interim between the execution of the preliminary
agreement and the definitive Plan and Agreement of Reorganization (the "Merger
Agreement"), the price of oil continued to deteriorate as did the Company's
financial condition and the price of the Common Stock. The Company's
deteriorating financial condition precluded the Company from raising funds
with which to redeem the Series A Preferred Stock as had been the Company's
intention.
In June 1998, the Company, Omimex, the shareholders of Omimex and, for
limited purposes, Mr. Ilyas Chaudhary, an officer and director of the Company,
at that time, (the "Parties") entered into the Merger Agreement. As part of
the Merger Agreement, Omimex lent to the Company approximately $4.2 million
("Loan"), the proceeds of which were used to redeem $2 million of stated value
of the Series A Preferred Stock (for approximately $2.15 million) and to pay
$2 million on the Company's outstanding bank indebtedness. The loan by Omimex
originally accrued interest at prime plus two percent and was due 90 days
after termination of the Merger Agreement in the event that the merger was not
consummated. The Merger Agreement provided that if another party acquired
control of the Company and as a result thereof the Merger be cancelled, the
Company was required to pay a break-up fee of $1 million to Omimex.
In July 1998, the Company terminated the engagement of Oppenheimer
effective August 1998.
The Parties agreed by mutual consent to terminate and release each other
from the Merger Agreement effective September 15, 1998 (the "Mutual
Termination and Release Agreement") as the proposed business combination could
not be completed by the expiration date of October 31, 1998 as required under
the terms of the Merger Agreement. As part of the Mutual Termination and
Release Agreement, the interest rate on the secured Loan payable to Omimex and
due by December 14, 1998, in the principal amount of approximately $4.2
million was reduced from prime plus two percent to prime. In compliance with
procedures for securing the Loan from Omimex, Sabacol's legal representative
in Colombia executed, but did not present for notarial inscription by a
Colombian notary public, a public deed or deeds to transfer to Omimex all of
the Company's right, title and interest of the Company in and to the
Velasquez-Galan pipeline held by the Company's wholly owned subsidiary,
Sabacol, Inc. and delivered the deed(s) to Bank One, Texas, N.A., which is
acting as the escrow agent. Sabacol also delivered to the escrow agent an
irrevocable letter of authority authorizing the completion of the execution of
the deed(s) before a Colombian notary public. The escrow agent had been
instructed, pursuant to the terms of an escrow agreement entered into between
Sabacol, Inc., Omimex and Bank One, Texas, N.A. that in the event full payment
of the Loan was delivered by December 14, 1998, then the escrow agent shall
have immediately delivered to Omimex the payment and to the Company the deeds
and the irrevocable letter of authority relating thereto for cancellation. In
the event payment of the loan in full is not delivered by December 14, 1998,
then the escrow agent shall have immediately delivered to Omimex the deeds and
the irrevocable letter of authority relating thereto. Thereafter, Omimex shall
deliver the deeds 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 deeds before a
Colombian notary public by Sabacol's legal representative. Full payment of the
Loan was not delivered by December 14, 1998 to the escrow agent. On December
11, 1998, Sabacol filed for protection of its assets under Chapter 11 of the
United States Bankruptcy Code. (see "The Company - Recent Developments -
Bankruptcy of Sabacol, Inc.") The deeds and the irrevocable letter of
authority relating thereto were not delivered to Omimex on December 14, 1998
under the escrow agreement and the requirements to do so has been stayed
pursuant to the Sabacol's petition for bankruptcy.
Bank Indebtedness
As indicated above, as part of the Merger Agreement, Omimex lent to the
Company $4.2 million, of which $2 million was applied to the Company's
existing bank indebtedness with Bank One, Texas, N.A. (the "Bank"). The Bank
consented to the borrowing from Omimex described in the preceding section and
the application of the proceeds of the loan, including the redemption of $2
million stated value of the Series A Preferred Stock. As a result of that
payment and a payment of $300,000 which was made in May 1998 and continued to
be payable each month thereafter by the Company, the Bank and the Company
entered into a written amendment to the existing loan agreement extending the
maturities of all three short term facilities to July 31, 1998. 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. The
Company's entire principal indebtedness to the Bank of $20.1 million was
classified by the Company as currently payable 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 the Bank are in
discussions to address such non-compliance. There is not any assurance that
the Company will be successful in its discussions with the Bank to address
such non-compliance.
On November 12, 1998, Ilyas Chaudhary resigned as the Company's Chairman,
Chief Executive Officer, and President in order to facilitate the closings of
the pending transactions with Horizontal Ventures, inc. (see "The Comapny -
Recent Developments - Transactions Involving Horizontal Ventures, Inc."). In
connection with various borrowings from the bank, Mr. Chaudhary has guaranteed
payment of approximately $3,000,000 of Company's debt to such bank.
Sale of Certain Assets
The Company has negotiated, and continues to pursue, the sale of certain
producing oil and gas assets and real estate assets, the proceeds of which
have been and will continue to be applied to reduce bank indebtedness and
provide working capital. The Company sold its interest in over 150 producing
wells in Michigan in July 1998 for a contract price of $3.7 million and two
producing wells in Alabama in September 1998 for a contract price of $800,000.
In December 1998, the Company entered into a letter of intent with Capco
Development, Inc. to sell all of the outstanding stock of its wholly-owned
subsidiary, Saba Energy of Texas, Inc. ("SETI"), for a contract price of $5
million and a closing scheduled for December 31, 1998, subject to certain
conditions and adjustments. At the closing, those properties of SETI that will
be part of the sale shall include certain interests located in Michigan, New
mexico, Oklahoma, Texas, Utah, and Wyoming and excludes interests located in
Louisiana. (see "Management - Certain Relationship and Related Transactions")
Transactions Involving Horizontal Ventures, Inc.
In October 1998, Horizontal Ventures, Inc. ("HVI") entered into certain
transactions that relate to the acquisition of securities of the Company,
which have been reported in a Schedule 13D filed by HVI. HVI is a publicly
traded corporation engaged primarily in the business of exploiting proven
producing reservoirs by utilizing a low cost proprietary horizontal drilling
technology to increase production rates.
On October 6, 1998, HVI entered into a Preferred Stock Transfer Agreement
(the "Preferred Stock Transfer Agreement") with RGC International Investors,
LDC ("RGC"), pursuant to which HVI acquired 690 shares of the 8,000 shares of
issued and outstanding Series A Preferred Stock of the Company held by RGC in
exchange for cash in the amount of $750,000, of which $500,000 was borrowed
from International Publishing Holding s.a. ("IPH"), the largest shareholder of
HVI.
Under the Preferred Stock Transfer Agreement, HVI had the exclusive right
until November 5, 1998 to acquire from RGC up to an additional 6,310 shares of
Series A Preferred Stock held by RGC in exchange for cash in the amount of
approximately $6.9 million, and such exclusive right was extended for an
additional thirty days by HVI's payment of $500,000, to RGC. HVI however did
not exercise its right to acquire the additional 6,310 shares of Series A
Preferred Stock prior to the expiration of the extension period. The 690
shares of Series A Preferred Stock acquired by HVI, along with the accrued but
unpaid dividends thereon, is currently convertible into an aggregate of
300,012 shares of the Company's Common Stock based on conversion price
negotiated by HVI and the Company. See "Preferred Stock." HVI currently is
negotiating with RGC to extend and amend the Preferred Stock Transfer
Agreement to enable HVI to acquire the additional 6,310 shares of Series A
Preferred Stock held by RGC.
On October 8, 1998, HVI entered into a Common Stock Purchase Agreement
(the "Common Stock Purchase Agreement") pursuant to which the Company agreed
to sell and issue to HVI by December 4, 1998, an aggregate of 2.5 million
shares of the Company's Common Stock in exchange for cash in the aggregate
amount of $7.5 million. HVI delivered to the Company on November 6, 1998,
$1.0 million in exchange for 333,333 shares of the Company's Common Stock as
part of an interim closing of the Common Stock Purchase Agreement. On December
3, 1998, the Company and HVI extended the final closing date of the Common
Stock Purchase Agreement from December 4, 1998 to January 31, 1999.
Pursuant to an Option Agreement dated July 22, 1998, (the "Option
Agreement") between HVI and IPH, HVI holds a call option to acquire the
500,000 shares of the Company's Common Stock held by IPH at an exercise price
equal to 120% of the cost to IPH of acquiring such shares, which is estimated
to be approximately $1.0 million. HVI has the option of paying such exercise
price to IPH in the form of cash or shares of HVI common stock.
HVI also has 3,080,000 shares of the Company's Common Stock in open
market purchases and other negotiated transactions.
Upon the execution of the Common Stock Purchase Agreement, Randeep S.
Grewal, a director and executive officer of HVI, was appointed to the
Company's Board of Directors. Upon the closing of the Common Stock Purchase
Agreement, a second director designated by HVI is to be appointed to the
Company's Board of Directors. In addition, a letter agreement between HVI and
Saba dated October 8, 1998, provided that upon HVI's conversion of the 7,000
shares of Series A Preferred Stock purchased from RGC a third director
designated by HVI was to be appointed to the Company's Board of Directors. In
connection with the foregoing, the Company has agreed to obtain the
resignations of three of its directors, resulting in the three designees of
HVI representing a majority of seats on the Company's five member Board of
Directors.
On December 7, 1998, HVI and the Company disclosed that the Board of
Directors of the Company approved HVI's proposal to merge with the Company. A
majority of the Company's disinterested Board members voted in favor of the
proposed merger. The Company's Board of Directors plans to call a special
meeting of the Company's stockholders to approve the merger. Under the
proposed merger, the Company's stockholders will receive one share of HVI
common stock for each six shares of the Company's common stock outstanding.
That exchange ratio is based upon (i) a total of 11,385,726 shares of Saba
common stock outstanding (11,052,393 shares outstanding as of December 2, 1998
plus 333,333 shares issued to HVI on December 7, 1998), (ii) a price of $2.02
for the Company's common stock based on a 55 percent premium over the average
closing price of the Company's common stock from November 2, 1998 through
December 2, 1998, and (iii) the average closing price of HVI's common stock of
$12.14 during the same period. Proforma financial statements of HVI and the
Comapny as a combined company have been included with this Prospectus. See
"Financial Statements."
Preferred Stock
The Company has outstanding 8,000 shares of Series A Preferred Stock. The
Certificate of Designations, Preferences and Rights of the Series A Preferred
provides that such shares are convertible into such number of shares of Common
Stock as is determined by dividing the per share stated value ($1,000) of the
shares of Series A Preferred Stock (as increased by accrued but unpaid
dividends) by the average of the closing prices for the Common Stock for any
three consecutive trading days during the preceding thirty day period ending
one day prior to conversion (but in no event will the Conversion Price be
greater than $9.345).
The Series A Preferred Stock agreements effectively prohibited the
Company from performing the Merger Agreement with Omimex without the consent
of the Holders of the Series A Preferred Stock. Concurrently with the
execution of the Merger Agreement, the Company and the Holders executed a
letter agreement, which was approved by Omimex, pursuant to which the Company
redeemed 2,000 shares of then outstanding Series A 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 and modified
the terms of the conversion rights of the Holders (the "Letter Agreement").
Under the Letter Agreement, the 8,000 shares of Series A Preferred Stock may
currently be converted by the Holders and remains subject to redemption by the
Company on the basis of (i) 115% of the stated value plus accrued dividends
and (ii) issuance of a five-year warrant to purchase 200,000 shares of Common
Stock at 105% of the average closing bid price of the Common Stock for the
five consecutive trading days ending one trading day prior to redemption.
The Certificate of Designations, Preferences, and Rights of the Series A
Preferred Stock provides that the Company cannot issue more than 2,153,344
shares of Common Stock underlying the Series A Preferred Stock (19.9% of the
total number of shares of the Company's Common Stock outstanding as of
December 31, 1997) without stockholder approval or a waiver from the American
Stock Exchange ("AMEX") Rule 713. AMEX Rule 713 provides that a company listed
on AMEX may not issue 20% or more of the then outstanding shares of the
company's common stock without first obtaining stockholder approval. Prior to
the issuance of any shares of the Company's Common Stock underlying the Series
A Preferred Stock in excess of 2,153,344 shares and the resale of those shares
pursuant to this Prospectus, the Company will obtain stockholder approval of
the issuance of those shares or a waiver from AMEX Rule 713.
Bankruptcy of Sabacol, Inc.
On December 15, 1998, the Company disclosed that Sabacol, Inc. a wholly-
owned subsidiary of the Comapny ("Sabacol"), filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the Central District of
California on December 11, 1998. Sabacol's assets, located solely in Colombia,
consist of a 50% interest in a 118-mile pipeline and varying interests in
heavy oil producing properties. (see "The Company - Recent Developments -
Terminated Business Combination") At the time of filing, Sabacol had a net
book value of approximately $5.3 million with liabilities of $4.6 million. For
the nine months ended September 30, 1998, the average daily production of
Sabacol's interest in the Colombian properties was 2300 Bopd and gross
revenues were approximately $5.9 million with a negative cash flow. Sabacol
had filed the bankruptcy petition to protect its asset base and to provide
adequate time to develop a reorganization plan. There is no assurance,
however, that a reorganization plan beneficial to Sabacol will be consummated.
The filing is not expected to have any material adverse effect on the Company
and does not change any terms of the proposed merger with Horizontal Ventures,
Inc.
American Stock Exchange
In August 1998, the American Stock Exchange contacted the Company to
inquire about the Company's continued listing eligibility following its report
of losses, bank indebtedness, and going concern and to inquire about the
independent status of the Company's outside directors.
PRINCIPAL PROPERTY AREAS
The Company owned interests in approximately 845 wells at September 30,
1998. The majority of these wells are concentrated along the central coast of
California and in the Middle Magdalena Basin of Colombia. These regions, which
primarily produce a low gravity/high viscosity or "heavy" oil, will be the
focus of the Company's near-term development drilling activities. The Company
also operates wells and has exploration and development activities in several
states outside of California and, through a majority-owned subsidiary, in
western Canada. The Company's evaluation of international projects resulted in
the acquisition of exploration projects in Indonesia and Great Britain.
United States
California
Approximately 20.3% of the Company's proved reserves at December 31, 1997
(5.9 MMBOE) were located in four onshore fields in California's central coast
region (collectively, the "Central Coast Fields"). Daily production from the
Central Coast Fields averaged 1,484 BOE for the nine months ended September
30, 1998, representing 23.3 % of the Company's total production. The Company
operates all of its wells in the Central Coast Fields. The Company also holds
interests in other California areas, which represented 7.2% (2.1 MMBOE) of the
Company's proved reserves at December 31, 1997. Daily production from these
other interests averaged 658 BOE for the nine months ended September 30, 1998,
representing 10.3% of the Company's total production. Further, the Company has
interests in several high risk exploratory projects.
Louisiana
Approximately 11.0% of the Company's proved reserves at December 31, 1997
(3.2 MMBOE) were located in two fields in Louisiana. An interest in one of
these fields was first acquired during 1996, the other in 1997, with
additional interests in both fields acquired in April of 1998. The Company's
share of daily production from the Louisiana fields averaged 644 BOE for the
nine months ended September 30, 1998, representing 10.1 % of the Company's
total production.
Other States
In addition to its California and Louisiana properties, the Company owns
producing properties in a number of other states, primarily New Mexico,
Michigan, Texas and Oklahoma, which collectively represented 9.3% of the
Company's proved reserves at December 31, 1997 (2.7 MMBOE). Daily production
from these properties averaged 778 BOE for the nine months ended September 30,
1998, representing 12.2 % of the Company's total production. The Company
however plans to sell some of the Company's non-core assets in some of those
states. See "The Company - Recent Development - Sale of Certain Assets."
International
Colombia
Approximately 43.3% of the Company's proved reserves at December 31, 1997
(12.6 MMBOE) were located in several fields in Colombia's Middle Magdalena
Basin. Daily production from these fields averaged 2,302 Bopd for the nine
months ended September 30, 1998, representing 36.2% of the Company's total
production. The Company also holds a 50% interest in the 118-mile Velasquez-
Galan Pipeline, which connects the fields to a 250,000 Bopd government-owned
refinery at Barrancabermeja. See "The Company - Recent Developments -
Terminated Business Combination." The Company and Omimex, the operator of the
fields, have formulated a plan for drilling approximately 200 development
wells.
During 1997, the Company and the operator participated in the drilling or
recompletion of thirteen wells in the Teca and South Nare Fields. All of the
wells drilled were productive and the operator is installing steaming
equipment. The Company and the operator also reentered a suspended well
acquired from Texaco and drilled to an area under the Magdalena River and
recompleted the well as productive of approximately 30 Bopd without artificial
stimulation. Both the Company and the operator believe that another two wells
should be drilled into the area in an effort to establish an additional
commercial area. During the nine months ended September 30, 1998, the Company
and the operator participated in the drilling and completion of seven wells in
the Teca and South Nare Fields. Three additional wells were recompleted during
the nine months ended September 30, 1998. Sabacol, the Company's wholly-owned
subsidiary and owner of the Company's properties in Colombia, has filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code. See
"The Company - Recent Developments - Terminated Business Combination;
Bankruptcy of Sabacol, Inc."
Canada
Approximately 8.9% of the Company's proved reserves at December 31, 1997
(2.6 MMBOE) were located in Canada. Daily production from these properties,
which are owned through an approximately 74%-owned subsidiary of the Company,
averaged 495 BOE for the nine months ended September 30, 1998, representing
7.8% of the Company's total production.
Other International Properties
In September 1997, the Company and Pertamina, the Indonesian state-owned
oil company, signed a production sharing contract covering 1.7 million
unexplored acres on the Island of Java near a number of producing oil and gas
fields. This agreement will require the Company to spend approximately $17.0
million over the next three years on this project, in addition to the
approximate $1.4 million expended as of December 31, 1997. The Company is
seeking a joint venture partner to share the costs of this project; however,
the recent economic turmoil in Indonesia may affect the timing and terms of
such agreement.
In July 1997, the Company entered into an agreement to become the
operator and a 75% working interest holder of two exploration licenses which
cover a 123,000 acre exploration area in southern Great Britain. On March 31,
1998, the Company assigned a 3.75% carried working interest in the first well
to be drilled on this concession as payment of a finder's fee. By agreement
dated April 14, 1998, the Company sold one half of its net interest in this
concession to Omimex at the Company's cost. A formal assignment has not been
conveyed to Omimex and the Company continues to hold Omimex's interest in the
prospect trust. The Company has incurred costs of approximately $766,000 as
of September 30, 1998, in connection with the concession acquisition and
drilling of an exploratory well on the concession. The well did not encounter
hydrocarbons and has been abandoned. Results from the initial well did not
condemn the entire prospect and data obtained from the test well is being
evaluated for further interpretation. The Company has not yet executed the
joint operating agreement for the prospect. While holding Omimex's interest in
trust, the Company may be liable to Omimex if it were to execute the joint
operating agreement that provides for foreclosure upon a working interest
owner due to non-payment.
SUMMARY FINANCIAL DATA
The following table presents summary historical consolidated financial
data of the Company as of and for each of the five years in the period ended
December 31, 1997 and the nine months ended September 30, 1997 and 1998, which
has been derived from the Company's consolidated financial statements. The
information in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere
herein. (in thousands, except for per share data)
<TABLE>
Years Ended Nine Months Ended
December 31, September 30,
1993 1994 1995 1996 1997 1997 1998
Statement of Operations Data
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $10,530 $12,954 $17,694 $33,202 $35,996 $26,778 $18,683
Expenses:
Production
costs (1) 5,857 7,547 10,561 14,604 16,607 12,250 10,140
General and
administrative 2,503 1,882 2,005 3,920 5,125 3,468 4,974
Depletion,
depreciation and
amortization 1,853 2,041 2,827 5,527 7,265 5,011 5,500
Writedown of
oil and gas
properties (6) - - - - - - 17,852
Interest expense 443 634 1,364 2,402 2,305 1,421 2,519
Net income (loss) (88) 509 547 3,765 2,397 2,548 (23,498)
Net earnings
(loss) per share
- basic (2): (0.01) 0.06 0.07 0.43 0.23 0.24 (2.17)
Weighted average
common shares
outstanding -
basic (2): 7,065 7,996 8,327 8,804 10,650 10,596 10,994
Statement of Cash Flow Data
Net cash
provided by
operating
activities $503 $3,346 $1,736 $6,914 $14,954 $11,977 $4,683
Net cash
used in
investing
activities (1,439) (3,930) (16,757) (11,856) (36,166) (30,813) (599)
Net cash
provided by
(used in)
financing
activities 958 860 14,850 5,037 21,991 18,331 (4,397)
Other Data
EBITDA (3) $2,171 $3,568 $5,188 $14,652 $13,843 $10,780 $2,522
Capital
expenditures (4) 2,372 6,573 17,015 12,776 35,270 29,080 9,216
Production (MBOE) 755 980 1,450 2,243 2,508 1,875 1,736
</TABLE>
<TABLE>
December 31, September 30,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital
(deficit) $(860) $(2,422) $2,471 $2,418 $(11,724) $(29,752)
Total assets 13,261 18,108 39,751 49,117 77,657 53,921
Current portion of
long-term debt 1,440 2,357 505 1,806 13,442 25,173
Long-term debt,
net (5) 4,875 5,323 23,543 20,812 19,610 5,347
Redeemable
preferred stock - - - - 8,511 7,169
Stockholders'
equity 4,407 6,283 7,848 17,715 23,640 30
</TABLE>
(1) Production costs include production taxes.
(2) As adjusted for a two-for-one stock split in the form of a stock
dividend paid in December 1996.
(3) EBITDA represents earnings before interest expense, provision (benefit)
for taxes on income, depletion, depreciation and amortization, and
writedown of oil and gas properties. EBITDA is not required by GAAP and
should not be considered as an alternative to net income or any other
measure of performance required by GAAP or as an indicator of the
Company's operating performance. This information should be read in
conjunction with the Consolidated Statements of Cash Flows contained in
the Consolidated Financial Statements of the Company and the Notes
thereto.
(4) Capital expenditures in 1995 include $10.0 million expended in
connection with acquisitions of producing properties in Colombia. The
acquisitions were principally responsible for the significant increase
in results of operations reported by the Company in 1995 and 1996. For
additional information, see Note 2 of Notes to Consolidated Financial
Statements of the Company.
(5) For information on terms and interest, see Note 8 of Notes to
Consolidated Financial Statements of the Company.
(6) See Note 4 of Notes to Consolidated Financial Statements for more
information with respect to the write down of oil and gas properties.
SUMMARY OIL AND GAS RESERVE DATA
The following table sets forth certain summary information as of December
31, 1995, 1996 and 1997 regarding the Company's interests in estimated proved
oil and gas reserves, the Company's estimated future net revenues therefrom
(before income taxes), the PV-10 Value thereof and other data concerning the
reserves of the Company for those years. Estimates are based upon average
year-end prices of $11.30, $17.05 and $13.13 per BOE on December 31, 1995,
1996 and 1997, respectively, at each date holding prices constant throughout
the life of the properties in accordance with regulations of the Securities
and Exchange Commission (the "Commission"). This information is based upon
numerous assumptions and is subject to various uncertainties. See "Risk
Factors - Factors Relating to the Oil and Gas Industry and the Environment -
Uncertainty of Estimates of Reserves and Future Net Revenues," "Business - Oil
and Gas Reserves" and "Supplemental Information About Oil and Gas Producing
Activities (Unaudited)" following the Notes to the Consolidated Financial
Statements of the Company. This summary oil and gas reserve information is
based on the reserve reports of Netherland, Sewell & Associates, Inc. and
Sproule Associates Limited, independent petroleum engineers. There can be no
assurance that volumes, prices and costs employed by the independent petroleum
engineers will prove accurate. Since December 31, 1997, oil and gas prices
have generally declined. At such date the price of West Texas Intermediate
("WTI") crude oil as quoted on the New York Mercantile Exchange was $18.30 per
Bbl and the comparable price at November 30, 1998 was $11.22. Quotations for
the comparable periods for natural gas were $2.45 per Mcf and $1.98 per Mcf,
respectively. A decline in prices will result in a reduction in volumes of oil
or gas which are ultimately recoverable, since certain remaining reserves will
become marginal earlier.
<TABLE>
December 31,
1995 1996 1997
<S> <C> <C> <C>
Estimated Net Proved Reserves:
Oil (Mbbls) 12,532 26,679 23,925
Gas (Mmcf) 19,479 23,665 31,296
Total (MBOE) 15,778 30,623 29,141
Estimated future net revenues
(before income taxes)
(in thousands) $73,525 $253,902 $183,578
PV-10 Value
(before income taxes)
(in thousands)(1) $48,155 $155,939 $118,629
Reserve Replacement Data:
Production replacement
ratio (2) 5.9x 7.7x 1.4x
All-in finding costs per BOE $2.02 $3.15 $4.49
</TABLE>
(1) Present value of estimated future net revenues before income taxes,
discounted at 10% per annum.
(2) Calculated by dividing (i) reserve additions through acquisitions of
reserves, extensions and discoveries and revisions during the year by
(ii) production for such year.
SUMMARY OPERATING DATA
The following table sets forth certain summary operating data with
respect to the Company's oil and gas operations for the periods indicated.
<TABLE>
Year Ended December 31, Nine Months Ended
September 30,
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Production Data:
Oil (Mbbls) 1,227 1,968 2,107 1,581 1,431
Gas (Mmcf) 1,337 1,651 2,408 1,767 1,831
Total (MBOE) 1,450 2,243 2,508 1,875 1,736
Average Sales Price
Data (Per Unit):
Oil (Bbls) $12.22 $14.45 $13.73 $13.81 $8.80
Gas (Mcf) 1.45 1.88 2.09 1.95 1.73
BOE 11.69 14.05 13.54 13.48 9.08
Selected Data per BOE:
Production
costs (1) $7.29 $6.51 $6.62 $6.53 $5.84
General and
administrative 1.27 1.75 1.93 1.77 2.67
Depletion,
depreciation and
amortization 1.92 2.43 2.84 2.63 3.05
</TABLE>
(1) Production costs include production taxes.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements contained in this Prospectus, such as those concerning
the Company's business strategy, governmental regulation, drilling programs,
potential acquisitions, future production amounts, values and revenues,
capital requirements and other statements regarding matters that are not
historical facts are "forward-looking" statements (as such term is defined in
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")). Statements that the Company or
management "believes", "expects", "anticipates", "intends", "plans", or that
refer to future events or plans are intended to identify the statements which
follow as "forward looking" statements. Because such forward looking
statements include risks and uncertainties, actual results may differ
materially from those expressed in or implied by such forward looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed herein under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." In addition, such factors include the price and
demand for oil and gas and refined products and the cost and supply of
drilling equipment and materials.
RISK FACTORS
Prospective investors should read the entire Prospectus carefully and
should consider, among other things, the risk factors set forth below.
Factors Relating to the Company
Effect of Price Declines
Most of the oil produced by the Company is of low gravity. Production
costs of such oil are generally much higher than production costs of higher
gravity oil. Consequently, heavy oil properties, such as those owned by the
Company, tend to become marginally economic in periods of declining oil
prices, such as that presently existing. This is true of the Company's
California heavy oil properties most of which, at present prices, remain
economic to produce; should prices continue to decline, much of the Company's
California production will become marginally economic and certain of its
properties may be temporarily removed from production.
During 1997, the Company embarked upon an aggressive development program
of its Cat Canyon and Gato Ridge heavy oil properties. This program included
the installation of surface facilities for handling much more oil than the
Company presently produces from such properties. The recent decline in prices
and the results of the 1997 drilling program render it doubtful that the
Company will realize the value of these installations within the foreseeable
future.
Near Term Cash Requirements
Bank Credit Facility
The Company maintains a reducing revolving credit facility with Bank One,
Texas, N.A. As provided for in the loan agreement, the Bank, applying its
internal projections of future oil and gas prices and applying its internal
discount factors to each classification of proved reserves, prepares its own
estimate of the Company's remaining reserves and the projected cash flows from
those reserves. In the event that the Bank's estimate of the loan value of the
Company's reserves ("borrowing base") is less than the outstanding loan
balance, the Bank may require the Company to (i) post additional collateral or
(ii) make additional payments in reduction of its indebtedness. In accordance
with the current terms of the reducing revolving credit facility, $3.6 million
of the outstanding balance may be payable within the next year depending upon
the Bank's determination of the borrowing base. In addition to the reducing
revolving credit facility, the Company's lending Bank has advanced three
short-term loans with an aggregate outstanding balance of $4.5 million at
September 30, 1998, all of which matured on July 31, 1998. As indicated under
the caption "Recent Developments" the Company borrowed funds from Omimex,
with which it has reduced Saba's Bank debt by $2.0 million and is in
discussions with the Bank to address its non-compliance with financial
covenants in the loan agreement. At September 30, 1998, the loan value of the
Company's oil and gas properties under the Bank's lending parameters was
$13.4 million and the outstanding loan balance as of such date (and after the
$2.0 million principal reduction) was $20.1 million.
The Company's Canadian subsidiary has a fully advanced borrowing base
revolving loan of $1.5 million at September 30, 1998 of which $393,000 is
classified as a current liability in that it may be payable over the next
year.
Further, accounts payable and accrued liabilities increased $6.3 million
over accounts receivable, cash balances, and other current assets during the
nine months ended September 30, 1998, due primarily to the Company's year end
drilling activities which contributed to the decrease in working capital. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Going Concern Qualification in Auditors Opinion
In that the current maturities of the Company's bank debt are in excess
of the Company's apparent ability to meet such obligations as they come due,
the Company's auditors have included an explanatory paragraph in their opinion
on the Company's 1997 financial statement to state that there is substantial
doubt as to the Company's ability to continue as a going concern. See "The
Company - Recent Developments - Going Concern Status". 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. Further, the Company
has listed for sale with sales agents certain of its non-core oil and gas
assets and real estate assets, located in Louisiana, Michigan, Wyoming, Texas
and California. The proceeds of such sales, if any, will 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 divestiture 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.
Capital Requirements of Exploratory and Development Operations
The Company is in a capital intensive industry. Its immediate needs for
capital will intensify should the Company be successful in one or more of the
exploratory projects it is undertaking, in that it is likely that the Company
will be required to drill several more wells on the apposite property to
demonstrate the existence of commercial reserves. Should a commercial
discovery exist, additional costs are likely to be incurred to create
transportation and marketing infrastructure. Major exploratory projects often
require substantial capital investments and a significant amount of time
before generating revenues.
Continuation of the Company's exploratory and development programs will
require more cash than the Company's properties will generate from operations
at present price levels. The Company plans to attempt to sell or dispose of
its non-core oil and gas properties which should result in the receipt of
significant amounts of cash by the Company during 1998, a major portion of
which may be applied to the Company's bank indebtedness. However, the timing
of any sale and the amounts realized therefrom nevertheless may not be
sufficient or early enough to permit the Company to make its bank payments and
fund its committed exploration activities, in which cases the Company would be
required to seek other financing or attempt to reduce its exploratory
commitments. There is no assurance that the Company will be able to do either
or that the terms of any new financing or reduction in commitments will be
favorable to the Company.
The Company's Series A Preferred Stock contains provisions which under
certain circumstances of default currently existing require the Company to
redeem that series at a price equal to 115% of its stated value. See
"Description of Capital Stock-Preferred Stock. The Company does not presently
have the funds with which to redeem the Series A Preferred Stock. See "Recent
Developments" for a discussion of the Company's redemption of $2 million of
Stated Value of the Series A Preferred Stock and "Description of Capital Stock
Preferred Stock." See also "Risk Factors Potential Dilution Outstanding
Preferred Stock." RGC had agreed to waive any default by the Company prior to
the closing of the sale of 7,000 shares of Series A Preferred Stock in the
aggregate to HVI under the terms of the Preferred Stock Transfer Agreement.
The sale of 7,000 shares of Series A Preferred Stock has not closed under the
terms of the Preferred Stock Transfer Agreement, and RGC and HVI are in
negotiations to extend the closing. HVI has agreed with the Company that after
acquiring 7,000 shares of the Series A Preferred Stock and upon HVI's
conversion of any such shares, HVI will waive any of the defaults in existence
with respect to the Series A Preferred Stock.
Restriction on Payment of Dividends
The Company has not paid any cash dividends on its Common Stock to date
and has no plans to pay such dividends in the foreseeable future. The payment
of cash dividends in the future will be dependent on the Company's future
earnings and financial condition. Pursuant to the terms of the Company's
credit facility and the terms of its Series A Preferred Stock and its
Debentures, the Company is prohibited from making any cash dividend payments
on its Common Stock without the specific consent from the lending bank, the
holders of the Series A Preferred Stock and the holders of the Debentures.
Dependence on Key Personnel
The Company depends upon the efforts and skills of its key executives.
The Company has employment agreements with certain key employees. See
"Management Benefit Plans and Employment Agreements - Employment Agreements."
The success of the Company will depend, in part, on its ability to manage its
assets and attract and retain qualified management and field personnel. There
can be no assurance that the Company will be able to hire or retain such
personnel. In addition, the loss of key personnel could have a material
adverse effect on the Company.
Volatility of Common Stock
The market price for the Common Stock has been extremely volatile in the
past and could continue to fluctuate significantly in response to the results
of drilling one or more wells, variations in quarterly operating results and
changes in recommendations by securities analysts, as well as factors
affecting the securities markets or the oil and gas industry in general. See "
Factors Relating to the Oil And Gas Industry and the Environment." Further,
the trading volume of the Common Stock is relatively small, and the market for
the Common Stock may not be able to efficiently accommodate significant trades
on any given day. Consequently, sizable trades of the Common Stock have in the
past, and may in the future, cause volatility in the market price of the
Common Stock to a greater extent than in more actively traded securities.
These broad fluctuations may adversely affect the market price of the Common
Stock. See "Price Range of Common Stock and Dividend Policy."
Shares Eligible for Future Sale
On December 17, 1998 the Company had outstanding 11,385,726 shares of
Common Stock. Of these shares, 8,014,467 shares of Common Stock were freely
transferable and tradable without restriction or further registration under
the Securities Act. In addition, approximately 817,143 shares of Common Stock
may currently be issued upon the conversion of the outstanding Debentures of
the Company. See "Shares Eligible For Future Sale."
Potential Dilution-Outstanding Preferred Stock
As of December 17, 1998, 8,000 shares (of an originally issued
10,000 shares) of the Company's Series A Preferred Stock were issued and
outstanding. Each share of the Series A Preferred Stock is convertible into
such number of shares of Common Stock as is determined by dividing the per
share stated value ($1,000) of the shares of Series A Preferred Stock (as
increased by accrued but unpaid dividends as of September 30, 1998) by the
then current Conversion Price (which is determined by reference to the then
current market price, but in no event will the Conversion Price be greater
than $9.345). If converted at December 17, 1998, based on a Conversion Price
of $2.50 for HVI's 690 shares of Series A Preferred Stock and $1.083 for the
remaining Series A Preferred Stock (the average of the closing prices for the
Common Stock for any three consecutive trading days during the preceding
thirty day period, the remaining 8,000 shares of Series A Preferred Stock
would have been convertible into 7,053,509 shares of Common Stock; however,
the Certificate of Designations, Preferences and Rights of the Series A
Preferred Stock provides that without waiver by the American Stock Exchange of
its rules, the Company would be permitted to issue only 2,153,344 shares of
Common Stock without a shareholders' vote approving the issuance of additional
shares. For the foregoing example, the lowest price averaged during such three
day period has been used. The number of shares of Common Stock which may be
required to be issued could prove to be even greater in the event of decreases
in the trading price of the Common Stock assuming that the required
shareholder approval is obtained. Purchasers of Common Stock could therefore
experience substantial dilution of their investment upon conversion of the
Series A Preferred Stock.
The shares of Series A Preferred Stock are not registered and may be sold
only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. See "Recent
Developments" for information concerning the recent redemption of a portion of
the Series A Preferred Stock.
On December 31, 1997, warrants to purchase 224,719 shares of Common Stock
were issued to the purchasers of the Series A Preferred Stock and warrants to
purchase 44,944 shares of Common Stock were issued to Aberfoyle Capital Ltd.
as a fee in connection with the placement of the Series A Preferred Stock.
Each of those warrants are exercisable for a three year period from December
31, 1997. The initial exercise price of those warrants was $10.68 (as may be
adjusted from time to time under certain antidilution provisions). In June
1998, in connection with securing the consent of the holder of the Series A
Preferred Stock holders to the business combination with Omimex, the exercise
price of the warrants held by the holders of the Series A Preferred Stock was
reduced to $2.5875. In connection with the issuance of the Series A Preferred
Stock, the purchaser of the Series A Preferred Stock received the right to be
issued warrants to acquire 200,000 shares of Common Stock should the Company
redeem the Series A Preferred Stock. Those warrants are exercisable at 105% of
the average daily closing price during the five trading days ending one
trading day prior to the redemption date of the Series A Preferred Stock. The
shares of Common Stock issuable upon exercise of the warrants are being
registered pursuant to the Registration Statement of which this Prospectus
forms a part.
The Series A Preferred Stock contains terms that impose restrictions on
the Company, with which the Company may not be in compliance, and may hinder
the Company's ability to raise additional capital. In addition, because the
conversion price of the Series A Preferred Stock is determined based on the
market price of the Common Stock, the conversion of the Series A Preferred
Stock could be extremely dilutive to the holders of Common Stock. See
"Description of Capital Stock Preferred Stock."
Authorization of Preferred Stock
The Company's Board of Directors has the authority to issue up to
49,990,000 additional shares of preferred stock and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued. The issuance of preferred stock could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present
plans to issue additional shares of preferred stock. See "Description of
Capital Stock."
Potential Dilution-Substantial Options, Warrants and Debentures
Outstanding
At November 30, 1998, the Company had granted outstanding options to
employees and consultants to purchase up to 1,028,000 shares of Common Stock
at exercise prices ranging from $1.25 to $15.50 with a weighted average
exercise price of $7.71 per share. The terms of such grants may require the
shares of Common Stock to be registered under the Securities Act of 1933 and
listed on the American Stock Exchange. The Company has not entered into
agreements with some or all of the Company's employees and consultants to whom
options to purchase Common Stock were granted. Additionally, as of November
30, 1998, the Company had outstanding Debentures in the aggregate principal
amount of $3,575,000, which may convert into Common Stock at a price of $4.375
per share (817,143 shares). If Common Stock prices improve, the Company
anticipates calling for the redemption of the Debentures in the next year,
which will likely result in a substantial number of the holders converting the
Debentures prior to the redemption date. In addition, on December 31, 1997,
the Company issued warrants to purchase 269,663 shares of Common Stock at an
amended exercise price described under the caption "Risk Factors Possible
Dilution Preferred Stock." In addition, if the Company redeems the Series A
Preferred Stock it will be obligated to issue warrants (the "Redemption
Warrants") to purchase 200,000 shares of Common Stock at an exercise price
determined based on the price of the Common Stock at the time of such
redemption. The shares of Common Stock issuable upon exercise of the
Redemption Warrants are being registered pursuant to the Registration
Statement of which this Prospectus forms a part.
The existence of these options, warrants and Debentures may hinder future
financings by the Company and the exercise of such options and warrants and
conversion of such Debentures will dilute the interests of all other
stockholders. The possible future resale of Common Stock issuable on the
exercise or conversion of these options, warrants and Debentures could
adversely affect the prevailing market price of the Common Stock. Further, the
holders of options and warrants may exercise them and adversely affect the
market price of Common Stock at a time when the Company would otherwise be
able to obtain additional equity capital on terms more favorable to the
Company. See "Description of Capital Stock Common Stock" and "Principal
Stockholders."
Dependence on Key Customers
Empresa Colombiana de Petroles ("Ecopetrol"), which also owns a 50%
working interest in the Company's Colombian Nare Association properties, is
the only viable purchaser of the Company's oil production in Colombia, which
accounted for 31.4% and 33.4% of the Company's total oil and gas revenues in
the year ended December 31, 1997, and the nine months ended September 30,
1998, respectively. Prices received from the sale of oil produced at the
Company's Colombian properties are determined by formulas set by Ecopetrol.
The formula for determining the price paid for crude oil produced at the
Company's Colombian properties is based upon the average of specified fuel oil
and international crude oil prices, which average is then discounted relative
to the price of West Texas Intermediate crude oil. The formula is expected to
be adjusted again by Ecopetrol in February 1999. There can be no assurance
that Ecopetrol will not decrease the prices it pays for the Company's oil in
the future. A material decrease in the price paid by Ecopetrol would have a
material adverse effect on the Company's financial condition and future
operations. Also, the loss of Ecopetrol as a purchaser could have a material
adverse effect on the Company. See "Business-Marketing of Production."
Much of the Company's domestic production is heavy, low gravity, viscous
crude oil from the Central Coast Fields. Often these crudes contain
significant amounts of sulfur and metals, which make it undesirable feedstock
for most refineries. In times of excess supply of competitive crudes and low
producer prices, these crudes are often the first crudes rejected by
California crude purchasers. This means that the demand and price paid for
much of the Company's production from the Central Coast Fields can vary
significantly. Substantially all of the Company's production from the Central
Coast Fields is sold to PetroSource, which in turn, has such oil processed at
the Company's asphalt refinery in Santa Maria, California (the "Santa Maria
Refinery"). The operation and ownership of the Santa Maria Refinery is
important to the Company because it creates additional demand for the
Company's heavy gravity crudes.
Dependence on Operator
For the nine months ended September 30, 1998, approximately 13.2% of the
Company's United States oil and gas production was derived from properties
operated by Omimex. All of the Company's Colombian properties are operated by
Omimex (together with Ecopetrol and the Colombian governmental authorities
necessary to operate the properties). The speed and success of the Company's
Colombian development and exploration efforts depend on the competence and
proficiency of Omimex. Further, because of its minority ownership in the oil
and gas interests in this jointly owned property, the Company does not have
the ability to materially influence the development and exploration plans for
such properties or, without the cooperation of Ecopetrol, remove Omimex as
operator. The costs and results of operations conducted by Omimex are not
within the control of the Company. See "Factors Relating to the Oil and Gas
Industry and the Environment - Colombian Operations."
Risks Relating to Certain Corporate Matters
Under previous management and prior to its reincorporation as a Delaware
corporation in 1997, the Company did not make various required filings with
the Commission, may not have complied with requisite corporate formalities,
may have failed to accord stockholders the right to exercise preemptive rights
(the right of an existing stockholder to purchase additional shares to prevent
dilution of its ownership percentage) and may have failed to validly adopt a
material amendment to its Articles of Incorporation. In addition, the Company
has been unable to locate all of its original minutes for meetings of the
Board of Directors and stockholders and stock records for much of its early
history. Further, until the Company's 1997 Annual Meeting of Stockholders, the
Company had not notified stockholders of their right to cumulative voting (the
right of a stockholder to accumulate his votes and cast all of them for less
than all of the nominees for director). When these matters were discovered,
the Company took corrective, ratifying and other actions designed to mitigate
the effect of these matters, including obtaining waivers from over ninety
percent of the shares entitled to exercise preemptive rights and securing an
indemnity from Capco Resources Ltd., a company which at that time was the
owner of approximately 50.3% of the Company and controlled by Ilyas Chaudhary,
the Company's former Chairman, Chief Executive Officer and President.
Additionally, since Mr. Chaudhary would have been entitled to elect a majority
of the Board of Directors of the Company, the Company believes that the
failure to inform stockholders of the existence of cumulative voting did not
have a material effect upon the election of previous Boards. For further
information regarding these matters and the risks related thereto, see the
discussion contained under the caption "Risk Factors Relating to the Company
- - Risks Relating to Certain Corporate Matters" in the Company's Form SB-2
Registration Statement (File No. 33-94678) dated December 20, 1995, filed with
the Commission pursuant to Rule 424(b) under the Securities Act, and under the
caption "Description of Business - General - Development of the Business of
Saba" in the Report on Form 10-KSB for the year ended December 31, 1996, filed
with the Commission (File No. 1-12322) under the Securities Exchange Act of
1934, as amended, which can be obtained from the Commission. See "Available
Information".
A substantial portion of the Company's Common Stock held directly or
indirectly by Ilyas Chaudhary, former Chief Executive Officer and President,
has been pledged to secure debt. During 1998, shares of the Common Stock were
sold by lenders as a result of Mr. Chaudhary's inability to pay the margin
debt. Such sales may have contributed to the decline in the price of the
Common Stock. At November 30, 1998, approximately 1.27 million shares of
Common Stock owned by Mr. Chaudhary were subject to pledge to secure
indebtedness of approximately $318,000.
Wells Operated Under Joint Operating Agreements
Many of the Company's business activities are conducted through joint
operating agreements in which the Company owns a partial interest in oil and
gas wells and the wells are operated by the Company or another joint owner. If
the Company is the operator, it has the risk that one of the joint owners may
not pay the owner's share of costs. If the Company is not the operator, it has
risks because it must reimburse the operator for the Company's share of costs
incurred by the operator, and the Company does not have control over operating
procedures and expenditures of the operator.
Corporate and Reporting Compliance
The Company is qualified and licensed to transact business as a foreign
corporation in the jurisdiction of California doing business as ("DBA")
Delaware Saba Petroleum Company. Saba Petroleum, Inc., a California
corporation, is a wholly-owned subsidiary of the Company and had consented to
the Company's DBA in California as Saba Petroleum Company. The Company's
request to the California Secretary of State to change its DBA to Saba
Petroleum Company was, however, denied for similarity notwithstanding the
wholly-owned subsidiary's consent. No further action has been taken either
with respect to the change of the Company's DBA or the implementation in
California of the DBA.
Effective in January 1998, the Company acquired the remaining partnership
interest in MV Ventures, GP, a partnership in which the Company was the only
other partner. Pursuant to the terms of the partnership agreement for MV
Ventures, GP, the Company had determined that the partnership had dissolved,
without having to wind up and liquidate its affairs, and that the sole
remaining partner, the Company, may continue the business of the partnership.
Franchise taxes, local taxes and/or tax returns are or may be outstanding
for the Company and its subsidiaries. As a result some of the Company's
subsidiaries are not in good standing in jurisdictions in which the Company
does business.
The Company is in receipt of a notice of default from Colombian tax
authorities for the outstanding payment of income taxes for the year 1997
attributable to Sabacol, Inc., a wholly-owned subsidiary of the Company, in
the principal amount of $2.64 billion Colombian pesos. The outstanding
principal amount may accrue interest until paid at the current rate of
approximately 33% and increasing to 55% on April 1, 1999. The Colombian
government is identified as a creditor of Sabacol, Inc. in its petition filed
under Chapter 11 of the U.S. Bankruptcy Code. (See "The Company Recent
Developments Bankruptcy of Sabacol, Inc.")
The Company's United Kingdom subsidiary forfeited its U.K. residence
address provided by counsel for non-payment of legal fees. The U.K. counsel
also served as corporate secretary, and the subsidiary's first annual meeting
to be held in June, 1998 has not yet been completed to the Company's
knowledge. The Company's appointment of officers has not yet been recorded in
the minute book.
Governmental Programs
The Company has completed the establishment of Department of
Transportation ("DOT") programs for the drug and alcohol screening for all
employees who are and have been working on DOT regulated vacuum trucks and is
in the process of doing the same on DOT regulated pipelines in use by the
Company.
Legal Proceedings
The Company is subject to certain legal proceedings. See "Business
Strategy - Legal Proceedings"
Risks Relating to the Oil and Gas Industry and the Environment
Volatility of Commodity Prices and Markets
Oil and gas prices have been and are likely to continue to be volatile
and subject to wide fluctuations in response to relatively minor changes in
the supply of and demand for oil and gas, market uncertainty, political
conditions in international oil producing regions, the extent of domestic
production and importation of oil and gas in certain relevant markets, the
level of consumer demand, weather conditions, the competitive position of oil
or gas as a source of energy as compared with other energy sources, the
refining capacity of oil purchasers, the effect of federal, state and local
regulation on the production, transportation and sale of oil and political
decisions such as trade restrictions or the sale of strategic energy reserves.
Adverse changes in the market for oil and gas or the related regulatory
environment would likely have an adverse effect on the price of the Company's
Common Stock and the Company's ability to obtain capital or partners for its
projects. See " Factors Relating to the Company -Dependence on Key Customers."
Uncertainty of Estimates of Reserves and Future Net Revenues; Decline in
Oil and Gas Prices
The proved developed and undeveloped oil and gas reserve figures
presented in this Prospectus are estimates based on reserve reports prepared
by independent petroleum engineers at a particular point in time and based on
specific pricing assumptions which may no longer be valid. Changes in pricing
assumptions can have a material effect on the estimated reserves. Since
December 31, 1997, oil and gas prices have generally declined. At November 30,
1998, the price of WTI crude oil as quoted on the New York Mercantile Exchange
was $11.22 per Bbl and the comparable price at December 31, 1997, was $18.30.
Quotations for natural gas at such dates were $1.98 per Mcf and $2.45 per Mcf,
respectively. Estimating reserves requires substantial judgment on the part of
the petroleum engineers, resulting in imprecise determinations, particularly
with respect to new discoveries. Estimates of reserves and of future net
revenues prepared by different petroleum engineers may vary substantially,
depending in part on the assumptions made, and may be subject to material
adjustment. There can be no assurance that the pricing and production
assumptions will be realized. Estimates of proved reserves may vary from year
to year reflecting changes in the price of oil and gas and results of drilling
activities during the intervening period. Reserves previously classified as
proved undeveloped may be completely removed from the proved reserves
classification in a subsequent year as a consequence of negative results from
additional drilling or product price declines which make such undeveloped
reserves non-economic to develop. Conversely, successful development and/or
increases in product prices may result in additions to proved undeveloped
reserves. Estimates of proved undeveloped reserves, which comprise a
substantial portion of the Company's reserves, are, by their nature, much less
certain than proved developed reserves. Consequently, the accuracy of
engineering estimates is not assured. See "Business - Oil and Gas Reserves."
Replacement of Reserves; Exploration, Exploitation and Development Risks
The Company's success will largely depend on its ability to replace and
expand its oil and gas reserves through the development of its existing
property base, the acquisition of other properties and its exploration
activities, all of which involve substantial risks. There can be no assurance
that these activities will result in the successful replacement of, or
additions to, the Company's reserves. Successful acquisitions of producing
properties generally require accurate assessments of recoverable reserves,
future oil and gas prices, drilling, completion and operating costs, potential
environmental and other liabilities and other factors. After acquisition of a
property, the Company may begin a drilling program designed to enhance the
value of the prospect. The Company's drilling operations may be curtailed,
delayed or cancelled as a result of numerous factors, including title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment, including drilling rigs.
Furthermore, even if a well is drilled and completed as capable of production,
it does not ensure a profit on the investment or a recovery of drilling,
completion and operating costs. A portion of the Company's oil and gas leases
require that the working interest owner continuously drill wells on the lands
covered by the leases until such lands are fully developed. Failure to comply
with such obligations could result in the loss of a lease. In addition,
foreign concessions (such as the Company's Indonesian Concession) impose
substantial work obligations upon the concession holder. See "Business -
Exploration and Development Drilling Activities."
Writedowns of Carrying Values
The Company periodically reviews the carrying value of its oil and gas
properties under the full cost accounting rules of the Commission. Under these
rules, capitalized costs of oil and natural 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. 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, even if prices declined for only a short period of time, and even
if prices increase in subsequent periods. The risk that the Company will be
required to write down the carrying value of its oil and natural gas
properties increases when oil and natural gas prices are depressed or decline
substantially. If a write down is required, it would result in a one-time
charge to earnings, but would not impact cash flow from operating activities.
As of December 31, 1997, the Company reported approximately $55.3 million
of net capitalized oil and gas property costs and estimated the cost ceiling
exceeded the net capitalized costs, less related deferred income taxes, by
approximately $40.7 million. However, cost ceilings are computed on a country
by country basis, therefore lower product prices coupled with unsuccessful
capital investment or higher operating costs may cause a write down with
respect to the cost center for a particular country.
At the end of the first quarter 1998, the Company determined to write
down the capitalized costs for the United States cost center by approximately
$10.7 million dollars, primarily because of a reduction in the present worth
of future net revenues from its California heavy oil properties. That
reduction was caused by the interplay of two factors. A reduction in proved
undeveloped reserves from 1996 year-end to 1997, which reflected the results
of the Company's 1997 drilling program and the differential in prices at year-
end 1996 and 1997, and the continued rapid decline of oil prices during the
first quarter of 1998.
Crude oil prices continued to decline during the second quarter of 1998,
resulting in an additional write down of capitalized costs for the United
States cost center in the amount of $6.5 million. Capitalized costs
attributable to foreign operations in the amount of $595,000 and $57,000 were
also charged to operations during the second and third quarters of 1998,
respectively.
Competition in the Oil and Gas Industry
The oil and gas industry is highly competitive. Many of the Company's
current and potential competitors have significantly greater financial
resources and a greater number of experienced and trained managerial and
technical personnel than the Company. There can be no assurance that the
Company will be able to compete effectively with these firms.
Environmental Obligations
In connection with the acquisitions of most of its properties, including
those in Colombia and in California, the Company has agreed to indemnify the
sellers from various environmental liabilities, including those that are
associated with the seller's prior obligations. Many of these properties were
in production during years in which environmental controls were significantly
more lax than they are presently. The Company does not conduct a detailed
investigation and, accordingly, the Company may be subject to requirements for
remediation of environmental damage caused by its predecessors. At the time of
an acquisition, there may be unknown conditions which subsequently may give
rise to an environmental liability. Consequently, it is difficult to assess
the extent of the Company's obligation under these indemnities. Further, 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.
However, the Company continuously seeks to comply with environmental
laws.
Non-Operated Properties
Many of the Company's properties are operated by others and the Company
is not in a position to describe remedial actions which may be required on
such properties. As is common in the oil and gas industry, oil properties are
subject to the risks of contamination, which may occur without knowledge of
the executive officers of the Company.
Governmental Regulations and Environmental Risks
The production and refining of oil and natural gas is subject to
regulation under a wide range of federal, state and local statutes, rules,
orders and regulations. These requirements specify that the Company must file
reports concerning drilling and operations and must obtain permits and bonds
for drilling, reworking and recompletion operations. Most areas in which the
Company owns and operates properties have regulations governing conservation
matters, including provisions for the unitization or pooling of oil and
natural gas properties, the establishment of maximum rates of production from
oil and natural gas wells and the regulation of spacing. Many jurisdictions
also restrict production to the market demand for oil and natural gas and
several states have indicated interest in revising applicable regulations.
These regulations may limit the rate at which oil and natural gas can be
produced from the Company's properties. Some jurisdictions have also enacted
statutes prescribing maximum prices for natural gas sold from such
jurisdictions.
Various federal, state and local laws and regulations relating to the
protection of the environment affect the Company's operations and costs. In
particular, the Company's production operations and its use of facilities for
treating, processing or otherwise handling hydrocarbons and related wastes are
subject to stringent environmental regulation. Compliance with these
regulations increases the cost of Company operations. Environmental
regulations have historically been subject to frequent change and
reinterpretation by regulatory authorities and the Company is unable to
predict the ongoing cost of complying with new and existing laws and
regulations or the future impact of such laws and regulations on its
operations. The Company has not obtained environmental surveys, such as Phase
I reports, which would disclose matters of public record and could disclose
evidence of environmental contamination requiring remediation, on all of the
properties that it has purchased. The Company has, however, completed limited
environmental assessments for substantially all of its California and Michigan
oil and gas properties and the Santa Maria Refinery. These assessments are
generally the result of limited investigations performed at governmental
environmental offices and cursory site investigations and are not expected to
reveal matters which would be disclosed by more costly and time-consuming
physical investigations. Generally, such reports are employed to determine if
there is obvious contamination and to attempt to obtain indemnification from
the seller of the property. Most of the properties that have been purchased by
the Company have been in production for a number of years and should be
expected to have environmental problems typical of oil field operations
generally, and may contain other areas of greater environmental concern. The
Company has identified a limited number of areas in which contamination exists
on properties acquired by it.
Refinery Matters
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 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 purchase 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 the previous refinery
owner's operations, since the contaminates at the refinery were produced by
the previous owner of the refinery and were identified prior to purchase.
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 pat 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 the predecessor owner 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 adjoining property to an
affiliate of the Company, had advised the Company that his adjoining 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 the predecessor owner in interest. The
Company is also in contact with the predecessor owner 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
adjoining property retains a mortgaged interest in the adjoining 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 adjoining property.
Property Matters
The Cocorna Concession in Colombia located in the Cocorna Association
expired in February 1997 in accordance with its governing documents, 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 Company believed had been substantially, if not
wholly, completed. Following their inspection of the Concession, Colombian
officials claim that the Company and the operator were obligated to treat the
water for disposal on the Concession with a water treatment plant. While the
Company and the operator occupied the Concession, the plant was not built and
the water was instead transferred to one of the Association areas for
treatment in conjunction with the water produced in that area. Colombian
officials are requiring that the plant be built. The Company believes that the
operator is testing methods to treat water. There can be no assurance as to
the amount of future expenditures of the Company associated with the
environmental requirements for the Cocorna Concession. The property in
Colombia which the Company has an interest may be subject to additional
environmental remedial operations as reported to the Company by a third party
who had performed a due diligence review of the property. The Company is
researching the validity and extent of this report.
In 1993, the Company acquired a producing mineral interest in California
from a major oil company. At the time of acquisition, the Company's
investigation revealed that a discharge of diluent (a light, oil-based fluid
which is often mixed with heavier grades of crude) had occurred on the
acquired property. 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 contain
the 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 major oil company agreed
to remediate or is a separate spill area. The Company also found a second area
of diluent contamination and is investigating to determine the source of that
contamination. 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 on remediation activities, and present estimates are that the cost of
complete remediation could approach $750,000. Since the investigation is not
complete, the Company is unable to accurately estimate the cost to be borne by
the Company.
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 were 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 is
presently considering whether to attempt to secure new leases. A preliminary
estimate of the cost of abandoning the wells and restoring the well sites is
approximately $1.5 million. The Company has been unable to determine its
exposure to third parties if the Company elects to plug such wells without
first obtaining necessary consents. For these and other reasons, there can be
no assurance that material costs for remediation or other environmental
compliance will not be incurred in the future. These environmental compliance
costs could materially and adversely affect the Company. In addition, the
Company is generally required to plug and abandon well sites on its properties
after production operations are completed. No assurance can be given that the
costs of closure of any of the Company's other oil and gas properties would
not have a material adverse effect on the Company.
The Company discharged water from its operations in Louisiana pursuant to
a compliance order issued by the Department of Environmental Quality ("DEQ").
In September 1997, a determination was made by the DEQ that the Company's
permit had expired while the Company continued operations. The Company paid a
fine of approximately $15,000.
The property in Louisiana in which the Company has an interest may be
subject to additional environmental remedial operations as reported to the
Company by a third party who had performed a due diligence review of the
property. The report referred to a field inspection of Manila Village and
liabilities relating to that property and additional liabilities in the form
of oil and salt water spills of Fort Trinidad. The Company is researching the
validity and extent of this report.
In December 1998, the Company also incurred fines of approximately $23,500
payable to the Air Pollution Control District for the County of Santa Barbara
resulting from violations of the Company that flexible sump covers located on
certain oil and gas properties of the Company in California were damaged due
to the El Nino rains and found to be not completely covering the respective
sumps. In December 1998, the Company received notification from the County of
Santa Barbara indicating its decision to take civil and/or criminal action
against the Company based on four oil spill incidents investigated by the Fish
and Game Department which occurred in the first half of 1998. The Company is
in communication with the County to confer on the matter and does not expect
the outcome to have a material adverse effect on the Company. In December
1998, it became known to the Company that an oil spill of approximately less
than 10 Bbl had occurred in the Central Coast Field of Casmalia and traversed
approximately less than half a mile down a dry creek. Appropriate agencies
have been notified and corrective action has been taken by the Company.
Notwithstanding the foregoing, the Company may be subject to a fine.
Operational Hazards and Uninsured Risks
Oil and gas exploration, drilling, production and refining involves
hazards such as fire, explosions, blow-outs, pipe failures, casing collapses,
unusual or unexpected formations and pressures and environmental hazards such
as oil spills, gas leaks, ruptures and discharges of toxic gases, any one of
which may result in environmental damage, personal injury and other harm that
could result in substantial liabilities to third parties and losses to the
Company. The Company maintains insurance against certain risks which it
believes are customarily insured against in the oil and gas industry by
companies of comparable size and scope of operations. The insurance that the
Company maintains does not cover all of the risks involved in oil exploration,
drilling and production and refining; and if coverage does exist, it may not
be sufficient to pay the full amount of these liabilities. The Company may not
be insured against all losses or liabilities which may arise from all hazards
because insurance is unavailable at economic rates, because of limitations in
the Company's insurance policies or because of other factors. Any uninsured
loss could have a material and adverse effect on the Company. The Company
maintains insurance which covers, among other things, environmental risks;
however, there can be no assurance that the insurance the Company carries will
be adequate to cover any loss or exposure to liability, or that such insurance
will continue to be available on terms acceptable to the Company. See
"Governmental Regulations and Environmental Risks."
Title Matters
There are certain risks relating the Company's title to its properties.
See "Business Strategy - Title To Properties"
Economic and Political Risks of Foreign Operations
International Operations-General
The Company has producing properties in Colombia and Canada, is
undertaking exploration operations in Indonesia and Great Britain and is
exploring opportunities in the Peoples Republic of China. Risks inherent in
international operations generally include local currency instability,
inflation, the risk of realizing economic currency exchange losses when
transactions are completed in currencies other than United States dollars and
the ability to repatriate earnings under existing exchange control laws.
Changes in domestic and foreign import and export laws and tariffs can also
materially impact international operations. In addition, foreign operations
involve political, as well as economic, risks such as nationalization,
expropriation, contract renegotiation and changes in laws resulting from
governmental changes. In addition, many licenses and agreements with foreign
governments are for a fixed term and may not be held by production. In the
event of a dispute, the Company may be subject to the exclusive jurisdiction
of foreign courts or may not be successful in subjecting foreign persons to
the jurisdiction of courts in the United States. The Company may also be
hindered or prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity.
Colombian Operations
Inherent Risks
Colombia, which has a history of political instability, is currently
experiencing such instability due to, among other factors: insurgent guerrilla
activity, which has affected other oil production and pipeline operations;
drug-related violence and actual and alleged drug-related political payments;
kidnapping of political and business personnel; the potential change of the
national government by means other than a recognized democratic election;
labor unrest, including strikes and civil disobedience; and a substantial
downturn in the overall rate of economic growth. There can be no assurance
that these matters, individually or cumulatively, will not materially affect
the Company's Colombian properties and operations or by affecting Colombian
governmental policy, have an adverse impact on the Company's Colombian
properties and operations.
Uncertainties in the United States , Colombia Bilateral Political, Trade
and Investment Relations
Pursuant to the Foreign Assistance Act of 1961, the President of the
United States is required to determine whether to certify that certain
countries have cooperated with the United States, or taken adequate steps on
their own, to achieve the goals of the United Nations Convention Against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances. In 1995, 1996,
1997 and 1998, the President did not certify Colombia. The 1995 and 1998
decertifications were subject to a so-called "national interest" waiver,
effectively nullifying its statutory effects. Based on the 1996 and 1997
Presidential decertification, the United States imposed substantial economic
sanctions on Colombia, including the withholding of bilateral economic
assistance, the blocking of Export-Import Bank and Overseas Private Investment
Corporation loans and political risk insurance, and the entry of the United
States votes against multilateral assistance to Colombia in the World Bank and
the InterAmerican Development Bank.
The consequences of continued and successive United States
decertifications of Colombian activities are not fully known, but may include
the imposition of additional economic sanctions on Colombia in 1998 and
succeeding years. The President also has authority to impose far-reaching
economic, trade and investment sanctions on Colombia pursuant to the
International Emergency Economic Powers Act of 1978, which powers were
exercised in 1988 and 1989 against Panama in a dispute over narcotics
trafficking activities by the Panamanian government. The Colombian
government's reaction to United States sanctions could potentially include,
among other things, restrictions on the repatriation of profits and the
nationalization of Colombian assets owned by United States entities.
Accordingly, imposition of the foregoing economic and trade sanctions on
Colombia could materially affect the Company's long-term financial results.
Colombian Labor Disturbances
All of the workers employed at the Company's Colombian fields belong to
one of two unions. Renegotiations concerning contracts with both unions were
conducted by the operator during the third quarter of 1998. The parties to
those renegotiations have executed a definitive agreement with respect to
changing the union contracts which is currently being translated for the
Company. At December 17, 1998, the impact of the renegotiation is unknown.
While the Company has experienced organized work disruptions, including
intermittent disruption of production during the course of such discussions,
there have been no major union disturbances. There can be no assurance,
however, that the Company will not experience such disturbances, including
significant production interruption due to sabotage, work slowdowns or work
stoppages.
Sale Price of Colombian Oil
All of the Company's crude oil produced at the Company's properties in
Colombia has been sold exclusively to Ecopetrol at negotiated prices. See
"Business - Marketing of Production." The contract price for the oil in which
the Company has an interest may be reduced significantly as of January 1,
1999.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Stock in this offering. The Company, however, will receive proceeds from the
warrants of the Company, if exercised, and has received $1.0 million for the
issuance of 333,333 shares of Common Stock to HVI. The Company plans to use
those proceeds for general working capital.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock trades on the American Stock Exchange under the symbol
"SAB." The following table sets forth the high and low quarterly closing sales
prices of the Common Stock as reported on the American Stock Exchange for the
periods indicated. The sales prices set forth below have been adjusted to
reflect a two-for-one stock split in the form of a stock dividend paid in
December 1996. Prior to May 22, 1995, the Common Stock was traded on the
Emerging Company Marketplace of the American Stock Exchange.
<TABLE>
Low High
<S> <C> <C>
1998
Fourth Quarter (through November 30, 1998) $0.69 $1.81
Third Quarter 0.81 2.13
Second Quarter 1.44 4.12
First Quarter 3.38 8.50
1997
Fourth Quarter $8.00 $14.88
Third Quarter 12.81 20.12
Second Quarter 10.75 17.75
First Quarter 12.75 25.25
1996
Fourth Quarter $9.25 $27.12
Third Quarter 6.19 9.94
Second Quarter 3.88 8.00
First Quarter 3.56 4.75
</TABLE>
On November 30, 1998, the last reported sales price of the Common Stock
on the American Stock Exchange was $1.44. The Company has never paid cash
dividends on its Common Stock and does not anticipate doing so in the
foreseeable future. The Series A Preferred Stock, the Company's Debentures and
the Company's principal revolving credit agreement restrict the payment of
dividends by the Company. See Note 8 of Notes to Consolidated Financial
Statements of the Company. At November 30, 1998, the Company had approximately
2,851 stockholders of record.
SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data for the Company as of and for each of the five years in the period ended
December 31, 1997 and for the nine months ended September 30, 1997 and 1998.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere herein. (in thousands, except for per share data)
<TABLE>
Nine Months Ended
Years ended December 31, September 30,
1993 1994 1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data
Revenues:
Oil and
gas sales $10,130 $12,170 $16,941 $31,521 $33,969 $25,282 $15,769
Other 400 784 753 1,681 2,027 1,496 2,914
_______ _______ _______ ______ ______ ______ ______
Total
revenues 10,530 12,954 17,694 33,202 35,996 26,778 18,683
_______ _______ _______ ______ ______ ______ ______
Expenses:
Production
costs (1) 5,857 7,547 10,561 14,604 16,607 12,250 10,140
General and
Adminis-
trative 2,503 1,882 2,005 3,920 5,125 3,468 4,974
Depletion,
Depreciation
and
Amortization 1,853 2,041 2,827 5,527 7,265 5,011 5,500
Writedown of
oil and
gas
properties
(6) - - - - - - 17,852
_______ ______ ______ ______ ______ _____ _______
Total
expenses 10,213 11,470 15,393 24,051 28,997 20,729 38,466
_______ ______ ______ ______ ______ _____ ______
Operating
income (loss) 317 1,484 2,301 9,151 6,999 6,049 (19,783)
_______ ______ ______ ______ ______ _____ ______
Other income
(expense):
Interest
expense (443) (634) (1,364) (2,402) (2,305) (1,421) (2,519)
Gain on
issuance of
shares of
subsidiary - - 125 8 4 - -
Other 1 43 (10) 207 (369) 190 (1,125)
_______ _______ _______ ______ ______ ______ ______
Total other
income
(expense) (442) (591) (1,249) (2,187) (2,670) (1,611) (3,644)
_______ _______ _______ _______ _______ ______ ______
Income (loss)
before
income taxes (125) 893 1,052 6,964 4,329 4,438 (23,427)
Provision
(benefit) for
taxes on
income (37) 384 450 2,958 1,876 1,800 149
Minority
interest in
earnings
(loss) of
consolidated
subsidiary - - 55 241 56 90 (78)
________ ______ ______ _______ _______ _____ ______
Net income
(loss) $(88) $509 $547 $3,765 $2,397 2,548 (23,498)
======== ====== ====== ======= ====== ===== ======
Net earnings
(loss) per
share
(basic)(2) $(0.01) $0.06 $0.07 $0.43 $0.23 $.24 $(2.17)
Weighted average
common shares
outstanding:
(basic) (2) 7,065 7,996 8,327 8,804 10,650 10,596 10,994
Statement of
Cash Flow Data
Net cash
provided by
operating
activities 503 3,346 1,736 6,914 14,954 11,977 4,683
Net cash used
in investing
activities (1,439) (3,930) (16,757) (11,856) (36,166) (30,813) (599)
Net cash
provided by
financing
activities 958 860 14,850 5,037 21,991 (18,331) (4,397)
972)
Other Financial
Data
EBITDA (3) $2,171 $3,568 $5,188 $14,652 $13,843 $10,780 $2,522
Capital
expen-
ditures(4) $2,372 $6,573 $17,015 $12,776 $35,270 $29,080 $9,216
</TABLE>
<TABLE>
December 31, September 30,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital
(deficit) $(860) $(2,422) $2,471 $2,418 $(11,724) $(29,752)
Total assets 13,261 18,108 39,751 49,117 77,657 53,921
Current portion
of long-term
debt 1,440 2,357 505 1,806 13,442 25,173
Long-term debt,
net (5) 4,875 5,323 23,543 20,812 19,610 5,347
Redeemable
preferred stock - - - - 8,511 7,169
Stockholders'
equity 4,407 6,283 7,848 17,715 23,640 30
</TABLE>
________________________________
(1) Production costs include production taxes.
(2) As adjusted for a two-for-one stock split in the form of a stock
dividend paid in December 1996.
(3) EBITDA represents earnings before interest expense, provision (benefit)
for taxes on income, depletion, depreciation and amortization, and
writedown of oil and gas properties. EBITDA is not required by GAAP and
should not be considered as an alternative to net income or any other
measure of performance required by GAAP or as an indicator of the
Company's operating performance. This information should be read in
conjunction with the Consolidated Statements of Cash Flows contained in
the Consolidated Financial Statements of the Company and the Notes
thereto included elsewhere in this Prospectus.
(4) Capital expenditures in 1995 include $10.0 million expended in
connection with acquisitions of producing properties in Colombia. The
acquisitions were principally responsible for the significant increase
in results of operations reported by the Company in 1995 and 1996. For
additional information, see Note 2 of Notes to Consolidated Financial
Statements of the Company.
(5) For information on terms and interest, see Note 8 of Notes to
Consolidated Financial Statements of the Company.
(6) See Note 4 of Notes to Consolidated Financial Statements for more
information about the write down of oil and gas properties.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last eleven quarters in the period ended
September 30, 1998. The data has been prepared on a basis consistent with the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus and includes all necessary adjustments, consisting only of normal
recurring accruals that management considers necessary for a fair
presentation. The operating results for any quarter are not necessarily
indicative of results for any future period. (in thousands, except for per
share data)
<TABLE>
QUARTERS ENDED
1996 1997 1998
Mar, June, Sept, Dec, Mar, June, Sept, Dec, Mar, June, Sept
31 30 30 31 31 30 30 31 31 30 30
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil and
gas
sales$6,963 $7,641 $7,472 $9,445 $9,668 $7,695$7,919 $8,687 $6,110$5,503$4,155
Other $424 $362 $291 $604 ($105) $577$1,024 $531 $364 $902$1,649
Total
revenues
$7,387 $8,003 $7,763$10,049 $9,563 $8,272$8,943 $9,218 $6,473$6,406$5,804
Depletion
depre-
ciation
and
amorti-
zation
$1,140 $1,228 $1,247 $1,912 $1,587$1,646 $1,778 $2,253 $2,019$1,835$1,646
Writedown
of oil and
Gas
properties
- - - - - - - - $10,700$7,095 $57
Net income
(loss)
$755 $734 $731 $1,544$1,442 $507$599($150)($12,016)$(9,577)$(1,905)
Net earnings
(loss)
per share-
basic
$0.09 $0.09 $0.08 $0.17 $0.14 $0.05 $0.06$(0.01)$(1.12)$(0.88)$(0.18)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company and the Notes thereto and
the "Selected Financial Data" included elsewhere in this Prospectus.
General
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
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 six years. From January 1, 1992 through
December 31, 1997, the Company completed 26 property acquisitions. During that
six year period, the Company's proved reserve base, production and operating
cash flow have increased at compound annual growth rates of 48.4%, 45.0%, and
45.8%, respectively. In 1996, the Company broadened its strategy to include
growth through exploration and development drilling.
The current focus of the Company's activity is the re-development of the
Central Coast Fields and drilling approximately 200 wells in Colombia's Middle
Magdalena Basin. A total of thirteen gross (13.0 net) oil wells were drilled
in California as part of the Company's 1997 drilling program. Seven of the
wells are currently in production, three wells have encountered formation
problems which the Company is seeking to remediate, one well was determined to
be noncommercial and two wells (one pair) of SAGD horizontal wells are shut-in
awaiting local permits and an increase in oil prices. Five of these wells were
horizontal wells drilled in a previous waterflood area and high water cuts are
inhibiting oil production rates. Although this situation was not unexpected,
the de-watering process is occurring at slower rates than anticipated. Based
on disappointing results, the Company reduced the number of wells it had
originally projected to drill in 1997 and 1998. In Colombia, a total of
thirteen gross (3.25 net) wells were drilled in 1997 on the Teca/Nare
property, and one well drilled by the previous operator was re-entered and
completed for production. The operator has made an application to obtain a
global environmental permit in order to more rapidly develop the Colombian
properties. At the Velasquez field, three gross (0.75 net) wells were
recompleted in 1997 to establish additional reserves and increase production.
During the nine months ended September 30, 1998, seven wells were drilled and
completed in the Teca and Nare fields and three wells were recompleted in the
Velasquez field. (See "Business Strategy - Property - Colombian Properties").
The Company's revenues are primarily comprised of oil and gas sales
attributable to properties in which the Company owns a 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 by country, all costs incurred in connection with the acquisition
of oil and gas properties and the exploration for and development of oil and
gas reserves. Proceeds from the disposition of oil and gas properties are
accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless such disposition involves a significant change in reserves.
The Company's financial statements have been consolidated to reflect the
operations of its subsidiaries, including Beaver Lake Resources Corporation
("Beaver Lake"), its 74% owned Canadian oil and gas operation.
Crude Oil Prices
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 also
predominantly a heavy grade of oil. The prices received by the Company for its
Colombian production are determined based on formulas set by Ecopetrol. See
"Description of Business-Economic and Political Factors of Foreign Operations-
Colombian Operations".
The weighted average sales price of the Company's crude oil was $8.80 per
Bbl for the nine months ended September 30, 1998 and $13.73 per Bbl in 1997,
representing approximately 70.8% and 73.7% respectively, of the average posted
price per Bbl for WTI crude oil during those periods. Since January 1, 1992,
the weighted average quarterly sales price received by the Company for its
crude oil ranged from a low of $8.02 for the quarter ended September 30, 1998
to a high of $16.31 for the quarter ended December 31, 1996.
Results of Operations
Comparison of Nine Months Ended September 30, 1998 and 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% 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 write downs 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 write downs 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, write down 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.
Comparison of Years Ended December 31, 1997 and 1996
Oil and Gas Sales
Oil and gas sales increased 7.9% to $34.0 million during the year ended
December 31, 1997 from $31.5 million for 1996. Average sales price per BOE for
the year ended December 31, 1997 decreased 3.6% to $13.54 from $14.05 per BOE
in 1996.
Total production increased 13.6% to 2.5 MMBOE in the year ended December
31, 1997 as compared to 2.2 MMBOE for 1996. The increase in oil and gas
production was primarily attributable to the Company's property acquisitions
in Louisiana in November 1996 and September 1997 and the horizontal drilling
program that began in California in June 1996. The production increases were
partially offset by a decline in production in Colombia of 145,000 BOE for the
year ended December 31, 1997 as compared with 1996. The decline resulted from
the reversion of the Cocorna Concession in February 1997 and normal production
declines.
Other Revenues
Other revenues increased 17.6% to $2.0 million for the year ended
December 31, 1997, as compared to $1.7 million for 1996. The increase was due
primarily to additional processing fee income of $659,000 realized from the
Company's asphalt refinery and additional operator's overhead recoveries of
$101,000 on operated oil and gas properties, reduced by excess Velasquez-Galan
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 1997.
Production Costs
Production costs increased 13.7% to $16.6 million for the year ended
December 31, 1997, as compared to $14.6 million in 1996. Average production
costs per BOE increased $0.11 to $6.62 for the year ended December 31, 1997
from $6.51 in 1996, resulting in increased production costs of $279,000.
A production increase of 265,000 BOE for the year ended December 31,
1997, from 2.2 MMBOE in 1996, resulted in increased production costs of $1.7
million. In comparison with the prior year, production volume in 1997
increased 415,000 BOE in the United States and decreased 145,000 BOE in
Colombia. The increase in the United States was primarily attributable to the
Company's property acquisitions in Louisiana in November 1996 and September
1997, and the horizontal drilling program that began in California in June
1996. Approximately two-thirds of the production declines in Colombia resulted
from the reversion of the Cocorna Concession property interest located in the
Cocorna Association in February 1997; the balance of the decrease was due to
normal production declines. The results of the drilling program in Colombia,
which began in the second quarter of 1997, partially offset normal production
declines.
General and Administrative Expenses
General and administrative expenses increased 30.8% to $5.1 million for
the year ended December 31, 1997, from $3.9 million for 1996. The overall
increase in general and administrative expenses was due principally to the
increase in employment in the Company's domestic offices to support its oil
and gas property development programs in California, New Mexico and Louisiana.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased 32.7% to $7.3
million for the year ended December 31, 1997, from $5.5 million in 1996.
Depletion expense increased 32.0% to $6.6 million for the year ended December
31, 1997, from $5.0 million in 1996. The increase was primarily attributable
to domestic production volume increases for the year ended December 31, 1997,
of 415,000 BOE in comparison with 1996, capital costs recorded by the Company
in its full cost pools beginning in the second quarter of 1996, and
anticipated future development and abandonment costs to be incurred in
connection with the management of its oil and gas properties. Depreciation and
amortization expenses increased 19.3% to $654,000 for the year ended December
31, 1997, from $548,000 in 1996.
Other Income (Expense)
Other income (expense) decreased to a net expense of $365,000 for the
year ended December 31, 1997, from income of $215,000 in 1996. The change was
primarily due to foreign currency transaction losses of $230,000 realized by
the Company's Colombia operations, costs in the amount of $321,000
attributable to prospect screening activities and financing proposal costs in
the amount of $175,000, partially reduced by interest income of $52,000 and
other income of $67,000.
Interest Expense
Interest expense decreased 4.2% to $2.3 million for the year ended
December 31, 1997, from $2.4 million in 1996. Interest expense attributable to
the Debentures decreased $636,000 due to the conversion of $9.1 million of
Debentures to Common Stock occurring since June, 1996. Interest expense
attributable to the Company's principal commercial credit facilities increased
$881,000 for the year ended December 31, 1997, from 1996. The average debt
balance outstanding under the credit facilities increased 106.5% to $19.0
million for the year ended December 31, 1997, from $9.2 million in 1996, due
principally to the use of loan proceeds to fund property acquisitions and
development drilling activities. The weighted average interest rate for the
credit facilities decreased 2.8% to 8.75% for the year ended December 31,
1997, from 9.00% for 1996.
Provision for Taxes on Income
Provision for taxes on income decreased 36.7% to $1.9 million for the
year ended December 31, 1997, from $3.0 million in 1996. The Company's
effective tax rate was 43.9% in 1997 and 44.0% in 1996.
Net Income
Net income decreased $1.4 million (36.8%) to $2.4 million for the year
ended December 31, 1997, from $3.8 million in 1996. This decrease reflected
the effects of changes in oil and gas sales, other revenues, production costs,
general and administrative expenses, depletion, depreciation and amortization
expenses, interest expense, other income (expense) and provision for taxes on
income as discussed above.
Comparison of Years Ended December 31, 1996 and 1995
Oil and Gas Sales
The Company's total oil and gas sales increased 86.4% to $31.5 million
for the year ended December 31, 1996, from $16.9 million for 1995. The average
sales price per BOE increased 20.2% to $14.05 in 1996 from $11.69 in 1995. The
increase was primarily attributable to the full year results in 1996 of the
property acquisitions in Colombia during 1995. Excluding the financial impact
of the Colombian properties, which were principally acquired in September
1995, oil and gas sales increased 44.2% during 1996, to $18.6 million from
$12.9 million for 1995. The average sales price per BOE for United States and
Canadian operations was $15.87 and $13.26, respectively, in 1996, representing
increases of 21.7% and 28.5%, respectively, from the comparable 1995 averages.
Oil and gas production increased 46.7% to 2.2 MMBOE for the year ended
December 31, 1996, from 1.5 MMBOE for 1995. The increase in oil and gas
production was primarily attributable to the acquisitions of the Company's
Colombian properties, which were completed in the second half of 1995, and the
Company's drilling and rework activities performed in 1996.
Other Revenues
Other revenues increased 125.8% to $1.7 million for the year ended
December 31, 1996, from $753,000 in 1995. This increase was due primarily to
net pipeline revenue of $717,000 for use of the Velasquez-Galan Pipeline in
Colombia, in which the Company acquired a 50% interest in September 1995. In
addition, the Company's asphalt refining operation reported processing fee
income of $514,000 for 1996, as compared to no processing fee income in 1995.
Production Costs
Production costs increased 37.7% to $14.6 million in 1996 from $10.6
million in 1995. The Company's production costs per BOE decreased 10.7% to
$6.51 in 1996 from $7.29 in 1995. This increase in total production costs was
due primarily to increased production volumes. Excluding the financial impact
of the Colombian properties, the Company's average production costs per BOE
decreased 5.9% to $7.70 for 1996 from $8.18 for 1995. For 1996, production
costs for the Colombian properties were $5.3 million, or $5.11 per BOE.
General and Administrative Expenses
General and administrative expenses increased 95.0% to $3.9 million in
1996 from $2.0 million in 1995. The Company's general and administrative
expenses per BOE increased 26.8% to $1.75 in 1996 from $1.38 in 1995. The
increase was due principally to expenses incurred in connection with the
Company's expanded international operations in Canada and Colombia in the
third and fourth quarters of 1995, and an increase in employment in its
domestic offices to support anticipated future growth.
Depletion, Depreciation and Amortization Expenses
Depletion, depreciation and amortization expenses increased 96.4% to
$5.5 million in 1996 as compared to $2.8 million in 1995. Depletion,
depreciation and amortization expenses per BOE increased 26.8% to $2.46 per
BOE for the year ended December 31, 1996 from $1.94 per BOE for 1995. This
increase was primarily attributable to the capital costs recorded by the
Company in its full cost pools during 1996 and the anticipated future
development and abandonment costs to be incurred in connection with the
management of its oil and gas properties.
Other Income (Expense)
Other income increased 87.0% to $215,000 for the year ended December 31,
1996 from $115,000 in 1995. The change was due primarily to foreign currency
transaction gains of $41,000 and additional interest income of $97,000
realized in 1996.
Interest Expense
Interest expense increased 71.4% to $2.4 million in 1996 from $1.4
million in 1995, due principally to interest expense totaling $998,000
attributable to the Debentures, which were issued in December 1995. The
average debt balance outstanding under the Company's revolving credit facility
for the year ended December 31, 1996 increased 7.0% to $9.2 million as
compared to an average debt balance of $8.6 million in 1995. This increase was
due principally to loan proceeds used to fund the Company's acquisition and
development program during 1996. The weighted average interest rate for the
Company's revolving credit facility decreased to 9.0% in 1996 from 9.8% in
1995.
Provision for Taxes on Income
Provision for taxes on income increased 557.3% in 1996 to $3.0 million
compared to $450,000 in 1995. The Company's effective tax rate for 1996 was
44.0%, a decrease from 45.1% in 1995 due to the impact of foreign tax credits.
Net Income
Net income increased 594.7% to $3.8 million in 1996 from $547,000 in
1995. This increase reflected the effects of changes in oil and gas sales,
other revenues, production costs, general and administrative expenses,
depletion, depreciation and amortization expenses, other income (expense),
interest expense and provision for taxes on income as discussed above.
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 sold certain producing oil and gas assets, the
proceeds of which were used to reduce bank indebtedness and provide working
capital. In December 1998, the Company entered into a letter of intent to sell
all of the outstanding stock of its wholly-owned subsidiary, Saba Energy of
Texas, Inc. ("SETI"), including certain interests located in Michigan, New
Mexico, Oklahoma, Texas, Utah and Wyoming and excluding interest of SETI
located in Louisiana for a contract price of $5 million and a closing
scheduled for December 31, 1998, subject to certain conditions and
adjustments. The consummation of the Common Stock Purchase Agreement between
the Company and HVI will result in an aggregate cash infusion into the Company
of $7.5 million.
The Company's obligation to repay the principal sum of approximately $4.2
million, plus interest, as evidenced by a promissory note secured by a 50%
interest in a 118-mile pipeline in Colombia owned by Sabacol, Inc., a wholly-
owned subsidiary of the Company, became due and payable in its entirety on
December 14, 1998. The promissory note was not paid in full by December 14,
1998. Also, the Company has deferred the semi-annual interest payment of
$162,000 due in December 1998 on the Debentures. The Company intends to make
the interest payment within the thirty day cure period provided by the
Debenture and avoid default.
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.
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 8 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.
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
sells at a minimum of $7.00 per barrel. At November 16, 1998, postings were
approximately $5.85 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-
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 assets 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 wells in New Mexico, amounted to approximately $3.5 million, while foreign
activities, including an unsuccessful exploratory well in the United Kingdon
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 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 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.
Capital Budget
The Company expended approximately $32.6 million, and $8.4 for its
acquisition, development and exploration activities during the year ended
December 31, 1997, and the nine months ended September 30, 1998, respectively.
The expenditures were funded principally by cash flow from operations, the
assumption of indebtedness due to the Company and borrowings under bank credit
facilities. The producing property acquisition in September 1997 was funded in
total by a short-term bank loan. 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.
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.
BUSINESS OF THE COMPANY
Saba Petroleum Company is an independent energy company engaged in the
acquisition, development and exploration of oil and gas properties in the
United States and internationally. The Company has grown primarily through the
acquisition and exploitation of producing properties in California and
Colombia. Beginning in 1997, the Company initiated exploration projects in
California, Indonesia and Great Britain. The Company has assembled a portfolio
of over 200 potential development drilling locations. Based on current
drilling forecasts, the Company estimates that these locations represent a
five-year drilling inventory. The preponderance of these drilling locations
are in Colombia's Middle Magdalena Basin. The Company also has drilling
locations in California, New Mexico and Louisiana. The Company however is
pursuing the sale of its interests in properties located in Louisiana. See
"Recent Developments - Sale of Assets." The Company intends to continue using
advanced drilling and production technologies in an effort to enhance the
returns from its drilling programs. On its California properties, the Company
has used horizontal drilling and high-efficiency cavitation pumps, and drilled
its first steam assisted gravity drainage ("SAGD") pair of wells in California
on which producing operations have been held in abeyance awaiting a permit and
oil price increases. (See Note 16 to the Consolidated Financial Statements for
a description of operating results by geographic region)
At December 31, 1997, the Company had estimated proved reserves of 29.1
MMBOE, consisting of 23.9 MMBbls of oil and 31.3 Bcf of gas (5.2 MMBOE), with
a PV-10 Value of $118.6 million. Since quantities of oil and gas recoverable
from a property are price sensitive, declines in oil and gas prices may be
expected to result in a reduction of the quantities of oil and gas included in
the Company's proved reserves and the PV-10 value of such reserves. See
"Properties Reserve Estimates."
BUSINESS STRATEGY
The Company's strategy is to emphasize growth through exploration and
development drilling. The Company intends to continue to increase its proved
reserves, production rates and operating cash flow through a program which
includes the following key elements:
Development of existing hydrocarbon base. The Company has an
extensive inventory of drilling locations, which the Company intends
to exploit over the next five years. The Company's program includes
exploitation of existing producing properties located in California,
Colombia, New Mexico and Louisiana. The Company believes that this
program will provide it with a cost-effective means to significantly
increase proved reserves, production rates and operating cash flow.
The Company is pursuing the sale of certain producing oil and gas
Assets in these areas (See "The Company - Recent Developments -
Sale of Certain Assets")
Acquisition of producing properties with significant development
potential. The Company seeks to acquire domestic and international
producing properties where it can significantly increase reserves
through development or exploitation activities and control costs by
serving as operator. The Company intends to
concentrate these domestic activities in California where the
Company believes that its substantial experience and established
relationships in the oil and gas industry enable it to identify,
evaluate and acquire high potential properties on favorable terms.
Selective pursuit of exploration prospects. The Company plans to
expand its reserve base by acquiring or participating in
exploration prospects in California, New Mexico, Louisiana and
internationally. The Company believes these activities complement
its traditional development and exploitation activities. In pursuing
these exploration opportunities, the Company plans to use advanced
technologies, including 3-D seismic and satellite imaging, where
appropriate. The Company intends to increase its exposure to natural
gas and lighter oil prospects. In addition, the Company may seek to
limit its direct financial exposure in exploration projects by
entering into strategic partnerships.
There is not any assurance that the Company will be successful in
pursuing such strategies.
History of the Company
The Company's initial efforts focused on the acquisition of producing
properties with positive cash flow, development potential and an opportunity
to improve cash flow through more efficient operations. The Company has
acquired several properties that meet these criteria, including the 1993
acquisition of Cat Canyon and the other properties that comprise the
California Central Coast Fields. These heavy oil properties were attractive
acquisitions because the Company believed it could acquire the properties on
the low end of a market cycle, reduce the relatively high operating cost on
the fields, and significantly develop their proven reserve base through low
risk drilling and workover activities. As the Company grew through such
acquisitions, it developed expertise in heavy oil projects, drilling and
enhanced recovery techniques, field management and cost controls. The Company
expanded its operations internationally by acquiring an interest in oil and
gas properties in Canada in 1994 and heavy oil production in the Middle
Magdalena Basin of Colombia in 1995.
From January 1, 1992 through December 31, 1997, the Company completed 26
property acquisitions with an aggregate purchase price of approximately $43
million. These properties, as improved through the Company's development
efforts and including associated drilling activities, represented
approximately 29.1 MMBOE of proved reserves as of December 31, 1997. The
Company's all-in-finding costs for these acquisitions and related activities
have averaged $2.71 per BOE.
Exploration and Development Drilling Activities
The Company has identified over 200 potential drilling locations on its
properties in Colombia, which represent an estimated five year inventory at
planned drilling rates. In addition, the Company has identified a number of
drilling locations on its properties located in the United States, primarily
in California, Louisiana and New Mexico. The Company also pursues the
acquisition of high potential exploration prospects to enhance its inventory
of drilling opportunities. Beginning in 1997, the Company initiated
exploration activities in Indonesia, Great Britain and California. It has
recently completed the analysis of a 3-D seismic survey covering some 10,500
acres of land in which it has interests in the area of the Coalinga oil field
in Kern County, California, resulting in defining a number of drillable
prospects; has entered into an agreement with a subsidiary of Chevron Corp.
pursuant to which the Company will analyze Chevron 3-D seismic data covering
lands in Kern County, California, and if warranted, will drill exploratory
wells on Chevron fee lands. See "Property - California Exploration Ventures"
and "Exploration and Development Drilling Activities - Other International
Properties."
The Company's capital expenditure budget for 1998 is dependent upon the
price for which its oil is sold and upon the ability of the Company to obtain
external financing. Subject to these variables, the Company originally
budgeted a minimum of $12.0 million and a maximum of $18.3 million for capital
expenditures during 1998. 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, improve oil prices and the
availability of external financing.
The Company's exploration and development drilling programs are conducted
by its in-house technical staff of petroleum engineers and geologists. In
addition, the Company retains the services of several consulting geologists
and engineers to evaluate and develop exploration projects in California and
internationally. These consultants report to the Company's professional staff,
which evaluates the consultants' recommendations and determines what, if any,
actions are to be taken. The Company's professional staff oversees the
Company's development strategy which is designed to maximize the value and
productivity of its existing property base through development drilling and
enhanced recovery methods. One of the most important components of the
Company's development program is its use of horizontal drilling technology. In
general, a horizontal well is able to encounter a greater volume of
hydrocarbons through its exposure to a longer lateral portion of a producing
formation than a comparable vertical well. As a result, in appropriate
formations, a horizontal well may generate both higher initial production and
greater ultimate recovery of oil and gas than a vertical well. In addition,
because a horizontal well can be extended laterally into a formation, it can
significantly reduce the number of wells required to drain a given reservoir.
An important component of the Company's horizontal well program is the use of
high efficiency cavitation pumps. These pumps, which are particularly
effective for heavy oil, reduce maintenance, increase production and permit
the production of oil mixed with sand and other formation materials.
Beginning in June 1997, the Company initiated use of another enhanced
production technique known as SAGD. This technique involves drilling two
horizontal wells in a parallel configuration, one above, and within a short
distance of, the other. After drilling is complete, steam is injected into the
upper wellbore, which creates a steam chamber and heats the oil so that it may
flow by gravity to the lower producing wellbore for extraction. The SAGD
process has been successfully employed by other companies in Canada in thick
reservoirs containing viscous oils, similar to those found in areas of the
Central Coast Fields. Although this technique is initially more costly than
employing a single horizontal well, the Company anticipates that it will
result in increased rates of production and recovery and lower per-unit
production costs. The Company has drilled one pair of SAGD wells on its Gato
Ridge Field and is awaiting local permits before initiating steaming
operations, but does not anticipate commencing such operations until oil
prices improve.
California
The Company's drilling operations in California are focused on the
Central Coast Fields, which consist of four onshore fields that collectively
comprise approximately 4,525 gross (4,487 net) developed acres and 1,139 gross
(1,138 net) undeveloped acres. The Company intends to capitalize on the
potential of these properties through a five year multiwell drilling program.
The Central Coast Fields consist of the Cat Canyon, Gato Ridge, Santa Maria
Valley and Casmalia fields. The Company also has producing properties in
Ventura, Solano, Kern and Orange Counties, California. Of these properties,
the Company regards the Cat Canyon and Gato Ridge fields, both heavy oil
properties, as the most significant and upon which it has focused its
development drilling efforts. Aggressive development activities during 1997,
in contemplation of significantly increased production, included the
installation of surface facilities for handling much more oil than the Company
presently produces from the properties. The recent decline in oil prices
coupled with the drilling results of the 1997 program render it doubtful that
the Company will realize its initially projected rates of return. In addition
to the producing properties, the Company has several exploratory projects in
California. See "Property - California Exploration Ventures."
Overall, the Company during 1997 experienced a 38% increase in annual
production from its California properties (from 654 MBOE in 1996 to 904 MBOE
in 1997). The development costs incurred by the Company in California during
1997 were $12.8 million. The economic benefits derived from the program were
substantially below the Company's expectations. Notwithstanding the 1997
results, the Company continues to believe that its focus on the Central Coast
Fields will ultimately be justified. This opinion is based in part on the
established synergy between the Company's production from the Central Coast
Fields and its asphalt refinery located in Santa Maria, in that the Company is
able to sell its production to the refinery at a price reflecting a premium to
market. Generally, the crude oil produced by the Company and other producers
in the Santa Maria Basin is of low gravity and makes an excellent asphalt.
Recent prices for asphalt exceed market prices for crude oil and costs of
operating the refinery. The Company believes that as road building and repair
increase in California and surrounding western states, the market for asphalt
will expand significantly.
To date, the Company has drilled and completed thirteen horizontal wells
in the Sisquoc sands of the Cat Canyon Field. Twelve of these wells are
currently producing at rates from 40 to 140 Bopd; the thirteenth well has
encountered a sand intrusion problem which the Company is attempting to
rectify. The Company also drilled one pair of SAGD wells in the Gato Ridge
Field, which is awaiting local permits and oil price increases before
production will be attempted. Two horizontal wells drilled to test a different
zone in this field have encountered severe sand production and are presently
planned to undergo recompletion operations during 1998. During 1997, the
Company drilled one well in the Casmalia Field which was non-productive.
Louisiana
The Company acquired an 80% working interest in the Potash Field in
September 1997 and the remaining 20% working interest in April, 1998. Proved
reserves of the Company's interest in the field were approximately 13.9 Bcf
and approximately 1.3 MMBbl at December 31, 1997. The Company's share of daily
production from the Potash Field, including the 1998 acquired interest,
averaged 91 Bopd and 2.1 MMcfd for the nine months ended September 30, 1998.
Increases in productivity and possibly reserves are expected to be achieved
through completion of a number of potential zones presently behind pipe in
existing wells. These potential producing zones range in depth from 1,500 to
15,000 feet. Further technical programs, including a possible 3-D seismic
shoot, are planned to evaluate the exploration potential of the Company lands
associated with this field. The Company owned a 40.5% working interest in the
Manila Village Field and acquired an additional 10.2% working interest in
April 1998. The Company may be subject to certain environmental liabilities
with respect to its interest in the Manila Village Field. See "Risk Factors -
Property Matters." The Company's net reserves at December 31, 1997, including
the 1998 acquired interest, were approximately 327 MBbl and 156 MMcf. The
Company's share of daily production, including the 1998 acquired interest,
averaged 211 BOEPD for the nine months ended September 30, 1998. A 3-D seismic
program is scheduled for 1999 or beyond to determine additional opportunities
to further develop this field.
Colombia
The Company owns interests in two Association Areas (Cocorna and Nare)
and one fee property (Velasquez) all of which are located in the Middle
Magdalena Basin, some 130 miles northwest of Bogota, Colombia. The Association
Areas encompass several fields, some of which are partially developed and some
of which await development. The Teca, Nare and Velasquez fields are presently
under development. The Association Areas, Nare and Cocorna, are held under
Articles of Association between Empresa Petroleos Colombiana ("Ecopetrol") and
the Company's predecessor in interest, a subsidiary of Texaco, Inc.
("Texaco"). Each Association Area is large enough to encompass more than one
commercial area or field.
The Company and Omimex, the operator of the fields, have formulated a
development program which includes, pending regulatory approval, the drilling
of approximately 200 development wells through the year 2001 at an average
depth of 2,900 feet. During 1997, the Company and its operator successfully
completed or reworked fourteen wells of the development program, which wells
have met or exceeded initial production expectations. The 200 well program is
a refinement of an approximate 600 well program originally designed by Texaco.
The Texaco program was not implemented due to what the Company believes was
Ecopetrol's concern with refinery capacity and oil prices. The ability of
Omimex, as operator of the fields, to implement the development program is
dependent on the approval of Ecopetrol and the Colombian Ministry of the
Environment. The Company and Omimex have submitted an application for an
omnibus approval of the drilling of the remainder of the 200 well program;
failing receipt of the omnibus approval, the companies would continue to seek
approval for drilling such wells in segments. In 1997, approval was obtained
for the drilling of 21 development wells in the Teca and Nare Fields, 13 of
which were completed during the year. Also, a well under the Magdalena River
was recompleted and plans to drill two additional wells which, if commercial,
should establish a new commercial area for development. In the Velasquez
Field, the operator recompleted a behind pipe zone in three gross (0.75 net)
wells in 1997. Initial per well production rates ranged from 142 Bopd to 223
Bopd. Studies to date indicate up to 23 wells with behind pipe zones suitable
for recompletion. During the nine months ended September 30, 1998, seven wells
were drilled and completed in the Teca and Nare Fields and three wells were
recompleted in the Velasquez Field. The Company continues its plans to
increase production from the property. The Company is also pursuing selected
exploration opportunities in Colombia including acquiring third party 3-D
seismic data on the currently producing Velasquez Field to determine its
exploration potential. (See "Business Strategy - Property - Colombian
Properties").
Canada
The Company's Canadian properties, which are owned through Beaver Lake
(Alberta Stock Exchange), represented approximately 8.5% of the Company's PV-
10 Value at December 31, 1997. The Canadian properties produced an average of
495 BOEPD for the nine months ended September 30, 1998, from 142 wells
covering 56,800 gross (14,972 net) developed acres, most of which are located
in the province of Alberta. These properties had proved reserves of 2.6 MMBOE
at December 31, 1997. The information presented has not been adjusted for the
approximate 26% minority interest in Beaver Lake held by others. See
"Business Exploration and Development Drilling Activities Other United
States and Canadian Properties."
Other International Properties
In September 1997, the Company and Pertamina, the Indonesian state-owned
oil company, signed a production sharing contract covering 1.7 million
unexplored acres on the Island of Java near a number of producing oil and gas
fields. The Company is required to spend approximately $17.0 million over the
next three years on this project in addition to the approximate $1.4 million
expended as of December 31, 1997 on bonus payments, data acquisition and
geophysical investigation. The Company expects to identify drilling locations
based on geologic trends identified through its review of existing seismic
data, satellite images and the results a potential 3-D seismic program to be
performed in 1998 and 1999. The Company has held discussions with several
potential joint venture partners with a view to negotiate a participation
agreement. In view of this, the Company has slowed its pace of activity. The
recent civil and economic turmoil in Indonesia may affect the timing and terms
of such agreement.
In July 1997, the Company entered into an agreement to participate in
two exploration licenses which cover a 123,000 acre exploration area in
southern Great Britain in which the Company had a right to acquire a 75%
working interest earned upon drilling and payment of its share of costs. On
March 31, 1998, the Company assigned a 3.75% carried working interest in the
first well to be drilled on this concession as payment of a finder's fee. By
agreement dated April 14, 1998, the Company sold one half of its net interest
in this concession to Omimex at the Company's cost. A formal assignment has
not been conveyed to Omimex and the Company continues to hold Omimex's
interest in the prospect trust. The Company had incurred costs of
approximately $766,000 at September 30, 1998 in connection with the concession
acquisition and drilling of an exploratory well on the concession. The well
did not encounter hydrocarbons and has been abandoned. Results from the
initial well did not condemn the entire prospect and data obtained from the
test well is being evaluated for further interpretation. The Company has not
yet executed the joint operating agreement for the prospect. While holding
Omimex's interest in trust, the Company may be liable to Omimex if it were to
execute the joint operating agreement that provides for foreclosure upon a
working interest owner due to non-payment.
Other United States Properties.
Other than its California and Louisiana properties, the Company had
interests in over 290 oil and gas wells at December 31, 1997, located
principally in Texas, Michigan, New Mexico and Oklahoma, with other interests
located in Utah, Wyoming, and Alabama. The Company seeks to acquire domestic
and international producing properties where it can significantly increase
reserves through development or exploitation activities and control costs by
serving as operator. The Company believes that its substantial experience and
established relationships in the oil and gas industry enable it to identify,
evaluate and acquire high potential properties on favorable terms. As the
market for acquisitions has become more competitive in recent years, the
Company has taken the initiative in creating acquisition opportunities,
particularly with respect to adjacent properties, by directly soliciting fee
owners, as well as working and royalty interest holders, who have not placed
their properties on the market. The Company also plans to expand its existing
reserve base by acquiring or participating in high potential exploration
prospects in known productive regions. The Company believes these activities
complement its traditional development and exploitation activities. In
pursuing these exploration opportunities, the Company may use advanced
technologies, including 3-D seismic and satellite imaging. In addition, the
Company may seek to limit its direct financial exposure in exploration
projects by entering into strategic partnerships. In July 1998 and September
1998, the Company sold its interest in over 150 wells in Michigan and two
wells in Alabama, respectively.
Property
At December 31, 1997, on a PV-10 Value basis, approximately 16.9% of the
Company's proved reserves were in California, primarily in the Central Coast
Fields and approximately 48.2% were attributable to the Company's Colombian
properties.
The following table summarizes the Company's estimated proved oil and gas
reserves by geographic area as of December 31, 1997. The following table
includes both proved developed (producing and non-producing) and proved
undeveloped reserves. The reliability of estimates of proved undeveloped
reserves is significantly less than that of proved developed producing
reserves. Approximately 33.0% of the total reserves reflected in the following
table are proved undeveloped. See "Risk Factors - Factors Relating to the Oil
and Gas Industry and the Environment - Uncertainty of Estimates of Reserves
and Future Net Revenues." There can be no assurance that the timing of
drilling, reworking and other operations, volumes, prices and costs employed
by the independent petroleum engineers will prove accurate. Since December 31,
1997, oil and gas prices have generally declined. At such date, the price of
WTI crude oil as quoted on the New York Mercantile Exchange was $18.30 per Bbl
and the comparable price at November 30, 1998 was $11.22. Quotations for the
comparable periods for natural gas were $2.45 per Mcf and $1.98 per Mcf,
respectively.
The proved developed and proved undeveloped oil and gas reserve figures
see "Glossary" for a definition of those terms according to the rules of the
Commission, which have been applied in estimating presented in this report are
estimates based on reserve reports prepared by independent petroleum
engineers. The estimation of reserves requires substantial judgment on the
part of the petroleum engineers, resulting in imprecise determinations,
particularly with respect to new discoveries. Estimates of reserves and of
future net revenues prepared by different petroleum engineers may vary
substantially, depending, in part, on the assumptions made, and may be subject
to material adjustment. Estimates of proved undeveloped reserves (see
"Glossary" for a definition), comprise a substantial portion of the Company's
reserves and, by definition, had not been developed at the time of the
engineering estimate. The accuracy of any reserve estimate depends on the
quality of available data as well as engineering and geological
interpretation and judgment. Results of drilling, testing and production or
price changes subsequent to the date of the estimate may result in changes to
such estimates. The estimates of future net revenues in this report reflect
oil and gas prices and production costs as of the date of estimation, without
escalation, except where changes in prices were fixed under existing
contracts. There can be no assurance that such prices will be realized or that
the estimated production volumes will be produced during the periods
specified in such reports. The estimated reserves and future net revenues may
be subject to material downward or upward revision based upon production
history, results of future development, prevailing oil and gas prices and
other factors. A material decrease in estimated reserves or future net
revenues could have a material adverse effect on the Company and its
operations.
<TABLE>
December 31, 1997
Proved Reserves, net PV-10 Value
Property Gross Oil Gas Dollar
Wells(1) (Mbbls) (Mmcf) MBOE Value Percentage
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
California
Cat Canyon 51 4,483 485 4,564 $10,320 8.7
Casmalia 26 259 10 260 328 0.3
Santa Maria 20 558 822 695 2,127 1.8
Gato Ridge 9 399 5 400 816 0.7
Other 77 2,034 623 2,138 6,466 5.4
______ ______ _____ _______ ________ _______
Total
California 183 7,733 1,945 8,057 20,057 16.9
______ ______ _____ _______ ________ ________
Louisiana
Potash Field 37 1,066 11,116 2,919 15,917 13.4
Manila Village 10 262 125 283 2,186 1.9
______ ______ _____ ______ ________ _________
Total
Louisiana 47 1,328 11,241 3,202 18,103 15.3
______ ______ _____ ______ ________ _________
Other
United States
Michigan 185 560 3,889 1,209 4,743 4.0
Texas 48 397 1,141 587 2,794 2.4
New Mexico 23 474 1,133 662 4,576 3.9
Other 38 58 961 218 1,172 0.8
______ ______ _____ ______ _______ ______
Total Other
United States 294 1,489 7,124 2,676 13,285 11.1
______ ______ _____ _______ _______ ______
Total
United States 524 10,550 20,310 13,935 51,445 43.3
______ _______ ______ _______ _______ ______
Colombia 511 12,568 -- 12,568 57,136 48.2
Canada 168 807 10,986 2,638 10,048 8.5
______ ______ _______ _______ _______ ______
Total
International 679 13,375 10,986 15,206 67,184 56.7
______ ______ _______ _______ _______ ______
Total 1,203 23,925 31,296 29,141 $118,629 100.0
====== ====== ======= ======= ======= ======
</TABLE>
(1) Includes locations attributed to proved undeveloped reserves and wells
in which the Company holds royalty interests.
California
Producing Properties
The Company operates all of its wells in the Central Coast Fields and
maintains an average working interest in these wells of 98.8% and an average
net revenue interest of 89.4%. These fields produced 1,808 net BOEPD for the
year ended December 31, 1997 and 1,484 net BOEPD for the nine months ended
September 30, 1998, and had proved reserves at December 31, 1997 of 5.9 MMBOE.
Cat Canyon Field. The Cat Canyon Field is the Company's principal
California producing property, representing approximately 8.7% of the
Company's PV-10 Value at December 31, 1997. This field, which covers
approximately 1,775 acres of land is located in northern Santa Barbara County
and was acquired by the Company in 1993. At the time of acquisition, there
were 89 producing wells and 74 suspended wells, all of which were vertically
drilled to either the Sisquoc or Monterey Formations (lying between
approximately 2,400 feet and 3,400 feet and 4,000 feet and 6,600 feet,
respectively). At the time of acquisition, average production was 425 Bopd and
for the nine months ended September 30, 1998, average production was
approximately 1,002 Bopd. Daily production varies depending upon various
factors, including normal decline in production levels, the production of
newly drilled wells and whether remedial work is being done on wells in the
field. The field produces a heavy grade of viscous oil, which is in demand at
the Company's Santa Maria Refinery. The property is considered (as are many
heavy oil properties) a high production cost field and reductions in prices
paid for crude generally affect such properties more dramatically than higher
gravity lower production cost fields.
The Company owns a 100% working interest (99.7% net revenue interest) in
approximately 45 producing wells and a number of non-producing wells located
in this field which consists of two major producing horizons, the Sisquoc and
the Monterey. The Sisquoc formation, which consists of a number of separate
zones, is divided by two major north-south trending faults into three separate
and distinct areas. The area between the faults contains the bulk of the
productive reservoir volume and has the highest cumulative production. A
portion of that area was the subject of a waterflood instituted in 1962 by a
previous operator. The waterflood was not economically successful. The
Company believes that the two faults are sealing faults, thus preventing
communication with the portions of the field lying outside of the fault block,
which areas were not the subject of waterflood operations.
In 1995, the Company drilled its first horizontal well into the Monterey
formation. The well developed mechanical problems and operations were
suspended. The Company has deferred attempts to correct the problem until such
time as oil prices increase sufficiently to justify further efforts. In 1996,
the Company initiated its present horizontal well drilling program in the Cat
Canyon Field by drilling five horizontal wells into the Sisquoc formation S1b
sand (which is one of the multiple separate sand bodies comprising the Sisquoc
formation). Of the five wells, three wells were drilled in the central fault
block, on which a waterflood operation was previously conducted, and one in
each of the eastern and western portions of the field. The well in the western
portion of the field initially produced at rates approaching 400 Bopd and, as
expected, has declined to a present rate of approximately 130 Bopd. Wells
drilled into the Sisquoc formation may be expected to produce varying amounts
of formation water as part of the production process. The well drilled in the
eastern portion of the field has encountered mechanical problems and plans are
to rework the well during 1998. The three wells drilled in the central
portion, or waterflood area of the field, developed initial production rates
of approximately 150 Bopd per well and have declined to approximately 40 Bopd
per well. In 1997, the Company continued its horizontal drilling program in
the Cat Canyon Field by drilling eight additional wells into the Sisquoc S1b
sand. Of the eight wells, five were drilled into the waterflood area and the
remaining three were drilled into other areas. Year end average production
rates for the wells in the waterflood area were 82 Bopd and 1,100 barrels of
water per day per well. Production rates for the other wells were 88 Bopd and
13 barrels of water per day per well. The wells drilled into the central
waterflood area, as expected, are producing oil with high volumes of residual
water from the prior waterflood operations. The Company believes that by using
high volume pumps and lifting large volumes of fluid, the ratio of oil to
total fluids produced will gradually increase. Production declines have been
in line with the Company's expectations of roughly a 40-50% decline in
production during the first 12 months of the wells' operation, followed by a
more moderate 10% annual decline in production. Results from the horizontal
well drilling program have not met the Company's expectations and continuing
study is being given to the field to determine how to maximize production. In
addition, the Company, has implemented measures designed to ensure that
operations are conducted with greater efficiency than was the case during
1997.
In addition to the Cat Canyon Field, the Company has interests in a
number of fields in California, none of which had a PV-10 Value equal to five
percent or more of the PV-10 Value of the Company's proven reserves at
December 31, 1997. Among such fields are the following:
Gato Ridge Field. The Gato Ridge Field, which represented approximately
0.7% of the Company's PV-10 Value at December 31, 1997, is located in the
Santa Maria Basin adjacent to the Cat Canyon Field and covers approximately
405 acres. The Company owns a 100% working interest and net revenue interests
ranging from 86% to 100% in seven producing wells in the Gato Ridge Field.
The existing vertical wells primarily produce a heavy oil (11 degrees) from
the same formations as those underlying the Cat Canyon Field. In 1997, the
Company drilled a pair of SAGD wells, to the Sisquoc formation at a total cost
of $1.8 million, including related surface equipment. In addition, two
horizontal wells were drilled to a different zone in the Sisquoc formation, at
an average cost of $537,000, both of which experienced sand intrusion
problems. One well initially produced at a rate of 300 Bopd before sand
infiltrated the well bore necessitating a reduction in production levels to
approximately 20 Bopd. Operations on the other well have been suspended. The
Company is of the view that it will be able to rectify the sand intrusion in
these wells and establish the wells as commercial producers. The pair of SAGD
wells drilled on this property during 1997 have been completed and the
initiation of steaming operations is awaiting the issuance of county permits
and a recovery in oil prices. At such time steam will be injected into the
upper well and thereafter production will commence from the lower well. Should
this procedure prove economically successful, the Company plans to initiate
other SAGD projects on its Central Coast Fields.
Richfield East Dome Unit (REDU). The REDU unit, which represented
approximately 2.4% of the Company's PV-10 Value at December 31, 1997, is
located in Orange County, California and covers approximately 420 acres. The
Company is the operator of this unit and owns a working interest of 50.6% and
a net revenue interest of 40.8%. The unit is under waterflood in the Kraemer
and Chapman formations and contains approximately 68 producing wells, 39 shut-
in wells and 54 water injection wells. The Company conducted remedial
operations on this property during 1997 which resulted in increasing
production by approximately 100 Bopd. The Company owns fee interests in lands
in this unit which it believes will be developable for real estate purposes as
oil operations are curtailed.
Other. The Company also owns other producing properties located in Santa
Barbara, Ventura, Solano, Kern and Orange counties, California, which in the
aggregate represented approximately 5.1% of the Company's PV-10 Value at
December 31, 1997.
California Exploration Ventures
Coalinga Exploratory Prospect, Kern County, California. The Company has
acquired leases covering approximately 3,600 acres of land and contractual
rights covering an additional approximate 7,000 acres of land in the region of
the prolific Coalinga oil field in the San Joaquin Valley of California. The
Company has participated in a 16 square mile 3-D seismic survey covering this
area and has partially interpreted the survey. Nineteen anomalies have been
identified in the prospect area, covering five potentially productive zones,
ranging in depth from 6,500 to 12,000 feet. The Company has an obligation to
drill a test well by December 31, 1998. Because of low oil prices and the poor
economic conditions in the oil industry, the Company intends to seek an
extension of time to drill such a test well. Under the agreement, the Company
would bear 100% of the cost of the wells, which is estimated at approximately
$300,000 in the aggregate as a dry hole and $450,000 as a completed well. The
Company would have an 85% working (68% net revenue) interest in the wells.
Northern California Exploratory Project. In late 1997, the Company
entered into a joint venture with a large independent company and a company in
which Rodney C. Hill, a former director, has a financial interest, to acquire
a multi-thousand acre block of oil and gas leases and drill an exploratory
well for gas on such block. The Company has a 30% initial interest in the
exploratory well to earn a 20% working interest in the well and in the block
and any additional wells that may be drilled by the venture thereon. The
Company regards the project as a high risk venture with possible commensurate
returns. The initial objective was the sands of the Cretaceous Age at a depth
of approximately 8,500 feet. Lease acquisition costs are estimated at
approximately $300,000 to the venture and the cost of the well is estimated at
approximately $1,250,000. An exploratory well was drilled on this prospect
during March and April 1998 and has been abandoned. A technical review of the
land block is being performed.
Chevron Seismic Venture. In January 1998, Saba and Nahama Natural Gas Co.
entered into an agreement with a subsidiary of Chevron Corp. under which
Chevron made available to Saba and its partner, on a non-exclusive basis, the
right to process Chevron proprietary 3-D survey data covering approximately 42
square miles of land in Kern County, California. Included in the 42 square
miles are approximately 14 square miles of land owned in fee by Chevron. Saba
and Nahama will reprocess the seismic data employing modern techniques at a
cost estimated at $300,000 and will have the ability to select and drill upon
the Chevron owned lands as well as the other lands should it and Chevron be
able to acquire leases covering such other lands. Under the terms of the
agreement, Saba will have the right to obtain oil and gas leases covering the
Chevron lands by drilling one or more exploratory wells on such lands. Should
Saba and Nahama acquire a lease on Chevron owned lands, the sharing of costs
will be 85% and 15% to Saba and Nahama, respectively, and revenues will be
shared 68% to Saba (63.7% after payout) and 12% (11.24% after payout) to
Nahama.
Louisiana
Manila Village is located in Jefferson Parish, Louisiana. The Company
operates this property and at year end 1997, owned a working interest of 40.5%
(28% net revenue interest.) The property represented approximately 1.9% of the
Company's PV-10 Value at December 31, 1997. The property covers approximately
450 gross acres of land covered by shallow waters, and is located
approximately forty miles south of New Orleans. There are six producing wells
that produced an average of approximately 331 BOEPD for the year ended
December 31, 1997 and 211 BOEPD for the nine months ended September 30, 1998.
The Company is participating in a 3-D seismic program which includes the field
and expects that the results of the survey will assist the Company in its
evaluation of additional drilling opportunities in the field. In April of
1998, the Company acquired an additional 10.2% working interest in this
property.
Potash Field, which is located in Plaquemines Parish, Louisiana, was
acquired by the Company in September 1997. The Company operates all of the
wells in the property that represented approximately 13.4% of the Company's
PV-10 Value at December 31, 1997. The property is a salt dome feature
originally discovered by Humble Oil and Refining Company and covers
approximately 3,600 acres. The property is located in a shallow marine
environment southeast of New Orleans. At year end 1997, the Company owned an
80% working interest and a 67% net revenue interest in this property, on which
are located ten active wells and a number of shut-in or suspended wells.
Average production from the property for the nine months ended September 30,
1998, was 433 BOEPD. The Company believes that remedial work on several of the
wells will result in increased production levels. The salt dome feature in the
field has not been fully explored. The Company plans on conducting a 3-D
seismic survey to delineate the field. Production in this field is from
multiplay zones, the deepest of which is 15,000 feet. In April of 1998, the
Company acquired the remaining working interest in this property.
The Louisiana properties in which Company has producing oil and gas
fields were damaged by the 1998 Hurricane Georges. Although portions of the
properties were minimally damaged, others were considerably damaged. Initial
assessments did not indicate environmental problems; however, tanks, piping,
living quarters and other equipment have been heavily damaged, causing delays
in resuming operations. The Company's insurance carrier has been contacted to
process a claim.
Other United States Properties
In addition to its California and Louisiana properties, the Company owns
producing properties in a number of states, primarily New Mexico, Michigan,
Texas and Oklahoma, which collectively represented approximately 11.1% of the
Company's PV-10 Value at December 31, 1997. At such date, these properties had
proved reserves of 2.7 MMBOE. Production from the properties approximated 833
BOEPD for the year ended December 31, 1997 and 778 BOEPD for the nine months
ended September 30, 1998. (see "The Company - Recent Developments - Sale of
Certain Assets") The principal producing property is:
Southwest Tatum Field, which is located in Lea County, New Mexico was
acquired by the Company as an exploratory project in late 1996. The Company
holds leases covering approximately 2,000 gross acres of land, in which the
Company has a working interest of 50% (38.75% net revenue interest). During
the last part of 1996, the Company, as operator, commenced the drilling of a
14,000 foot exploratory Devonian test well. In addition to the deepest zone,
the Devonian (which has been abandoned after having produced in excess of
20,000 barrels of high gravity oil), the well has three other potential oil
producing zones. The Company has recompleted the well in the shallower Cisco
zone. A second reentry well to test the shallower zones was completed in
September 1997. A gas sales line was completed in February 1998, allowing for
gas sales from the two wells. Two additional wells were drilled on this
property in 1998 at an approximate cost of $350,000 each to the Company's
interest. One well was completed in September 1998 in the Cisco zone, and the
other was drilled in August 1998 and is being tested. The property produced
approximately 126 BOEPD for the nine months ended September 30, 1998.
Colombian Properties
General
The Company's Colombian operations are conducted on two Association Areas
and one mineral fee property. These properties are located in the Middle
Magdalena Basin of Colombia, some 130 miles northwest of Bogota. The Company
and Omimex, acquired their interests in the Middle Magdalena Basin properties
from Texaco in 1994 and 1995 transactions; each has a 25% working (20% net
revenue) interest in Nare and Cocorna Association properties, while Ecopetrol,
the Colombian state oil company owns the remaining 50% working interest. The
mineral fee property, Velasquez, is owned 75% by Omimex and 25% by the
Company. The three areas cover 52,894 gross acres of land. The Nare
Association is the northernmost area in which the Company has an interest and
covers approximately 37,164 gross (approximately 9,300 net) acres of land.
The exploitation and development of the Teca and Nare Fields, and the adjacent
Nare North, Chicala and Morichi Fields are governed by the association
contract originally entered into between Ecopetrol and Texaco in 1980. Under
these contracts, the cost of exploratory wells is borne solely by the Company
and its partner, who are entitled to all revenues from such wells. Once an
area within an Association is declared to be a commercial area by Ecopetrol,
the Company and its partner each receives 20% of the crude oil produced at
these fields, while Ecopetrol receives 40% of production and the Colombian
government receives the remaining 20% of production in the form of royalties.
A commercial area is roughly equivalent to a field. Each of the Company and
its partner bears 25% of the production costs of commercial areas and
Ecopetrol is responsible for the remaining 50%. The exploitation rights under
these contracts expire in September 2008 and are not renewable by the Company
under their current terms. The Company understands that legislation is being
considered by the Colombian government which would permit such extensions to
be obtained. The Company intends to seek an extension of these contracts;
however, no assurance can be given that any extension will be granted or that
the terms on which any extension may be obtained will be acceptable to the
Company. Omimex anticipates that the costs associated with preparing the
necessary documentation for applying to extend the terms of the exploitation
rights on the North Nare Field through 2030 will cost approximately $1
million. On October 2, 1998, the Company agreed with Omimex that it will pay
up to $500,000 to prepare such documentation if the contract for the North
Nare Field is extended. The $500,000 will be payable by the Company in January
1999. See "Risk Factors - Factors Relating to Operations in Colombia and Other
Foreign Countries - Foreign Operations" and "- Exploration and Development
Drilling Activities - Colombia."
Generally, as in the case of the Company's interests under the Nare and
Cocorna Associations, the Articles require that the contracting oil company
perform various work obligations (including the drilling of any exploratory
wells) at its cost on the lands covered by the Articles, and allow production
of hydrocarbons for a stated period of years. Upon discovery of a field
capable of commercial production and upon commencement of production from that
field, Ecopetrol reimburses the contracting party out of Ecopetrol's share of
production for 50% of the allowable costs. Thereafter, costs of operations and
working interest revenues are shared 50% by Ecopetrol and 50% by the
contracting oil company, which in this case is Omimex and the Company, as
successors to Texaco, the original contracting party. The working interest is
subject to a royalty of 20% which is paid to Ecopetrol on behalf of the
Colombian government. Several of the fields in the contract area owned by the
Company and Omimex have been declared to be commercial areas, but a number of
other areas have not yet been so designated. Approval of both Ecopetrol and
the Ministry of the Environment is required to implement a development
program. The Cocorna Concession area, located within the Cocorna Association,
which was acquired by the Company from Texaco, has reverted to Ecopetrol
because of the expiration of the term of the Articles governing that field.
Description of the Properties
At the date hereof, three fields within the Cocorna Association have been
declared commercial by Ecopetrol: Teca (approximately 1938 acres), Toche
(approximately 150 acres), and South Cocorna (approximately 700 acres); and
four fields within the Nare Association have been declared commercial: South
Nare (approximately 660 acres), North Nare (approximately 1,700 acres),
Chicala (approximately 830 acres), and Moriche (approximately 1085 acres). The
Company's Teca and Nare Fields, which represented approximately 40.0% of the
Company's PV-10 Value at December 31, 1997, produced an average of 1.87Mbopd
for the year ended December 31, 1997 and 1.80Mbopd for the nine months ended
September 30, 1998, from 309 wells covering 2,598 gross (649.0 net) developed
acres and is the primary producing area. The Company owns a 25% mineral fee
interest in the Velasquez Field which covers approximately 3,800 gross (950
net) acres of land, and produced an average of 505 Bopd for the year ended
December 31, 1997 and 500 Bopd for the nine months ended September 30, 1998.
The Company's Colombian properties in the aggregate represented 12.6
MMBOE at December 31, 1997 or approximately 43.1% of the Company's total
proved reserves and approximately 48.2% of the Company's PV-10 Value at that
date. The following table provides information concerning the Company's
interest in the commercial areas and fee minerals in Colombia.
<TABLE>
Field Name Proved Reserves Average Daily Barrels
at Dec. 31, 1997 of Oil Produced
(MMBbls) Number of for the nine months ended
Wells September 30, 1998
<S> <C> <C> <C>
Velasquez 2.9 102 500
North Nare 3.8 78 0
Magdalena/Cocorna 0.1 3 0
Teca & South Nare 5.8 328 1,802
_________ _______ __________
Total 12.6 511 2,302
========= ======== ==========
</TABLE>
Production from all of the fields comes from relatively shallow
reservoirs lying at approximate depths of from 1,200 to 3,000 feet. All of the
production (save that produced from the Velasquez field) is of a relatively
heavy grade of crude oil, generally in the area of 10 degrees to 13 degrees
gravity API. Wells generally produce small amounts of formation water in
conjunction with oil. Because of the viscosity of the oil, wells are initially
produced without artificial stimulation and thereafter stimulated by cyclic
steam injection. Wells cost approximately $250,000 to $300,000 to the total
working interest, depending upon depth.
During 1997, the Company and the operator participated in the drilling or
recompletion of thirteen wells in the Teca and South Nare Fields. All of the
wells drilled were productive and the operator is in the process of installing
steaming equipment. During the nine months ended September 30, 1998, the
Company and the operator participated in the drilling and completion of seven
wells in the Teca and South Nare Fields.
The Company and Omimex reentered a suspended Texaco drilled well to an
area under the Magdalena River and recompleted the well as productive of
approximately 30 Bopd without artificial stimulation. Both the Company and the
operator believe that another two wells should be drilled into the area in an
effort to establish an additional commercial area. Should those efforts be
successful, it is believed that from 15 to 20 additional drilling locations
would be established. In the Velasquez field, the Company and Omimex
recompleted three wells in a behind-pipe zone. Initial per well production
rates range from 142 Bopd to 223 Bopd. Studies to date indicate up to 23
additional wells with behind pipe reserves suitable for recompletion. Three
additional wells were recompleted during the nine months ended September 30,
1998.
During 1997, the operator in conjunction with the Company formulated a
plan for the drilling of approximately 200 development wells in the Nare
North, Chicala and Moriche fields. This program, subject to regulatory
approval, would be implemented through the year 2001. The Company is also
considering joining in a development program at the Velasquez property. The
Company originally budgeted approximately $2.5 million for its Colombian
operations' capital expenditures in 1998, but a majority of the work has been
deferred based upon the price of oil and other economic factors.
Sabacol, the Company's wholly-owned subsidiary and owner of the Company's
properties in Colombia, has filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code. See "The Company Recent Developments
Terminated Business Combination; Bankruptcy of Sabacol, Inc."
Sabacol is not the operator of the Colombian properties in which it has
an interest and has notified the operator of Sabacol's intent to audit all
relevant operating documents and all financial transactions for 1996, 1997 and
1998. Any potential future action would be based on results of the audit. In
December 1998, a new management team was appointed for Sabacol to protect its
assets and develop an effective re-organization plan.
In the event Sabacol's interest in the Colombian pipeline is transferred
to a third party while Sabacol maintains its interest in the Colombian
production, Sabacol may be subject to a tariff in excess of the current rate
charged to Sabacol by the current owner of the remaining 50% interest in the
pipeline. In or about July 1998, the pipeline was affected by guerrilla
activity.
Crude Oil Sales and Pipeline Ownership
All of the Company's crude oil produced at the Company's properties in
Colombia has been sold exclusively to Ecopetrol at negotiated prices. See
"Business - Marketing of Production." The contract price for the oil in which
the Company has an interest may be reduced significantly as of January 1,
1999. In conjunction with its purchase of interests in the Nare Association,
the Company also purchased a 50% interest in the 118-mile Velasquez-Galan
Pipeline, which connects the fields to the 250,000 Bopd Colombian government-
owned refinery at Barrancabermeja. See "Exploration and Development Drilling
Activities - Colombia." The pipeline transports oil from the Company's
fields, together with a lighter crude oil supplied by Ecopetrol which acts as
a diluent to the Company's heavier crude, and crude oil from other adjacent
fields. The pipeline generates revenues through collection of tariffs for the
use of the pipeline. Throughput on this pipeline in September 1998 averaged
28,900 Bopd of which the Company's share was approximately 2,100 Bopd. In
addition to the operator and the Company, three other companies transport
their crude oil through the pipeline at tariff rates established by Colombian
authorities. The Company and the operator have considered expansion of the
pipeline system if additional production is developed by operators in the
area. See "The Company - Recent Developments - Terminated Business
Combination; Bankruptcy of Sabacol, Inc."
Canadian Properties
The Company's Canadian properties, which are owned through Beaver Lake,
represented approximately 8.5% of the Company's PV-10 Value at December 31,
1997. The Canadian properties produced an average of 608 BOEPD for the year
ended December 31, 1997, and 495 BOEPD for the nine months ended September 30,
1998, from wells covering 56,800 gross (14,972 net) developed acres, most of
which are located in the province of Alberta. These wells had proved reserves
of 2.6 MMBOE at December 31, 1997. The information presented has not been
adjusted for the approximate 26% minority interest in Beaver Lake held by
others.
Other International Properties
The Company has oil and gas projects in Indonesia and Great Britain as
described in "Exploration and Development Drilling Activities."
Oil and Gas Reserves
The Company's proved reserves and PV-10 Value from proved developed and
undeveloped oil and gas properties in this Prospectus have been estimated by
the following independent petroleum engineers. In 1995, 1996 and 1997,
Netherland, Sewell & Associates, Inc. ("NSA") prepared reports on the
Company's reserves in the United States and Colombia and Sproule Associates
Limited ("Sproule") prepared a report on the Company's Canadian reserves. The
estimates of these independent petroleum engineers were based upon review of
production histories and other geological, economic, ownership and engineering
data provided by the Company. In accordance with the Commission's guidelines,
the Company's estimates of future net revenues from the Company's proved
reserves and the present value thereof are made using oil and gas sales prices
in effect as of the dates of such estimates and are held constant throughout
the life of the properties, except where such guidelines permit alternate
treatment, including, in the case of gas contracts, the use of fixed and
determinable contractual price escalation. Future net revenues at December 31,
1997, reflect weighted average prices of $13.13 per BOE compared to $17.05 per
BOE and $11.30 per BOE as of December 31, 1996 and 1995, respectively. See
"Risk Factors - Factors Relating to the Oil and Gas Industry and the
Environment - Uncertainty of Estimates of Reserves and Future Net Revenues."
There have been no reserve estimates filed with any other United States
federal authority or agency, except that the Company participates in a
Department of Energy annual survey, which includes furnishing reserve
estimates of certain of the Company's properties. The estimates furnished are
identical to those included herein with respect to the properties covered by
the survey.
The following tables present total estimated proved developed producing,
proved developed non-producing and proved undeveloped reserve volumes as of
December 31, 1995, 1996 and 1997, and calculation of the PV-10 Value thereof.
As used herein, the term "proved undeveloped reserves" are those which can be
expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where
it can be demonstrated with certainty that there is continuity of production
from the existing productive formation. Under no circumstances should
estimates for proved undeveloped reserves be attributable to any acreage for
which an application of fluid injection or other improved recovery technique
is contemplated, unless such techniques have been proved effective by actual
tests in the area and in the same reservoir. There can be no assurance that
these estimates are accurate predictions of reserves or of future net revenues
from oil and gas reserves or their present value. As indicated elsewhere, the
prices received for oil and gas have declined since the preparation of the
1997 year end engineering estimates.
<TABLE>
ESTIMATED PROVED OIL AND GAS RESERVES
At December 31,
__________________________________
1995 1996 1997
<S> <C> <C> <C>
Net oil reserves (MBbl)
Proved developed producing 10,278 12,029 13,977
Proved developed non-producing 590 1,367 2,639
Proved undeveloped 1,664 13,283 7,309
________ _________ _______
Total proved oil
reserves (MBbl) 12,532 26,679 23,925
======== ========= =======
Net natural gas reserves (MMcf)
Proved developed producing 9,371 12,659 11,995
Proved developed non-producing 871 1,516 5,407
Proved undeveloped 9,237 9,490 13,894
________ ________ ________
Total proved natural gas
reserves (MMcf) 19,479 23,665 31,296
======== ======== ========
Total proved reserves (MBOE) 15,778 30,623 29,141
======== ======== ========
</TABLE>
Estimates of proved reserves may vary from year to year reflecting
changes in the price of oil and gas and results of drilling activities during
the intervening period. Reserves previously classified as proved undeveloped
may be completely removed from the proved reserves classification in a
subsequent year as a consequence of negative results from additional drilling
or product price declines which make such undeveloped reserves non-economic to
develop. Conversely, successful development and/or increases in product prices
may result in additions to proved undeveloped reserves. Estimates of proved
undeveloped reserves, which comprise a substantial portion of the Company's
reserves, are, by their nature, much less certain than proved developed
reserves.
<TABLE>
ESTIMATED PRESENT VALUE OF PROVED RESERVES
At December 31,
__________________________________
1995 1996 1997
PV-10 Value (In thousands)
<S> <C> <C> <C>
Proved developed
producing $38,618 $84,916 $62,215
Proved developed
non-producing 3,044 9,227 16,097
Proved undeveloped 6,493 61,796 40,317
_______ ________ ________
Total $48,155 $155,939 $118,629
======= ======== ========
</TABLE>
Proved reserves are estimates of hydrocarbons to be recovered in the
future. Reservoir engineering is a subjective process of estimating the sizes
of underground accumulations of oil and gas that cannot be measured in an
exact way. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgment. Reserve reports of other engineers might differ from the reports
contained herein. Results of drilling, testing and production subsequent to
the date of the estimate may justify revision of such estimate. Future prices
received for the sale of oil and gas may be different from those used in
preparing these reports. The amounts and timing of future operating and
development costs may also differ from those used. Accordingly, reserve
estimates are often different from the quantities of oil and gas that are
ultimately recovered. See "Risk Factors - Factors Relating to the Oil and Gas
Industry and the Environment - Uncertainty of Estimates of Reserves and Future
Net Revenues."
Marketing of Production
The prices obtained for oil and gas are dependent on numerous factors
beyond the control of the Company, including domestic and foreign production
rates of oil and gas, market demand and the effect of governmental regulations
and incentives. Substantially all of the Company's North American crude oil
production is sold at the wellhead at posted prices under short term
contracts, as is customary in the industry. No one customer accounted for more
than ten percent of the sales of the Company's North American production
during 1997 except PetroSource which accounted for 33.2% of such sales. The
Company's Colombian oil production, which is, and as a practical matter can
only be, sold to Ecopetrol, accounted for 31.4% of total oil and gas revenues
in 1997.
The market for heavy crude oil produced by the Company from its Central
Coast Fields differs substantially from the remainder of the domestic crude
oil market, due principally to the transportation and refining requirements
associated with California heavy crude oil. The prices realized for heavy
crude oil are generally lower than those realized from the sale of light crude
oil. The Company's Santa Maria refinery uses essentially all of the Company's
Central Coast Fields' crude oil, in addition to third party crude oil, to
produce asphalt, among other products. Ownership of the refinery gives the
Company a steady market for its local crude oil which is not enjoyed by
producers generally. See "Property- Asphalt Refinery".
Colombia
Oil produced from the Company's Middle Magdelena Basin Fields, after
being sold to Ecopetrol, is processed in a 250,000 Bopd government owned
refinery in Barrancabermeja, Colombia. The Company believes that the refinery
has sufficient unused throughput capacity to satisfy any reasonably
foreseeable increase in production that might be achieved from the Company's
Colombian exploration and development program. The refinery is connected to
the Company's Colombian fields through the 118-mile Velasquez-Galan Pipeline
owned by the Company and its partner. The pipeline is currently operating at
approximately 12,000 Bopd (together with 18,000 Bbls of diluent per day) and
has the capacity to carry approximately 20,000 Bopd (together with 30,000 Bbls
of diluent per day). Accordingly, significant capacity exists for additional
throughput. The Company owns a 50% interest in the Velasquez-Galan Pipeline
and is working with Omimex, the owner of the remaining 50% interest, to
explore the feasibility of extending it to an export terminal on the Colombian
coast. The pipeline currently generates tariff revenue from the transportation
of oil produced for Ecopetrol's interest and by other producers in the area.
The tariff revenue is sufficient to cover the direct expenses associated with
the operation of the pipeline. See "The Company - Recent Developments -
Terminated Business Combination."
The formula for determining the price paid for oil produced at the Teca-
Nare Fields is based upon the average of two price baskets of fuel: (a) a
crude fuel oil basket (1% sulphur United States Gulf Coast and Ecopetrol fuel
oil for exportation) ("Basket A") and (b) an international crude basket (Maya,
Mandji and Isthmus) adjusted for gravity API and sulphur content ("Basket B").
The average of Baskets A and B is then discounted based on the price of West
Texas Intermediate ("WTI") crude oil, an industry posted price generally
indicative of prices for sweeter, lighter crude oil. If WTI is less than
$16.00 per Bbl, the average of Baskets A and B is discounted by $1.65 per Bbl;
if WTI is between $16.00 and $20.00 per Bbl, the average of Baskets A and B is
discounted by $2.05 per Bbl; and if WTI is greater than $20.00 per Bbl, the
average of Baskets A and B is discounted by $2.45 per Bbl. The formula may be
adjusted by Ecopetrol in February 1999. Ecopetrol is required to pay for oil
produced at the Teca-Nare Field in the following denominations: 75% in United
States dollars paid in the United States and 25% in Colombian pesos paid in
Colombia.
For production from its Velasquez Field, the Company receives a
contracted price of between $6.00 and $7.00 per Bbl for basic production of up
to 34 MBbl per month. For incremental production above such amount, the
Company receives a price equal to the average of (a) the prior quarter average
of the prices of Baskets A and B and (b) the average international price of
crude oil from the Velasquez and Tisquirama Fields in Colombia, which average
is then discounted by approximately 47%.
The average sales price of the Company's Colombia production was $8.37
per Bbl for the nine months ended September 30, 1998 and $12.04 per Bbl in
1997, representing approximately 67.3% and 64.6%, respectively, of the average
posted price per Bbl for WTI crude oil during those periods.
The following table summarizes sales volume, sales price and production
cost information for the Company's net oil and gas production for each of the
years in the three-year period ended December 31, 1997 and for the nine month
periods ended September 30, 1997 and 1998.
<TABLE>
Year Ended December 31, Nine Months Ended
September 30,
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Production Data:
Oil (Mbbls) 1,227 1,968 2,107 1,581 1,431
Gas (Mmcf) 1,337 1,651 2,408 1,767 1,831
Total (MBOE) 1,450 2,243 2,508 1,875 1,736
Average Sales Price
Data (Per Unit):
Oil (Bbls) $12.22 $14.43 $13.73 $13.81 $8.80
Gas (Mcf) 1.45 1.88 2.09 1.95 1.73
BOE 11.69 14.05 13.54 13.48 9.08
Selected Data per BOE:
Production costs (1) $7.29 $6.51 $6.62 $6.53 $5.84
General and
administrative 1.27 1.72 1.93 1.77 2.67
Depletion, depreciation
and amortization 1.92 2.43 2.84 2.63 3.05
</TABLE>
___________________________
(1) Production costs include production taxes.
Drilling Activity
The following tables sets forth certain information for each of the years
in the three-year period ended December 31, 1997 and the nine months ended
September 30, 1998, relating to the Company's participation in the drilling of
exploratory and development wells in:
United States
<TABLE>
Year Ended December 31, Nine Months Ended
1995 1996 1997 September 30, 1998
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)Gross(1)Net(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells
Oil - - - - 2 - -1 0.5
Gas - - 3- 1.35 - - - -
Dry (3) 3 .46 3 1.28 - - 1 0.2
Development Wells
Oil 4 1.51 10 6.59 10 10.00 - -
Gas 1 .10 3 .64 - - - -
Dry (3) 1 .04 1 .35 1 1.00 - -
Total Wells
Oil 4 1.51 10 6.59 12 11.00 1 0.5
Gas 1 .10 6 1.99 - - - -
Dry (3) 4 .50 4 1.63 1 1.00 1 0.2
</TABLE>
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest
is owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is
the sum of fractional working interests owned in gross wells expressed
as whole numbers and fractions thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Colombia and Great Britain
<TABLE>
Year Ended December 31, Nine Months Ended
1995 1996 1997 September 30, 1998
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)Gross(1)Net(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells
Oil - - - - - - - -
Gas - - - - - - - -
Dry (3) - - - - - - 1 0.38
Development Wells
Oil - - - - 13 3.25- 7 1.75
Gas - - - - - - - -
Dry (3) - - - - - - - -
Total Wells
Oil - - - - 13 3.25- 7 1.75
Gas - - - - - - - -
Dry (3) - - - - - - 1 0.38
</TABLE>
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest
is owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is
the sum of fractional working interests owned in gross wells expressed
as whole numbers and fractions thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Canada
<TABLE>
Year Ended December 31, Nine Six Months Ended
1995 1996 1997 September 30, 1998
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)Gross(1)Net(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells
Oil - - - - - - - -
Gas - - - - - - - -
Dry (3) - - 1 .01 1 1.00 - -
Development
Wells
Oil - - - - - - - -
Gas 1 .09 - - - - - -
Dry (3) - - - - - - - -
Total Wells
Oil - - - - - - - -
Gas 1 .09 1 .01 - - - -
Dry (3) - - - - 1 1.00 - -
</TABLE>
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest
is owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is
the sum of fractional working interests owned in gross wells expressed
as whole numbers and fractions thereof. No reduction is made for the
minority interest in Beaver Lake.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Productive Oil and Gas Wells
The following table sets forth certain information at September 30, 1998
relating to the number of productive oil and gas wells (producing wells and
wells capable of production, including wells that are shut in) in which the
Company owned a working interest:
<TABLE>
Oil Gas Total
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
United States 257 161.7 37 22.3 294 184
Canada (1) 27 9.6 43 10.9 70 20.5
Colombia 397 99.3 - - 397 99.3
______ _______ _______ _______ ______ _______
681 270.6 80 33.2 761 303.8
====== ======= ======= ======= ====== =======
</TABLE>
(1) No reduction is made for the minority interest in Beaver Lake.
In addition to its working interests, the Company held royalty interests in
approximately 82 productive wells in the United States and Canada at September
30, 1998. The Company does not own any royalty interests in Colombia.
Oil and Gas Acreage
The following table sets forth certain information at September 30, 1998
relating to oil and gas acreage in which the Company owned a working interest:
<TABLE>
Developed (1) Undeveloped
Gross Net Gross Net
<S> <C> <C> <C> <C>
United States 27,347 10,774 28,778 22,382
Canada (2) 47,688 11,363 38,954 12,243
Colombia 6,398 1,599 46,496 11,624
________ ________ ________ ________
Total 81,433 23,736 114,228 46,249
======== ======== ======== =======
</TABLE>
(1) Developed acreage is acreage assigned to productive wells.
(2) No reduction is made for the minority interest in Beaver Lake.
Title to Properties
Many of the Company's oil and gas properties are held in the form of
mineral leases, licenses, reservations, concession agreements and similar
agreements. In general, these agreements do not convey a fee simple title to
the Company, but rather, depending upon the jurisdiction in which the apposite
property is situated, create lesser interest, varying from a profit a prendre
to a determinable interest in the minerals. In some jurisdictions, notably
non-US jurisdictions, the Company interest is only a contractual relationship
and bestows no interest in the oil or gas in place. As is customary in the oil
and gas industry, a preliminary investigation of title is made at the time of
acquisition of undeveloped properties. Title investigations are generally
completed, however, before commencement of drilling operations or the
acquisition of producing properties. The Company believes that its methods of
investigating title to, and acquisition of, its oil and gas properties are
consistent with practices customary in the industry and that it has generally
satisfactory title to the leases covering its proved reserves. Because most of
the Company's oil and gas leases require continuous production beyond the
primary term, it is always possible that a cessation of producing or operating
activities could result in the loss of a lease. Assignments of interest to
and/or from the Company may not be publicly recorded.
Substantially all of the Company's properties, including its stock in its
subsidiaries are hypothecated to secure the Company's current and future
indebtedness to its bank. The Company's working interest in properties may be
subject to lienholds pursuant to non-payment. The Company expects liens to be
filed against its assets and to be subject to lawsuits arising out of the
Company's non-payment or untimely payment of its obligations. The Santa Maria
Refinery and the associated real property owned by the Company is encumbered
by a first trust deed in the amount of $1.0 million in favor of the seller of
the refinery and is in place to secure the Company's performance of
obligations as provided under the terms of the purchase and sale agreement.
Oil and gas leases in which Company has an interest may be deficient and
subject to action by the Company.
The Company may require ratifications for various leases for Vacca Tar
Sand in California. Maintenance of the Company's interest is subject to
fulfillment of drilling and other obligations contained in its agreements with
the operator of the property. Maintenance of the leases is dependent upon
fulfillment of various drilling and producing operations over which the
Company has little if any control. Consequently, it is possible for the
Company to lose its interests in such leases through action or inaction of the
operator. The Company understands that the leases have been essentially non-
productive for various periods of time, which fact may result in termination
of the leases. The Company does not follow operations on the leases and
consequently is not aware of whether the leases are in good standing or may be
subject to termination.
Average Sales Price and Production Cost
The following table sets forth information concerning average per unit
sales price and production cost for the Company's oil and gas production for
the periods indicated:
<TABLE>
Nine Months Ended
Year Ended December 31 September 30,
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Average sales price
per BOE
California $12.55 $15.10 $13.49 $13.21 $7.94
Colombia 9.44 12.49 12.04 11.96 8.37
Canada 10.32 13.26 10.52 10.35 7.62
Other 13.97 17.39 17.68 17.49 12.46
Combined 11.69 14.05 13.54 13.48 9.08
Average production
cost per BOE
California $9.15 $8.50 $7.48 $7.55 $6.93
Colombia 5.17 5.11 5.71 5.64 4.75
Canada 5.92 5.15 4.87 4.72 4.67
Other 7.49 7.88 7.47 7.10 6.31
Combined 7.29 6.51 6.62 6.53 5.84
</TABLE>
Asphalt Refinery
In June 1994, in an effort to increase margins on the heavy crude oil
produced from the Company's oil and gas properties in Santa Barbara County,
California, the Company acquired from Conoco Inc. ("Conoco") and Douglas Oil
Company of California an asphalt refinery in Santa Maria, California, which
had been inoperative since 1992. The Company refurbished the refinery and, in
May 1995, completed a re-permitting environmental impact review process with
Santa Barbara County, receiving a Conditional Use Permit to operate the
refinery. Pursuant to the refinery purchase agreement, Conoco is required to
perform certain remediation and other environmental activities on the refinery
property until June 1999, at which point the Company will be responsible for
any additional remediation, if any. Recently, evidence of current
contamination of ground water by hydrocarbons has been brought to the
attentions of the Company. This fact presents the possibility of significant
liability to the Company and could result in curtailment or shut-down of
operations of the refinery. See "Risk Factors - Factors Relating to the Oil
and Gas Industry and the Environment - Environmental Obligations; and -
Refinery Matters."
The Company entered into a processing agreement with PetroSource in May
1995, and commenced operations of the refinery in June 1995. Under the
processing agreement, PetroSource purchases crude oil (including crude oil
produced by the Company), delivers it to the refinery, reimburses the
Company's out-of-pocket refining costs, markets the asphalt and other products
and generally shares any profits equally with the Company. The processing
agreement has a term that ends December 31, 1998. The Company is evaluating
various strategies with respect to the foregoing.
The refinery is a fully self-contained plant with steam generation,
mechanical shops, control rooms, office, laboratory, emulsion plant and
related facilities, and is staffed with a total of 23 operating, maintenance,
laboratory and administrative personnel. Crude oil is delivered to the
refinery by trucks to crude oil consisting of one 27,000 Bbl tank and two
40,000 Bbl tanks. Crude oil processing equipment consists of a conventional
pre-flash tower, an atmospheric distillation tower, strippers and a vacuum
fractionation tower. The refinery has truck and rail loading facilities,
including some capability of tank car unloading. Throughput at the refinery
has ranged between 2,000 to 6,000 Bopd, while production capacity is
approximately 8,000 Bopd. Permitted capacity for the refinery is 10,000 Bopd.
Refinery products include light naphtha, kerosene distillate, gas oils
and numerous cut-back, paving and emulsion asphalt products. Historically,
marketing efforts have been focused on the asphalt products which are sold to
various users, primarily in the Central and Northern California areas.
Distillates are readily marketed to wholesale purchasers.
The Company regards the refinery as a valuable adjunct to its production
of crude oil in the Santa Maria Basin and surrounding areas. Generally, the
crude oil produced in these areas is of low gravity and makes an excellent
asphalt. Recent prices for asphalt exceed market prices for crude and costs of
operating the refinery. The Company believes that as road building and repair
increase in California and surrounding western states, the market for asphalt
will expand significantly.
Real Estate Activities
The Company from time to time has purchased real estate in conjunction
with its acquisition of oil and gas and refining properties in California and
plans to continue this practice. In connection with the acquisition of oil and
gas producing properties in Santa Maria, California in June 1993, the Company
purchased approximately 1,707 acres in Santa Barbara County for an aggregate
purchase price of $465,000. In addition, the Company acquired approximately
370 acres in Santa Maria, California in June 1994 in connection with the
acquisition of its Santa Maria refinery. In addition, the Company entered in
to an agreement to acquire approximately 385 acres in Santa Barbara County in
connection with an acquisition of producing oil and gas properties at a
contract purchase price of $400,000, the closing of which took place in June
1995. In addition, the Company acquired approximately 1 acre in October 1997
for $50,000 and approximately 4 acres in February 1998, for $500,000 located
in Yorba Linda, Orange County, California. The Company has used a portion of
its real estate holdings for agricultural purposes. The Company plans to
retain some of these real estate holdings for asset appreciation which may
include developmental activities at a future date. The Company has listed for
sale with sales agents some of those real estate properties in California. See
"Recent Developments Sale of Certain Assets"
Office Facilities
The Company's executive offices are located in Santa Maria, California.
In September, the Company moved its accounting offices from Irvine,
California, to the executive office location in Santa Maria. In October 1998,
the Company downsized its Edmond, Oklahoma office. The Company maintains
regional offices in Calgary, Alberta, Canada, Bogota, Colombia and Indonesia.
These offices, consisting of approximately 20,200 square feet, are leased with
varying expiration dates to January 2002, at an aggregate rate of $17,300 per
month. The Company owns its office facilities at the asphalt refinery in Santa
Maria, which occupy approximately 1,500 square feet of space.
Employees
As of October 31, 1998, the Company employed 90 persons in the operation
of its business, 39 of whom were administrative employees. The Company has not
entered into any collective bargaining agreements with any unions and believes
that its overall relations with its employees are good. Omimex, the operator
of the Company's Colombian fields, has experienced minor organized work
disruptions from its union employees. See "Risk Factors-Economic and Political
Risks of Foreign Operations-Colombian Labor Disturbances"
Insurance
The Company maintains customary and usual insurance for companies in its
industry.
At September 30, 1998, a worker's compensation claim was pending for an
injury involving multiple body part burns at the Santa Maria Refinery which
occurred in June 1997. At September 30, 1998, a claim was pending under the
Company's commercial general liability policy pursuant to a claim caused by a
subcontractor of the Company. It is anticipated by the Company that this claim
will either be paid by the former year's carrier and then subrogated against
the subcontractor or will be paid directly by the subcontrator's insurance
carrier. In 1998, two deaths occurred on properties in which the Company has
an interest that have been to the Company's insurance carrier. The first
occurrence, which the Company understands was reported as a homicide, involved
an unknown person on its agricultural property in California, and the second
occurrence, which the Company understands was reported as a field accident by
the operator, involved an employee of the operator in Colombia.
Legal Proceedings
In re Sabacol, Inc. Debtor (BK Case No. ND 98-15858-RR United States
Bankruptcy Court, Central District of California, Northern Division, December
1998) On December 11, 1998, Sabacol, Inc., a wholly-owned subsidiary of the
Company ("Sabacol"), filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code in the Central District of California.
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). In December 1997, the Company contracted with Gitte-Ten, Inc. ("GTI")
to purchase from GTI all of its surface fee and leasehold interests in certain
property located in Santa Barbara County, California. A portion of the
purchase price was paid at closing on December 31, 1997, at which time GTI's
interests were conveyed to the Company. The remaining purchase price of
$350,000 was to be paid through overriding royalty payments of the Company's
gross income from the leases until the balance was retired but no later than
January 1, 2003, on which date any unpaid balance was to be immediately due
and payable. To provide GTI with an assurance of the Company's payment
obligation, the Company executed a promissory note in the principal amount of
$350,000 which provided that said amount (less the total amount of overriding
royalties paid to GTI) was all due and payable on February 27, 1998, unless
the Company replaced the note by February 24, 1998, with an irrevocable and
non-cancelable surety bond or letter of credit in the amount of the then
unpaid balance. Company was unable to procure either instrument and the note
became all due and payable on February 27, 1998. Notwithstanding attempted
settlement conferences by the Company with GTI, GTI filed a claim against the
Company in March 1998, for breach of contract, seeking damages of $350,000
plus interest at the rate of 13.5% per annum and attorney fees. The Company
has interposed certain defenses and the matter is in discovery.
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 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 judgment 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.
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.
Schwier v. v. Saba Petroleum, Inc. (Case No. MC980427, Municipal Court of
the State of California, County of Santa Barbara-Santa Maria Division, July
1998). In July, 1998, the Company was served with a lawsuit filed by an
individual alleging property damage and loss of income and property in the
amount of $6,000 resulting from a motor vehicle operated by the Company on one
of its access easements causing the death of plaintiff's dog. The Company is
represented by counsel appointed by the Company's insurance carrier pursuant
to a claim submitted under the Company's automobile policy.
CalResources LLC v. Maples, Kern County Assessor (Case No. 236790 NFT,
Superior Court of the State of California, County of Kern, July, 1998). In or
about July, 1998, the Company received a Notice of Hearing on joint petition
for order permitting disclosure of information and records and protective
order filed by CalResources LLC and James W. Maples, Kern County Assessor. It
is the Company's understanding that it received this Notice as a potential
party who may have provided confidential information to the Kern County
Assessor. The Company had not responded to nor attended the hearing.
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 since November 1997.
Securities. In October 1998, the Company was notified by a
representative of a shareholder of the Company that an investigation of
alleged violations of Section 16(b) of the Exchange Act was underway, and the
Company was requested to conduct an investigation of Ilyas Chaudhary's trading
activities from December 1997 and to account and disgorge profits realized by
Mr. Chaudhary pursuant to certain alleged securities transactions.
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 certain of these claims with respect to Louisiana and
New Mexico known by it as of September 30, 1998 in the aggregate approximate
amount of $1.1 million 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. The Company agreed to secure its approximate payment of
$133,000 to a trade vendor who had supplied equipment to the Company by two
pumps used on the Company's producing properties located in Louisiana.
Property Interests. In connection with an Exchange Agreement that closed
on April 6, 1998, for the Company's acquisition of the remaining 20% working
interest in the Potash Field located in Louisiana and an additional 10.2%
working interest in the Manila Village Field in Louisiana, the Company was
obligated to tender 200,000 shares of its Common Stock, free of all
restrictions, to the seller. In July, 1998, the seller assigned its entire
receivable from this transaction to Capco Resources, Ltd., an affiliate of the
Company, in exchange for its receipt of 200,000 unrestricted shares of the
Company Common Stock. The Company has been orally informed that the seller of
the 20% interest was seeking to acquire the Series A Preferred Stock and may
assert claims against the Company with respect to the disposition of the 20%
interest.
In March 1998, the Louisiana Department of Natural Resources claimed to
the Company an audit exception for royalties paid on lease use gas in the
approximate amount of $7,000 that was unpaid at September 30, 1998.
Property Matters. In March 1997, the Company received from the Weld
County Oilfield Waste Disposal Operating Group notice of a claim against it
based upon its alleged disposal of oil field waste materials at a waste
disposal site. Amoco, HS Resources and Gerrity Oil and Gas, all PRP,
submitted a proposed settlement agreement in March 1997 in regards to the
cleanup of the disposal of hazardous substances hauled to WCWDI by former
customers including the Company. A proposed settlement agreement and copies of
EPA Administrative Orders were delivered to the Company. The settlement
agreement proposed that the Company participate in the percentage of 0.05%, or
$4,001 in exchange for which the Company would receive an indemnification from
certain future exposures; the indemnity was unacceptably narrow in scope and
was rejected by the Company. The Company counter-offered with a settlement
contribution of $2,000. The matter is currently pending.
The Company may be subject to resolving property matters, including
claims related to mineral interests, working interests, and/or surface use and
rights, including without limitation relocations of gas transfer lines,
abandonment of wells or failure to abandon giving rise to claims of lost
profits from surface owners and/or a third parties in interest, and errors in
disclosure of location, production and/or rights may have occurred by Company
with respect to its operating activities. See "Risk Factors Risks Relating
to the Oil and Gas Industry and the Environment"
Internal Revenue Service. In its review of the Company's payroll tax and
information returns for the years ended 1993-1996, the Internal Revenue
Service proposed adjustments based upon the assertions that the Company
misclassified as independent contractors various persons who were employees of
the Company, that the Company did not withhold income taxes from payments made
to such persons, and that the Company failed to file its information returns
timely. In addition, the Service proposed to impose interest and penalties on
the Company. At September 30, 1998, there was no pending or threatened
litigation. The matter has been under review by the Company and the Service.
The Company filed a protest letter with the IRS on November 21, 1997, and an
Appeals Conference was held in June, 1998 with the Appellate Branch of the
Service to resolve these issues. The years ended 1993-1995 were settled for
$93,370, and the year ended 1996 assessed for $21,750 is yet to be settled.
The Company has requested or plans to request that the penalties for the year
ended 1996 be waived. It is the Company's hope that these issues can be
resolved without litigation in the U.S. Tax Court. The Company anticipates
that a number of the proposed assessments will be reduced and, in some cases,
such as penalties, eliminated. The Company believes that its ultimate exposure
as a result of these matters should not exceed $115,000. Based upon its
assessment of the matter, the Company has made a provision for these
contingencies in its year end 1997 financial statements in the amount of
$90,000.
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. The Company may be subject to legal actions that have been
threatened without the Company's knowledge.
Competition
The oil and gas industry is highly competitive in all its phases. The
Company encounters competition from a substantial number of companies, many of
which have greater financial and other resources than the Company in acquiring
economically desirable producing properties and drilling prospects, in
obtaining equipment and labor to operate and maintain its properties and in
the sale of oil and gas. See "Risk Factors - Factors Relating to the Oil and
Gas Industry and the Environment - Replacement of Reserves; - Exploration and
Development Risks; - Competition in the Oil and Gas Industry."
MANAGEMENT
Directors, Executive Officers, Control Persons and Key Employees
The following table sets forth the name, age and position of each
director, executive officer, control person and significant employee of the
Company and significant subsidiaries (references are to offices or
directorships held in the Company unless otherwise indicated):
<TABLE>
Name Age Position
<S> <C> <C>
Alex S. Cathcart 64 Director
Burt M. Cormany 70 President and Chief Operating Officer of
Santa Maria Refining Company
Randeep S. Grewal 33 Director, Member of the Management Committee
of the Company; Chairman/CEO of Sabacol, Inc.
William N. Hagler 66 Director, Chairman of the Board, and Chairman
of the Management Committee of the Company
Imran Jattala 40 Member of the Management Committee, Executive
Vice President and Chief Operating Officer,
Chief Financial Officer and Principal
Accounting Officer of the Company; President
and Chief Operating Officer of Saba
Petroleum, Inc.; and Vice President of Saba
Energy of Texas, Incorporated.
Dr. Charles A.
Kohlhaas 63 Director
Herb Miller 63 President Beaver Lake Resources Corp.
Susan M. Whalen 36 Secretary of the Company
</TABLE>
Each director is elected for a term of one year and the term of each director
expires in 1999.
Executive Officers and Directors
Alex S. Cathcart has been a director of the Company since January 1997
and has served as Executive Vice President of the Company since March 1997
until his appointment in December 1997 as President, in which position he
served until June 1998, when he resigned such position. Mr. Cathcart presently
is a consultant to the Company. Mr. Cathcart has served as President and Chief
Executive Officer of Beaver Lake Resources Corporation since 1993 and
previously as President and Chief Operating Officer of Saba Exploration
Company from May through December 1997. He has also served as President and
Chief Operating Officer of Saba Offshore, Inc. and Sabacol, Inc., subsidiaries
of the Company, from December 1996 to August 1997 and was re-appointed to
these positions in December, 1997 in which he served through December 1998 for
Sabacol, Inc. From 1987 to 1993 he was the Chairman and principal owner of
Barshaw Enterprises Ltd., a family-owned consulting and investment company
operating primarily in the oil industry. Mr. Cathcart has over 40 years
experience in the oil industry. His exploration experience was gained with
Texaco Exploration Company, Francana Oil & Gas and LL&E Canada. Since 1971 he
has been involved in general management with Banner Petroleum, Voyager
Petroleum, Natomas Exploration of Canada, Page Petroleum and Prime Energy.
Burt M. Cormany has been President of Santa Maria Refining Company since
July 1994. Mr. Cormany worked in various capacities for the previous owners of
the Company's Santa Maria Refinery from 1951 to 1990, including refinery
manager from 1974 to 1990. In 1991, Mr. Cormany was a consultant to the
previous owner of the refinery. He retired in 1991 and returned to work in
1994 as a consultant to the Company for several months prior to becoming
President of Santa Maria Refining Company later that year.
Randeep S. Grewal became a director of the Company on October 8, 1998,
and a member of the Company's Management Committee on November 12, 1998 and
the Chairman/Chief Executive Officer of Sabacol, Inc. in December 1998. Mr.
Grewal is Chairman and Chief Executive Officer of HVI, which is a publicly
reporting company. He most recently served as the corporate Vice President of
the Rada Group. His responsibilities within Rada were focused on a market
penetration and globalization of a new high-tech product resulting in the
conversion of the Rada Group from being primarily a defense contractor into a
diversified commercial industry. He has been involved in various joint
ventures, acquisitions, mergers and reorganizations since 1986 in the United
States, Europe and the Far East within diversified businesses. Mr. Grewal has
a Bachelor of Science degree in Mechanical Engineering from Northrop
University.
William N. Hagler has been a director of the Company since 1994 and
became Chairman of the Company's Management Committee on November 12, 1998.
Mr. Hagler is Chairman of the Board of Directors, CEO and President of
Intermountain Refining Co., Inc., a company he founded in 1984. Until June,
1998 Mr. Hagler was Chairman of the Board of Directors, Chief Executive
Officer and President of Unico, Inc., a company he founded in 1979. Unico is,
or has been, engaged in petroleum refining, co-generation, natural gas
production and the manufacturing of methanol, a natural gas-based
petrochemical. In addition, he is President of Hagler Oil and Gas Company and
Red Hills Manufacturing Company. Prior to 1979, Mr. Hagler was Vice President
of Plateau, Inc., a Rocky Mountain oil refiner and marketer. Mr. Hagler has
served for approximately 10 years on the City of Farmington, New Mexico Public
Utility Commission. Since 1955, Mr. Hagler has been continuously engaged in
various phases of petroleum manufacturing and marketing with Exxon
Corporation, Cities Service Oil Company and Riffe Petroleum Company. Mr.
Hagler currently serves as a director of Consolidated Oil & Transportation, a
privately held company in the business of asphalt transportation and
marketing, and Petrominerals Corporation, a publicly traded company engaged in
oil production.
Imran Jattala became a member of the Company's Management Committee on
November 12, 1998 and the Chief Financial Officer and Principal Accounting
Officer in August 1998. He has been Executive Vice President and Chief
Operations Officer since June 1998 and had been appointed President and Chief
Operating Officer of Saba Petroleum, Inc., which operates the Company's
California properties, in December 1997. Mr. Jattala joined the Company in
1992 as Assistant Controller for the Company and its subsidiaries. Since that
time, Mr. Jattala had worked in various capacities for the Company, including
Administrative Manager. In addition to Mr. Jattala's educational background in
international business and banking, he has over 4 years experience in revenue
auditing.
Dr. Charles A. Kohlhaas, a director since August, 1998 and interim CEO
from June to August of 1998, has over 40 years of varied experience in the oil
and gas industry. In December 1998, Dr. Kohlhaas was appointed President of
Sabacol, Inc. He spent 17 years with Mobil and ARCO, was a Professor of
Petroleum Engineering at the Colorado School of Mines for many years, and was
a founder of Kelt Energy, a large Paris-based international independent oil
and gas company formerly traded on the London Exchange. He has consulted for
many major and independent international oil and gas companies, service
companies, and financial institutions in North and South America, Europe,
Asia, and the Middle East and managed a research consortium of 15 companies.
He is director and/or officer of three Canadian junior public shell companies.
Dr. Kohlhaas received Petroleum Engineer and Ph.D. degrees from the Colorado
School of Mines.
Herb Miller has been President of Beaver Lake since March 1998 where he
had also served as Vice President of Exploration and Land from 1993 to
February 1997. At that time, Mr. Miller was transferred to the Company's
corporate office to the position of Manager of the Technical and Drilling
Departments, and in August 1997 he was appointed President and Chief Operating
Officer of Saba Petroleum, Inc. in which positions he served through December
1997. In December 1997, Mr. Miller was appointed Vice President of the
Company's international exploration and drilling operations and President and
Chief Operating Officer of Saba Exploration Company in which he served through
March, 1998. Mr. Miller graduated from the University of Tulsa, Oklahoma with
a Bachelor of Geology degree and has 38 years of oil industry experience. Mr.
Miller's exploration experience was obtained while employed by the Pure Oil
Company and Unocal Canada Explorations. For the period 1976-1980, he was
involved in managing exploration projects with Unocal in the position of
District Geologist, Division Geologist and Exploration Co-ordinator. In 1980
he joined Westar Petroleum serving as general manager of exploration/land and
general manager exploration/engineering. Mr. Miller's experience has been
primarily in Western Canada and also includes the Northwest Territories,
Beaufort Sea, east and west coast offshore, the United States and the North
Sea. From 1991 to 1993 when he joined Beaver Lake as Vice President
Exploration and Land, he was a private consultant to the energy industry.
Susan M. Whalen became Secretary of the Company in August 1998 and was
appointed as the Company's General Counsel in July 1998. During 1997, she
practiced contract and corporate law as an independent contractor for several
clients, including the Company, before she was employed by the Company in
November 1997 as an associate legal counsel. From 1994 through 1997, Ms.
Whalen managed the administrative operations of Cranford Street, Inc. a
product and brand development, licensing, and contract manufacturing company.
From 1991 through 1994, she served as Vice President of Sales and Customer
Relations of Sassaby, Inc. a product development and marketing company. Ms.
Whalen obtained a Juris Doctor degree from Western State University - College
of Law in 1987. An uncontested petition under the Federal bankruptcy laws was
filed by Ms. Whalen for her property in 1994.
Management Committee
The Management Committee of the Company was established by the Company's
Board of Directors in November 1998 to manage the day-to-day affairs of the
Company with the powers and duties generally prescribed in the Company's
Bylaws to the President continuing up to the closing of the transactions with
respect to the Company's securities and the designation of directors on the
Company's Board of Directors as described in "The Company - Recent
Developments - Transactions Involving Horizontal Ventures, Inc." William N.
Hagler, Imran Jattala and Randeep S. Grewal have been appointed by the Company
to serve as members of the Management Committee, with Mr. Hagler further
appointed as Chairman.
Director Compensation
The Company does not pay any additional remuneration to executive
officers for serving as directors. As of May 1997 and for each term
thereafter, non-employee directors will receive a retainer of $12,000 for the
first four Board meetings and $1,000 per meeting for the fifth and any
additional meetings, including committee meetings attended. Directors of the
Company are also reimbursed for out-of-pocket expenses incurred in connection
with their attendance at Board of Directors meetings, including reasonable
travel and lodging expenses. The Board of Directors received a total of
$47,900 in cash compensation in 1996 and $39,700 in 1997. Pursuant to the 1997
Stock Option Plan for Non-Employee Directors, 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. The Board of Directors amended the plan to provide for a one-
time grant of 15,000 shares of Common Stock, vesting 20% per year, which
amendment was approved by the shareholders on August 28, 1998. At December 31,
1997, each qualified non-employee director had been granted options to acquire
15,000 shares at an exercise price of $15.50 per share. See "Benefit Plans and
Employment Agreements Stock Option Plans."
No family relationships exist between or among any of the directors or
executive officers.
Executive Compensation
The following table sets forth certain information as to compensation of
the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company who received salary and bonuses
of over $100,000 in any of the years 1995, 1996 or 1997.
<TABLE>
Long Term
Compensation
Annual Other Securities
Name and Compensation Annual Underlying All Other
Principal Salary Bonus Compensation Options Compensation(3)
Position Year
<S> <C> <C> <C> <C> <C> <C>
Ilyas
Chaudhary 1997 $183,500 $2,885 (3) 500,000(5) $4,420
Chairman 1996 153,000 20,000 (3) 4,750
of the 1995 150,000(2) 1,731 (3) 200,000 _
Board, Chief
Executive
Officer (1)
Walton C.
Vance 1997 $120,700 $2,254 (3) _ $4,009
Vice 1996 101,633 20,000 (3) _ 2,259
President, 1995 _ _ _ _ _
Chief
Financial Officer,
and Secretary (6)
Burt
Cormany 1997 $110,040 $9,170 (3) 20,000 $1,351
President 1996 113,386 8,330 (3) _ 5,549
and Chief 1995 _ _ _ _ _
Operating
Officer of
Santa Maria
Refining Company
Bradley T.
Katzung 1997 $77,655 $70,200 (3) _ $1,097
Executive 1996 _ _ _ _ _
Vice 1995 _ _ _ _ _
President
& General
Manager - USA (7)
Rodney C.
Hill 1997 $121,636 _ _ 125,000 _
Vice 1996 _ _ _ _ _
President- 1995 _ _ _ _ _
Legal Affairs (8)
</TABLE>
__________________
(1) Resigned from all offices including Chief Executive Officer and
President and as a director and Chairman of the Board on November 12,
1998.
(2) Includes amounts reimbursed by the Company in 1995 to SEDCO, a
corporation wholly owned by Ilyas Chaudhary, of $75,000 for management
services performed by Mr. Chaudhary.
(3) "Other Annual Compensation" was less than the lesser of $50,000 or 10%
of such officer's annual salary and bonus for such year.
(4) Represents the contributions made by the Company on behalf of these
individuals to the Company's 401(k) Plan.
(5) Consists of options covering 200,000 shares granted pursuant to the
Company's 1996 Incentive Equity Plan; 200,000 shares of deferred Common
Stock; and 100,000 performance shares issuable if the Company meets 1998
earnings test.
(6) Resigned from all offices including Chief Financial Officer and
Secretary on July 21, 1998 and as a director on August 28, 1998.
(7) Employment Agreement expired November 8, 1998.
(8) Resigned as Vice President - Legal Affairs on December 31, 1997 and as
a director on June 6, 1998.
Option/SAR Grants In Last Fiscal Year
The following stock options were granted during 1997 by the Company to
the named executives.
<TABLE>
Potential Realized
Value At
Assumed Annual
Rates of Stock Alternative
Price Appreciation to (f) and
For Option (g); Grant
Individual Grants Term Date Value
(a) (b) (c) (d) (e) (f) (g) (h)
Number of
Securities % of Total
Underlying Options/
Options/ SARs
SARs Granted To Exer-
Granted (f) Employees cise Expi- Grant Date
(In In Fiscal Base ration Present
Name thousands) Year Price($/Sh.) Date 5%($) 10%($) Value $
<S> <C> <C> <C> <C> <C>
Ilyas
Chaudhary(1)200 33.6 15.50 5-30-07 1,454,500
Herb Miller 15 2.5 15.50 5-30-07 109,100
Alex
Cathcart 75 12.6 15.50 5-30-07 421,600
Imran
Jattala 25 4.2 15.50 5-30-07 181,800
Rod Hill(2) 125 21.0 15.50 5-30-07 909,000
Burt
Cormany 20 3.4 15.50 5-30-07 89,800
Total in
1997 595
Valuation Method used: Black-Scholes option pricing model:
Expected volatility 43.16%
Risk-free rate of return ranging from 6.18%-6.49%
Dividend yield 0%
Time of Exercise full vesting period of each option, ranging from 2-
5 years
(1) Resigned from all offices including Chief Executive Officer and
President and as a director and Chairman of the Board on November 12,
1998.
(2) Resigned as Vice President - Legal Affairs on December 31, 1997 and as
a director on June 6, 1998.
Option Exercises and Fiscal Year-End Values
The following table provides certain information with respect to options
exercised in 1997 and unexercised options to purchase Common Stock of the
Company at December 31, 1997:
</TABLE>
<TABLE>
Securities Value
Underlying Number of Unexercised,
Unexercised Options In-The Money
Shares SARs at Fiscal Fiscal Year End
Acquired On Value Year-End (#) Exercisable/
Name Exercise(#) Realized($) Exercisable/ Unexercisable
Unexercisable
<S> <C> <C> <C> <C>
Ilyas
Chaudhary(1)20,000 $50,000 60,000/120,000 $420,000/$840,000
Walton C.
Vance(2) - - 150,000/40,000 $1,087,500/$290,000
Bradley T.
Katzung(3) - - 80,000/20,000 $570,000/$142,500
</TABLE>
(1) Resigned from all offices including Chief Executive Officer and
President and as a director and Chairman of the Board on November 12,
1998.
(2) Resigned from all offices including Chief Financial Officer and
Secretary on July 21, 1998 and as a director on August 28, 1998.
(3) Employment Agreement expired November 8, 1998.
Compensation and Options Committee Interlocks and Insider Participation
For the year ended December 31, 1997, the following non-executive
directors of the Company served as members of the Compensation and Options
Committee of the Board of Directors: Messrs. Sohail, Ronald Ormand and Hagler.
Neither Mr. Sohail nor Mr. Ormand were formerly, nor are they currently,
officers or employees of the Company or any of its subsidiaries. Mr. Hagler,
although currently not an officer or employee of the Company or any of its
subsidiaries, was President from July 1997 through September, 1997 of Capco,
an affiliate of the Company.
Benefit Plans and Employment Agreements
Employment Agreements
Alex S. Cathcart Employment Agreement. The Company has entered into an
employment agreement with Alex S. Cathcart, dated March 1, 1997, for a two-
year term expiring on February 28, 1999, which can be extended for an
additional two years at the sole discretion of the Company. The employment
agreement provides for a base salary of $115,000, increasing to $123,000 in
the following years. Mr. Cathcart is granted options to purchase 50,000 shares
at fair market value as of May 31, 1997, which vest pro rata at the completion
of the year of service under the agreement to which they relate (with the
first 25,000 options vesting on March 1, 1998). In May 1997, the Company
granted to Mr. Cathcart options to purchase 25,000 shares at fair market value
as of May 31, 1997, the grant of such options being contingent upon Mr.
Cathcart remaining in the employ of the Company for an additional year
succeeding the expiration of his existing employment contract and such options
vesting at the completion of the additional year of service to which they
relate. While the employment agreement has not been formally amended, in June
1998, Mr. Cathcart and the Company agreed to change his employment to a
consulting arrangement on the same terms as those contained in the employment
agreement. In addition, Mr. Cathcart's arrangement provides for his
availability on a half-time basis to the Company at a compensation rate of 75%
($86,250) of that called for by the agreement.
Burt Cormany Employment Agreement. Santa Maria Refining Company, a wholly
owned subsidiary of the Company, and Burt Cormany have entered into an
employment agreement for a two-year term expiring on December 31, 1998,
pursuant to which Mr. Cormany will serve as President and Chief Operating
Officer of that subsidiary. Under the agreement, Mr. Cormany is eligible to
participate in the stock option plans of the Company and will receive a base
salary of $110,000 in the first year of the agreement and $120,000 in the
second year.
Imran Jattala Employment Agreement. The Company has entered into an
employment agreement with Imran Jattala for a three-year term expiring on July
23, 2001, pursuant to which Mr. Jattala will serve as an executive officer of
the Company and its subsidiary, Saba Petroleum, Inc. The agreement provides
for an annual salary of $72,000 subject to a 10% increase on January 1, 1999
and a 5% increase on January 1, 2000. Mr. Jattala is eligible to participate
in the stock option plan of the Company and is provided a Company automobile
under the agreement. Either party may terminate the employment with or without
cause upon thirty days' written notice; upon termination by the Company, the
agreement provides for a severance allowance in an amount equal to six months
of salary plus one month of salary for each year of employment with the
Company.
Herb Miller Employment Agreement. Beaver Lake Resources Corporation, a
74%-owned subsidiary of the Company, and Herb Miller have entered into an
employment agreement for a two-year term expiring on March 1, 2000, pursuant
to which Mr. Miller will serve as President of that subsidiary. The employment
provides for an annual salary of $85,000 (Cdn) and the grant of options to
purchase 500,000 shares of Beaver Lake Resources Corporation's common stock at
a strike price of $0.50 (Cdn) per share to be vested fifty percent a year for
two years. During the first year of Mr. Miller's employment, the agreement
provides that either party may terminate the agreement by providing three
months' written notice thereof to the other party.
Benefit Plans
Stock Option Plans. In June 1996, the Company's stockholders approved
the Company's 1996 Incentive Equity Plan (the "Incentive Plan"). The purpose
of the Incentive Plan is to enable the Company to provide officers, other key
employees and consultants with appropriate incentives and rewards for superior
performance. Subject to certain adjustments, the maximum aggregate number of
shares of the Company's Common Stock that may be issued pursuant to the
Incentive Plan, and the maximum number of shares of Common Stock granted to
any individual in any calendar year, shall not in the aggregate exceed
1,000,000 and 200,000 shares, respectively. Options granted under the
Incentive Plan have an exercise price equal to the market value of the Common
Stock on the date of grant, and become exercisable over periods ranging from
two to five years from the date of grant. At December 31, 1997, options to
purchase 580,000 shares of Common Stock had been awarded under the Incentive
Plan.
In May 1997, the Company's stockholders approved the Company's 1997 Stock
Option Plan for Non-Employee Directors, 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. The Board of Directors amended the, plan with shareholder
approval to provide for a one-time grant of 15,000 shares of Common Stock
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 December 31, 1997, a
total of 45,000 options had been granted under the Directors Plan.
In fiscal years 1993 through 1996, the Company issued options for 560,000
shares of Common Stock to certain employees of the Company, other than Mr.
Chaudhary. These options, which are not covered by the Incentive Stock Option
Plan or the Non-Qualified Stock Option Plan, become exercisable ratably over a
period of five years from the date of issue. The exercise price of the options
is the fair market value of the shares at the date of grant and ranges from
$1.25 to $4.38, with a weighted exercise price of $1.47. Options to acquire a
total 284,000 shares were exercisable as of December 31, 1997.
Retirement Plan. The Company sponsors a defined contribution retirement
savings plan (the "401(k) Plan"). The Company currently provides matching
contributions equal to 50% of each employee's contribution, subject to a
maximum of 4% of employee earnings. The Company's contributions to the 401(k)
Plan were $25,745 in 1995, $44,014 in 1996, and $42,016 in 1997.
Certain Relationships and Related Transactions
Certain officers, directors and key employees of the Company are engaged
in the oil and gas business for their own account and have business
relationships with other oil and gas exploration and development companies or
individuals. As a result, potential conflicts of interests between such
persons and the Company may arise.
In 1997, the Company adopted a policy whereby all transactions by and
between the Company and any affiliate of the Company shall be conducted on an
arm's-length basis, and all substantial transactions shall be approved by a
majority of the Company's directors without an interest in such transactions.
In 1995, the Company borrowed $350,000 from Unico, Inc., a company
controlled by William N. Hagler, a director. The loan bore interest at 10% per
annum and was repaid in December 1995.
The Company has, from time to time, outstanding balances due to, or
receivables due from, Capco and SEDCO (or subsidiaries of such companies).
Except as indicated to the contrary, balances from and to the Company are open
accounts and are unsecured. The transactions giving rise to such matters are
as follows:
In 1995, Capco loaned $2,221,900 to the Company at 9% per annum; the
proceeds were used to acquire certain of the Company's Colombian properties.
The loans were evidenced by unsecured promissory notes. $600,000 of the
initial loan proceeds was exchanged for 150,000 shares of Common Stock at a
price of $4 per share (which exceeded market price at the time). The notes
were paid in full in 1997.
In 1995, the Company borrowed $10,500 from SEDCO on a short-term basis
and repaid such amount during 1996.
In 1995, the Company paid SEDCO $10,700 for reimbursement of prior year
charges to the Company.
In 1995, the Company received $210,100 from Capco for reimbursement of
prior year charges and advances and was charged $22,700 for interest on
advances.
In 1995, the Company remitted $92,100 to Capco and affiliates in
settlement of prior year charges.
During 1995, the Company loaned $101,700 to SEDCO, evidenced by a secured
promissory note bearing interest at 9% per annum, collateralized by Mr.
Chaudhary's vested, but unexercised, options to purchase the Common Stock of
the Company. The note's principal and accrued, but unpaid, interest is due
December 31, 1998.
In 1996, the Company received $29,300 from Capco and certain affiliates
of Mr. Chaudhary for reimbursement of prior year advances and charged Capco
$9,600 for interest on such advances.
In 1996, the Company charged SEDCO $9,800 for interest on the outstanding
note receivable and was charged $5,100 by Saba Energy, Ltd. for interest due
to that company.
The Company charged SEDCO, Capco and certain affiliates of Mr. Chaudhary
$92,900 and $26,300 for administrative services provided to such companies
during 1995 and 1996, respectively. Such administrative services consisted
largely of Mr. Chaudhary's time. Of such amounts, $43,100 was unpaid at
December 31, 1996.
During 1996, a subsidiary of Capco participated in the drilling of one of
the Company's exploratory wells on the same basis as did the Company. The
Company has billed the subsidiary a total of $112,200, of which $64,700 was
outstanding at December 31, 1996.
During 1996, the Company provided a short-term advance to SEDCO amounting
to $10,000. No interest was charged on the advance.
During 1996, the Company loaned $300,000 to Mr. Chaudhary, evidenced by a
promissory note bearing interest at the rate of prime plus 0.75%. Interest is
due in quarterly installments and principal is due October 31, 1998. The note
is secured by Mr. Chaudhary's vested, but unexercised, options to acquire
Common Stock of the Company. In September 1997, the Company commenced
amortization of the note by applying twenty percent of Mr. Chaudhary's salary
thereto.
During 1996, the Company loaned $30,000 to William J. Hickey, a director
at the time. Such loan is evidenced by an unsecured promissory note, with
interest of 9.25% payable at maturity.
The Company charged SEDCO and Capco $18,600 for administrative services
provided to such companies during the year ended December 31, 1997. Such
administrative services consisted largely of Mr. Chaudhary's time.
The Company charged Capco $23,300 for charges incurred in connection with
the Solv-Ex Corporation matter, and $93,600 for an advance and related
expenses against an indemnification provided by Capco during the year ended
December 31, 1997.
In 1997, the Company received $10,000 in repayment of a short-term
advance to SEDCO, and $61,200 from Mr. Chaudhary for accrued interest and
principal on his loan from the Company.
During the year ended December 31, 1997, the Company billed a subsidiary
of Capco a total of $18,800 and received payments of $92,000 which included
amounts billed in the prior year, in connection with the subsidiary's
participation in drilling and production activities in one of the Company's
oil properties.
During the year ended December 31, 1997, the Company charged interest to
SEDCO, Ilyas Chaudhary and William Hickey (a former director of the Company)
in the amounts of $8,800, $27,500, and $2,700, respectively, on outstanding,
interest-bearing indebtedness to the Company.
During the year ended December 31, 1997, the Company incurred interest
charges in the total amount of $60,200 on the notes payable to Capco. The
Company paid Capco a total of $142,000 for such interest charges, which
included amounts charged, but unpaid, at the end of the previous year.
From time to time the Company chartered from a non-affiliated airplane
leasing service, a jet airplane acquired by Mr. Chaudhary in 1997. When
chartering the airplane, the Company paid the rate charged others by the
leasing service, less a discount, so that the rate paid by the Company was
less than that paid by others. Use of the airplane indirectly benefited Mr.
Chaudhary since it reduced the amount of time he was required to engage the
airplane. During 1997, the Company incurred usage charges of $72,800. Mr.
Chaudhary disposed of his ownership of the airplane in March 1998.
During the nine months ended September 30, 1998, the Company advanced
$36,000 to Capco, evidenced by an unsecured promissory note.
During the nine months ended September 30, 1998, the Company charged
interest to SEDCO, Ilyas Chaudhary, and William Hickey in the amounts of
$7,300, $22,100, and $2,200, respectively, on outstanding, interest-bearing,
indebtedness to the Company. The Company received $13,400 from Mr. Chaudhary
for accrued interest on his loan from the Company, and $29,500 from SEDCO for
accrued interest and principal on the loan to that Company.
During the nine months ended September 30, 1998, the Company charged
Capco $1,500 for interest on outstanding advances to that company.
In July 1997, the Company and Solv-Ex Corporation, which owned interests
in two tar sands licenses in the Athabasca region of Alberta, Canada,
informally agreed to terms upon which the Company would acquire a 55% interest
in the licenses, related improvements and certain related technology, subject
to various conditions, including satisfactory results of a due diligence
investigation by the Company. Solv-Ex and its principal subsidiary have filed
for reorganization pursuant to the United States Bankruptcy Code and for
protection under analogous Canadian legislation. To conclude the transaction,
the Company would be required to invest approximately $15 million, largely to
pay creditors in Canada and would then undertake project development, which
could cost as much as $1 billion. In lieu of committing to the purchase, the
Company entered into an agreement with Capco by which the Company transferred
to Capco its rights under such agreements in exchange for Capco's agreement to
convey to the Company a 2% overriding royalty on the project (commencing after
the project generated $10 million in gross revenues) and granted to the
Company the right to acquire up to 25% of the interests in the project that
are acquired by Capco for the same proportion of Capco's cost of acquisition
and maintenance of the project. The option runs for two years from the date of
Capco's acquisition of the properties or the company. Neither of these events
has occurred. In the investigation and negotiations of the acquisition of the
tar sands project, the Company and Capco had agreed that the Company would
bear all costs, internal and third party, incurred by the Company prior to
August 13, 1997, and that Capco would bear the expenses incurred subsequent to
said date. Such costs include $100,000 lent to Solv-Ex as an inducement to
negotiate and execute a purchase agreement the amount of which was repaid to
the Company in August 1998. The Company's total costs in respect of the
acquisition (excluding the loans) are approximately $60,000.
In November 1997, the Company and a large independent oil company each
entered into an agreement with Hamar II Associates, LLC, an entity in which
Rodney C. Hill, a director of the Company is a member, providing for the
Company and the large independent to acquire oil and gas leases and to
participate in the drilling of a test well in northern California, to bear a
proportionate part of the lease acquisition and maintenance payments and to
pay a proportionate share (30% in the case of the Company and 60% in the case
of the large independent) of a consideration of $100,000 to members of Hamar,
including Rodney C. Hill. The Company had orally agreed to issue 20,000 shares
of its Common Stock for no additional consideration should the test well
drilled on the Behemoth Prospect be productive in quantities deemed commercial
by the Company. Save for the issuance of the Common Stock, the terms of
participation are the same for the Company and the large independent, which
would be the operator of the project if it were successful. The exploratory
well was drilled on this prospect during March and April 1998 and has been
abandoned. A technical review of the land block is being performed.
Rodney C. Hill, a former director of the Company, is the sole stockholder
of Rodney C. Hill, a Professional Corporation, which acts as general counsel
to the Company. In 1997, such corporation was engaged to provide legal
services to the Company pursuant to a retainer agreement, which may be
cancelled by the Company at any time, and pursuant to which such corporation
receives an annual retainer of $150,000 and reimbursement of certain expenses.
During 1997, Mr. Hill was granted options to acquire 125,000 shares of the
Common Stock of the Company at a price equal to the current fair market value
of the Common Stock at the time of grant that vest over a period of five
years. In March, 1998, the legal services agreement was amended to terminate
the existing fee arrangement and limit the scope of representation of the
Company to matters pertaining to the proposed business combination with Omimex
Resources Inc. with compensation set at $100,000 upon completion of the
business combination or $50,000 if such transaction is not consummated. The
agreement was further amended to provide for the cancellation of the grant of
options to acquire 125,000 shares of Common Stock and, among other
consideration, the issuance of 20,000 shares of Common Stock, fully paid, and
the grant of options to acquire 30,000 shares of Common Stock at fair market
value at the time of grant that vested immediately. In June 1998, the
agreement was further amended to expand the scope of representation for a
period ending September 30, 1998, for an additional fixed fee of $50,000 plus
expense to be paid at the minimum rate of $6,000 per month with the unpaid
balance due by October 31, 1998. The agreement was further updated by the
Company for month to month consulting services commencing October 1, 1998, for
$6,000 per month plus expenses and to extend the exercisable term of options
granted to acquire 30,000 shares of Common Stock and at the exercise price of
$1.50 per share. At September 30, 1998, the Company was indebted to the
corporation controlled by Mr. Hill in an aggregate amount of $123,400,
representing accrued fees and reimbursements.
Ronald D. Ormand, who served as a director of the Company from May 1997
to July 1998, is a Managing Director of CIBC-Oppenheimer & Co., Inc., which
has rendered investment banking services to the Company. During January, 1998,
the Company engaged CIBC-Oppenheimer to advise the Company with respect to
strategies and procedures to adopt in an effort to maximize shareholder
values. This engagement was terminated effectively in August 1998, and through
August 1999, CIBC shall be entitled to a fee if a sale of the Company, or any
part, is consummated with any of thirty-four parties identified by CIBC and
the Company as having been contacted during the engagement by CIBC on behalf
of the Company.
William N. Hagler, a director of the Company, was formerly the President
of Unico, Inc. and was the President of Capco from July 1997 to September
1997.
In January 1998, the Company engaged Faysal Sohail, a former director of
the Company, to render investor relations services to the Company for which
Mr. Sohail had been granted 20,000 shares of fully paid Common Stock.
Meteor Industries, Inc., of which Capco owns a majority of the stock, has
an interest in Saba Power Company Ltd. ("Saba Power"), a limited liability
corporation in Pakistan which was established in early 1995 to pursue
development of a power plant project in Pakistan (the "Power Project"). On
December 27, 1996, Meteor Industries, Inc. entered into an agreement with the
Company whereby the Company participated and owns a 0.5% interest in the Power
Project. This percentage, however, could be reduced in the event that other
shareholders of Saba Power are required to make additional contributions to
equity. No such additional equity contributions have been requested.
In January 1998, the Company entered into an agreement and made a deposit
of $36,000 to purchase real property located in Santa Maria, California for
$300,000. The purchasing interest of the Company was thereafter assigned to
Capco in April 1998, and the sale closed in May 1998. Capco had agreed to
reimburse to the Company the $36,000 deposit, with interest at the rate of 12%
per annum, within 90 days of closing.
In July 1998, Bradley Katzung, an officer of the Company, earned a bonus
of one percent of the net proceeds of the sale of the Company's interest in
oil and gas properties in Michigan for approximately $3.7 million.
In connection with an Exchange Agreement entered into on March 6, 1998,
effective January 1, 1998, and closing on April 6, 1998, by a subsidiary of
the Company for its acquisition of the remaining 20% working interest in the
Potash Field located in Louisiana and an additional 10.2% working interest in
the Manila Village Field in Louisiana, the Company was obligated to tender
200,000 shares of Company Common Stock, free of all restrictions, to the
Seller, while the Company was to reserve and withhold 10,000 shares thereof
until such time as certain litigation affecting the subject matter of the
Exchange Agreement was dismissed or upon written agreement by the parties. In
July 1998, the Seller assigned its entire receivable from this transaction,
recorded by the Company at a cost of $750,000 based upon the closing price of
the Company's Common Stock on the closing date, to Capco and affiliates of
Capco in exchange for its receipt of 200,000 unrestricted shares of Company
Common Stock.
In August 1998, and for $525,000, an affiliate of the Company purchased
property adjoining the Company's refinery, said land that had been claimed by
the predecessor as being contaminated by underground emissions from the
refinery. The affiliate offered an option to the Company to assume the
payments of the financed balance of $450,000 plus 8.5% interest in exchange
for acquiring an interest in the property.
In August 1998, the Company sold its interest to Capco Development, Inc.
in two producing wells in Alabama for $800,000, an approximate 20% portion of
which was paid and acquired by Mr. Chaudhary.
On October 8, 1998, Randeep S. Grewal became a director of the Company
and a member of the Company's Management Committee on November 12, 1998. Mr.
Grewal is the Chairman and Chief Executive Officer of HVI. HVI has entered
into several transactions with respect to the Company's securities and the
designation of directors on the Company's Board of Directors as described in
"THE COMPANY Recent Developments Transactions Involving Horizontal
Ventures, Inc."
The Company entered into a letter of understanding that may be deemed an
employment agreement in August 1998 with Charles A. Kohlhaas, a director, and
while Dr. Kohlhaas was employed by the Company as its Chief Executive Officer
and President on an interim basis. The Company is unsure as to what rights, if
any, may be continuing under the August letter of understanding.
In May 1997, Capco and certain of its designees acquired a working
interest in the properties of the Company in New Mexico.
In December, 1998, the Company entered into a letter of intent with Capco
Development, Inc. to sell all of the outstanding stock of its wholly-owned
subsidiary, Saba Energy of Texas, Inc. ("SETI"), for a contract price of $5
million and a closing scheduled for December 31, 1998, subject to certain
conditions and adjustments. At the closing, those properties of SETI that
will be part of the sale shall include certain interests located in Michigan,
New Mexico, Oklahoma, Texas, Utah, and Wyoming and excluding interests
located in Louisiana.
The Company had entered into an employment agreement with Ilyas Chaudhary
for a term expiring in the year 2000, pursuant to which Mr. Chaudhary was to
serve as Chief Executive Officer of the Company. The employment agreement
provided for a base salary of $150,000 in 1995, increasing 10% annually to
$219,615 in 1999. The employment agreement also provided Mr. Chaudhary with
options to purchase 200,000 shares of the Company's Common Stock, for $1.50
per share, 40,000 of which vest each year of the agreement beginning in 1996.
Of the total shares vested at December 31, 1997, 60,000 were unexercised and
20,000 have been exercised. In May 1997, the Company authorized the issuance
to Mr. Chaudhary of 200,000 shares of Deferred Common Stock, the issuance of
such deferred shares being contingent upon Mr. Chaudhary remaining in the
employ of the Company for a period of two years succeeding the expiration of
his employment contract and such shares being issuable 100,000 shares at the
end of each such succeeding year. In addition, at that time the Company
authorized the issuance to Mr. Chaudhary of 100,000 shares of the Common Stock
should the Company meet certain earnings benchmarks during 1997.
On November 12, 1998, Mr. Chaudhary stepped down as Chief Executive
Officer and President of the Company in order to facilitate the closing of the
transactions pending with Horizontal Ventures, Inc. (see "The Company Recent
Developments Horizontal Ventures, Inc.") The Company had agreed at that
time to negotiate a severance package with Mr. Chaudhary with respect to the
termination of his employment agreement. Such negotiations are pending.
The Company is in discussions with Mr. Chaudhary, Capco, and their
affiliates for a global settlement of all related party transactions.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock by (i) each person who is either the
record owner or known to the Company to be a beneficial owner of more than 5%
of the Common Stock, (ii) each director and named executive officer of the
Company and (iii) all directors and officers of the Company as a group.
Shares Beneficially Owned and Ownership as a Percent of Common Stock is given
as of December 17, 1998, when there were 11,385,726 shares outstanding.
Ownership as a Percent of Common Stock Assuming Full Conversion and Exercise
assumes that the 8,000 shares of Series A Preferred Stock including a $360,000
dividend through September 30, 1998, are converted in accordance with the
agreements between and among the Company, HVI and RGC, that all 269,663
Warrants issued in connection with the Series A Preferred Stock are exercised,
and that the Company obtains all requisite approval to comply with the terms
of the Series A Preferred Stock with respect to conversion. See "Risk Factors-
Potential Dilution Series A Preferred Stock". Such conversion and exercise
would increase the outstanding shares by approximately 9,789,851 shares to
21,175,577. Because the Series A Preferred Stock is not required to be
converted and the conversion rate varies with the current price of the stock
these numbers could vary materially.
<TABLE>
Ownership as a Percent
Shares Ownership Of Common Stock Assuming
Beneficially as a Percent Full Conversion and
Owned (1) Of Common Stock Exercise
<S> <C> <C> <C>
Principal Stockholders:
Saba Acquisub, Inc.(2)
3201 Airpark Dr.,
Suite 201
Santa Maria, CA 93456 2,971,766 26.1% 14.0%
Horizontal Ventures, Inc.
(2)(3)
630 Fifth Avenue,
Suite 1501
New York, New York 6,351,778 46.9% 30.0%
Other Directors and
Named Executive Officers:
Dr. Charles Kohlhaas 0 * *
William N. Hagler 14,000 * *
Randeep Grewal (4) 0 * *
Alex S. Cathcart 0 * *
Herb Miller 0 * *
Burt Cormany 0 * *
Imran Jattala 11,500 * *
Susan M. Whalen 0 * *
All Directors and
Officers as a Group 25,500 * *
</TABLE>
<TABLE>
<CAPTION>
SELLING STOCKHOLDERS (5)
Percentage
Shares Amount To Be to be owned
Beneficially Amount Owned After After Com-
Owned Prior to Of Shares to Completion pletion of
Offering Be Offered Of the Offering the offering
<S> <C> <C> <C> <C>
RGC International
Investors(6)(7) 7,863,669 2,078,051 5,785,618 27.3%
Aberfoyle Capital
Limited (7)(8) 44,944 44,944 0 0
Horizontal Ventures,
Inc. (7)(9) 6,351,778 633,345 5,718,433 27.0%
</TABLE>
__________________________
Rule 13d-3 under the Securities Exchange Act of 1934, involving the
determination of beneficial owners of securities, includes as beneficial
owners of securities, among others, any person who directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise
has, or shares, voting power and/or investment power with respect to such
securities; and, any person who has the right to acquire beneficial ownership
of such security within sixty days through means, including, but not limited
to, the exercise of any option, warrant or conversion of a security. In
making this calculation, options and warrants which are significantly "out-of-
the-money" and therefore unlikely to be exercised within sixty days are not
included in the calculation of beneficial ownership. For this purpose, the
Company deems options and warrants with an exercise price above $2.50 as
unlikely to be exercised within the next sixty days. Any securities not
outstanding which are subject to such options, warrants or conversion
privileges are deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person, but
are not deemed to be outstanding for the purpose of computing the percentage
of the class by any other person.
* Less than one percent.
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed above have sole investment and voting
power with respect to such shares subject to community property laws
where applicable.
(2) HVI currently holds all of the outstanding shares of Saba Acquisub, Inc.,
("SAI"). HVI acquired all of the outstanding shares of SAI pursuant to a
Stock Exchange Agreement with the sole former shareholder of SAI, Capco
Resources Ltd. the former shareholder of SAI has the right until December
31, 1998 to terminate the agreement and reacquire its shares of SAI.
Ilyas Chaudhary owns 50% of a privately held Canadian company, which
through a subsidiary, owned 90% by it and 10% by Mr. Chaudhary, owns
1,582,126 shares of the common stock of Capco Resources Ltd. Mrs. Bushra
Chaudhary, the wife of Mr. Chaudhary, owns the remaining 50% of the
privately held Canadian company. Faisal Chaudhary, the adult son of Mr.
and Mrs. Chaudhary, owns 905,961 shares of the common stock of Capco
Resources Ltd. and Aamna Chaudhary, the daughter of Mr. and Mrs.
Chaudhary, owns 905,961 shares of the common stock of Capco Resources
Ltd. Mr. and Mrs. Chaudhary each disclaim beneficial interest in the
shares of Capco owned by each other and in the shares held by Faisal
Chaudhary. SEDCO, a corporation wholly owned by Mr. Chaudhary, owns
4,227,821 shares of the Common Stock of Capco Resources Ltd. As of
November 30, 1998 there were 9,148,311 outstanding shares of the common
stock of Capco Resources Ltd. Shares in Capco Resources Ltd. owned by
members of Mr. Chaudhary's family may be deemed to be owned by
Mr. Chaudhary by reason of the attribution rules of the Securities and
Exchange Commission. The remaining 1,526,442 shares of Capco Resources
Ltd. common stock are held by the public.
(3) Consists of (i) An aggregate of 300,012 shares of Common Stock of the
Company into which the 690 shares of the Company's Series A Preferred
Stock acquired by HVI from RGC under the Preferred Stock Transfer
Agreement, along with the accrued but unpaid dividends on such shares of
Series A Preferred Stock, are convertible, (ii) 2,500,000 shares of
Common Stock which are to be issued to HVI under the Common Stock
Purchase Agreement (of which 333,333 shares have been issued to HVI as
part of an interim closing), (iii) 500,000 shares of Common Stock held by
International Publishing Holding s.a. ("IPH") and subject to a presently
exercisable call option by HVI under the option agreement between HVI and
IPH, with the dispositive and voting power for such 500,000 shares being
effectively shared between HVI and IPH, (iv) 80,000 shares of Common
Stock held directly by HVI and (v) 3,000,000 shares of Common Stock held
by SAI, a wholly owned subsidiary of HVI.
(4) Mr. Grewal is an affiliate of, but does not control the Board of
Directors for, HVI.
(5) The Selling Stockholders, except HVI, do not and have not had any
material relationships with the registrant or any of its affiliates.
(6) RGC currently holds shares of Series A Preferred Stock with an aggregate
stated value of $7,310,000 and the accrued dividends for those shares
through September 30, 1998 was $328,950. The number of shares shown as
being beneficially by owned RGC includes (i) 7,638,950 shares issuable
upon conversion of the balance of the Series A Preferred Stock that are
held by (based on the average of the closing bid prices for the three
days ended December 16, 1998 of $1.083), and (ii) 224,719 shares into
which the warrants held by RGC may be converted. The number of shares as
being offered for sale by RGC includes 1,853,332 shares which may be
issued upon conversion of shares of the Series A Preferred Stock and
224,719 shares that may be issued upon conversion warrants held by RGC.
RGC is a party to an investment management agreement with Rose Glen
Capital Management, L.P., a limited partnership of which the general
partner is RGC General Partner Corp. Messrs. Wayne Bloch, Gary Kaminsky
and Steve Katznelson own all of the outstanding capital stock of RGC
General Partner Corp. and are parties to a shareholders agreement
pursuant to which they collectively control RGC General Partner Corp.
Through RGC General Partner Corp., such individuals control Rose Glen
Capital Management, L.P. Such individuals disclaim beneficial ownership
of the Company's Common Stock owned by the Selling Stockholder.
(7) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by the Selling
Stockholders. The actual number of shares of Common Stock issuable upon
conversion of Series A Preferred Stock and exercise of the warrants is
indeterminate, is subject to adjustment and could be materially less or
more than such estimated number depending on factors which cannot be
predicted by the Company at this time, including, among other factors,
the future market price of the Common Stock. The actual number of shares
of Common Stock offered hereby, and included in the Registration
Statement of which this Prospectus is a part, includes such additional
number of shares of Common Stock as may be issued or issuable upon
conversion of the Series A Preferred Stock and exercise of the Warrants
and the Redemption Warrants by reason of the floating rate conversion
price mechanism or other adjustment mechanisms described therein, or by
reason of any stock split, stock dividend or similar transaction
involving the Common Stock, in order to prevent dilution, in accordance
with Rule 416 under the Securities Act. The Certificate of Designation
governing the Series A Preferred Stock and the Warrants each contain
provisions which limit the number of shares of Common Stock into which
the shares of Series A Preferred Stock and the Warrants are
convertible. Under these provisions, the number of shares of Common
Stock into which the Series A Preferred Stock and the Warrants are
convertible on any given date (together with any additional shares of
Common Stock held by this Selling Stockholder) will not exceed 4.9% of
the Company's then outstanding Common Stock unless such provision is
waived by the holder of the Series A Preferred Stock being converted.
Accordingly, the number of shares of Common Stock set forth in the table
for this Selling Stockholder exceeds the number of shares of Common Stock
that this Selling Stockholder could own beneficially at any given time
through their ownership of the Series A Preferred Stock and the
Warrants.
(8) This number is the number of shares issuable upon exercise of the
Warrants issued to Aberfoyle as a fee in connection with the placement of
the Series A Preferred Stock.
(9) The number shares shown as being offered by HVI includes (i) an estimated
300,012 shares issuable upon the conversion of 690 shares of Series A
Preferred Stock currently held by HVI and (ii) 333,333 shares issued to
HVI pursuant to its payment of $1,000,000 on November 6, 1998 as part of
an interim closing of the Common Stock Purchase Agreement between the
Company and HVI. HVI presently does not have any intention of selling the
633,345 shares disclosed herein in the event that all of transactions
described under "Recent Developments - Transactions Involving Horizontal
Ventures, Inc." are consummated.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000
shares of Common Stock, par value $.001 per share, and 50,000,000 shares of
Preferred Stock, par value $.001 per share.
Common Stock
As of December 17, 1998, the Company had 11,385,726 shares of Common
Stock issued and outstanding. The holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders of the
Company. In addition, such holders are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor, subject to the payment of
preferential dividends with respect to any preferred stock that from time to
time may be outstanding. See "Price Range of Common Stock and Dividend
Policy." In the event of the dissolution, liquidation or winding-up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of all liabilities of the Company and subject
to the prior distribution rights of the holders of any preferred stock that
may be outstanding at that time. All outstanding shares of Common Stock are
fully paid and nonassessable.
Preferred Stock
On December 31, 1997, the Company issued 10,000 shares of Series A
Convertible Preferred Stock in exchange for $10 million. In June 1998, in
connection with the execution of the Merger Agreement, the holders of the
Series A Preferred Stock and the Company modified the terms of the Series A
Preferred Stock and redeemed $2 million Stated Value of the Series A Preferred
Stock for a consideration of 105% of Stated Value plus accrued dividends. The
Series A Preferred Stock bears a cumulative dividend of 6% per annum payable
quarterly in cash or, at the Company's option, the dividend amount may be
added to the "Conversion Amount" as defined in the Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock. The
Company has declared that the cumulative dividends accrued through and payable
on June 30 and September 30, 1998 shall be added to the conversion amount and
not paid in cash. All of the outstanding shares of Series A Preferred Stock
currently are convertible into Common Stock at a price equal to the lower of
$9.345 or the average closing bid price for any three consecutive trading days
during the 30 trading day period ending one trading day prior to the date the
conversion notice is sent to the Company. However, the Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock provides
that without waiver by the American Stock Exchange of its rules, the Company
would be permitted to issue only 2,153,344 shares of Common Stock without a
shareholders' vote approving the issuance of additional shares. The Company is
required to seek such shareholder approval. Mr. Chaudhary has agreed to vote
in favor of the proposal to be submitted to shareholders. The issuance of the
Series A Preferred Stock was exempt from registration under Rule 506 of
Regulation D of the Securities Act.
The Series A Preferred Stock is redeemable by the Company at any time and
must be redeemed upon the occurrence of certain events. The Company may redeem
the Series A Preferred Stock at 115% of its stated value plus accrued
dividends and the issuance of a five year warrant to purchase 200,000 shares
of the Common Stock at 105% of the average closing bid price for the five
consecutive trading days ending one day prior to the date fixed for
redemption. However, the holder has the ability to convert all or any shares
of the Series A Preferred Stock into Common Stock. The circumstances under
which the Series A Preferred Stock must be redeemed at the option of the
holders of at least 50% of the then outstanding Series A Preferred Stock
include the failure of the Company to obtain an effective registration
statement for the Common Stock underlying the Series A Preferred Stock prior
to June 28, 1998, failure to maintain American Stock Exchange listing or
should the Series A Preferred Stock cease to become fully convertible as a
result of such conversion resulting in the issuance of more than 19.9% of the
then outstanding shares of Common Stock and the Company has not, within
certain time limitations, secured shareholder approval to allow for full
conversion. The Company has not received a notice from the holders of the
Series A Preferred Stock requiring the Company to redeem that stock.
RGC had agreed to waive any default by the Company occurring prior to the
closing of the sale of 7,000 shares of Series A Preferred Stock in the
aggregate to HVI under the terms of the Preferred Stock Transfer Agreement.
The sale of 7,000 shares of Series A Preferred Stock has not closed under the
terms of the Preferred Stock Transfer Agreement, and RGC and HVI are in
negotiations to extend the closing. HVI had agreed with the Company that after
acquiring 7,000 shares of the Series A Preferred and upon HVI's conversion of
any such shares, HVI would waive any of the defaults in existence with respect
to the Series A Preferred Stock. HVI also has agreed with the Company that
upon HVI's acquisition of 7,000, or greater, shares of Series A Preferred
Stock, HVI would convert shares of Series A Preferred Stock into shares of the
Company's Common Stock at a price of $2.50 per share upon any such conversion.
The Series A Preferred Stock is senior to all other classes of the
Company's equity securities and is accorded preferential status with regard to
dividend and liquidation rights. The conversion of the Series A Preferred
Stock could have a dilutive effect on the Company's Common Stock. The Series
A Preferred Stock generally carries no voting rights other than with respect
to the future issuance of preferred stock.
The Board has the authority to issue an additional 49,990,000 shares of
preferred stock in one or more series and to fix the designations, relative
powers, preferences, rights, qualifications, limitations and restrictions of
all shares of each such series, including, without limitation, dividend rates,
preemptive rights, conversion rights, voting rights, redemption and sinking
fund provisions, liquidation preferences and the number of shares constituting
each such series. However, approval by the holders of a majority of the
Company's Series A Preferred Stock is required to create any new class or
series of capital stock having a preference over or on par with the Series A
Preferred Stock. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock or
adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. The issuance of preferred stock could also have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders in the event the Company no longer
remained in the control of the present controlling stockholders.
9% Convertible Senior Subordinated Debentures
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 underwriter exercised its right to overallotment and
$1,650,000 of additional Debentures were issued. The Debentures are
convertible into Common Stock, 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 reserved 3,000,000
shares of its Common Stock for the conversion of the Debentures. Mandatory
sinking fund payments of 15% of the original principal, adjusted for
conversions prior to the date of payments, are required annually commencing
December 15, 2000. The Debentures are uncollateralized and subordinated to all
present and future senior debt, as defined, of the Company and are effectively
subordinated to all liabilities of subsidiaries of the Company.
Debentures in the amount of $6,212,000 and $2,839,000 were converted into
1,419,846 and 648,882 shares of Common Stock during the years ended
December 31, 1996 and 1997, respectively. An additional $24,000 of Debentures
were converted into 5,485 shares of Common Stock during the nine months ended
September 30, 1998.
The Company has deferred the semi-annual interest payment of $162,000 due
in December 1998 on the Debentures. The Company intends to make the interest
payment within the next thirty days prior to the event of default. The Company
may not be in compliance with certain terms of the Amended and Restated
Indenture dated as of February 7, 1996 for the Debentures. (Note 8 to
Consolidated Financial Statements)
Warrants
The purchaser of the Series A Preferred Stock received warrants to
purchase 224,719 shares of Common Stock for a period of three years from
December 31, 1997. In addition, Aberfoyle Capital, Ltd., was issued warrants
to acquire 44,944 shares of Common Stock at an exercise price of $10.68 per
share for a three year period from December 31, 1997, as a fee in connection
with the placement of the Series A Preferred Stock. The warrants issued to the
purchaser of the Series A Preferred Stock and to Aberfoyle Capital, LTD., may
be adjusted from time to time under certain anti-dilution provisions. In June
1998, in connection with securing the consent of the holder of the Series A
Preferred Stock to the business combination with Omimex the terms of the
warrants held by the holder of the Series A Preferred Stock were modified to
reduce the exercise price to $2.5875 (115% of the closing price on the
American Stock Exchange of the Company's Common Stock on June 1, 1998).
Redemption Warrants
In connection with the issuance of the Series A Preferred Stock, the
purchaser received the right to be issued warrants to acquire 200,000 shares
of Common Stock should the Company exercise its right to redeem the Series A
Preferred Stock. The warrants are exercisable over five years commencing five
days after redemption of the Series A Preferred Stock at an exercise price of
105% times the average closing bid price of the Company's Common Stock for the
five consecutive trading days ending one trading day prior to the date of
redemption. The warrants may be adjusted from time to time under certain anti-
dilution provisions.
Certain Corporate Governance Provisions
Certain Anti-Takeover Effects of Certain Provisions of the Delaware
General Corporation Law
The Delaware General Corporation Law provides that, subject to certain
exceptions, a corporation shall not engage in any business combination with
any "interested stockholder" for a three-year period following the date that
such stockholder becomes an interested stockholder unless (1) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (2) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares),
or (3) on or subsequent to such date, the business combination is approved by
the board of directors of the corporation and at an annual or special meeting
of stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock, which is not owned by the interested stockholder.
Except as specified in the Delaware GCL, an interested stockholder is defined
to include (x) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the
relevant date, and (y) the affiliates and associates of any such person.
Under certain circumstances, the foregoing provisions make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed thereby. The Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") of the Company does not
exclude it from the restrictions imposed by the foregoing provisions of
Delaware law. Those provisions may encourage companies interested in acquiring
the Company to negotiate in advance with the Board of Directors of the
Company, since the stockholder approval requirement would be avoided if a
majority of the directors then in office approve, prior to the time the
stockholder becomes an interested stockholder, either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder.
Limitations on Directors' Liabilities and Indemnification of Officers and
Directors The Certificate of Incorporation and the Bylaws of the Company each
contain provisions that eliminate, to the extent permitted under the Delaware
GCL, the personal monetary liability of a director to the Company and its
stockholders for breach of a director's fiduciary duty of care as a director.
If a director were to breach the duty of care, neither the Company nor its
stockholders could recover monetary damages from the director and the only
course of action available to the stockholders would be equitable remedies,
such as an action to enjoin or rescind a transaction involving the breach. To
the extent certain claims against directors are limited to equitable remedies,
these provisions may reduce the likelihood of derivative litigation and may
discourage stockholders or management from initiating litigation against
directors for breach of their duty of care. Additionally, equitable remedies
may not be effective in many instances. Were a stockholder's only remedy to
enjoin the completion of the Board of Directors' action, this remedy would be
ineffective if the stockholder does not become aware of a transaction or event
until after it has been completed. In such a situation, the stockholder would
have no effective remedy against the directors. Liability for monetary damages
remains for (1) any breach of the duty of loyalty to the Company or its
stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) payment of an
improper dividend or improper repurchase or redemption of the Company's stock,
or (4) any transaction from which the director derived an improper personal
benefit. The Certificate of Incorporation also provides that the Delaware GCL
is amended to allow the further elimination or limitation of the liability of
directors, the liability of the Company's directors shall be limited to the
fullest extent permitted by such amendment. The Delaware GCL permits a
corporation to indemnify certain persons, including officers and directors,
who are (or are threatened to be made) parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than derivative actions) by reason of their being
officers or directors of the corporation. The indemnity may include expenses,
such as attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by an indemnified officer or director,
provided that he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the corporation's best interests and, in the case of
criminal proceedings, provided he had no reasonable cause to believe that his
conduct was unlawful. The Bylaws provide indemnification to the fullest extent
allowed pursuant to the foregoing provisions of the Delaware GCL.
The Delaware GCL also permits a corporation to extend indemnification to
various persons, including officers and directors, who are, or are threatened
to be made, parties to any threatened, pending or completed action or suit by
or in the right of the corporation to procure a judgment in its favor by
reason of their being officers or directors of the corporation. This indemnity
may include the items specified in the preceding paragraph, subject to the
proviso described in that paragraph. However, no such person will be
indemnified as to matters for which he is found to be liable for negligence or
misconduct in the performance of his duty to the corporation unless, and only
to the extent that, indemnification is ordered by a court. The Certificate of
Incorporation and Bylaws of the Company provide indemnification of the
Company's directors and officers to the fullest extent allowed pursuant to the
foregoing provisions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
As permitted by the Delaware GCL, the Company has obtained a directors'
and officers' liability insurance policy that, subject to the terms and
conditions of the policy, insures the director and officers of the Company
against losses arising from any wrongful act (as defined by such policy) in
his or her capacity as director or officer of the Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
American Securities Transfer, Inc., Denver, Colorado.
PLAN OF DISTRIBUTION
The shares of Common Stock (the "Shares") being offered by the Selling
Stockholders, or their respective pledgees, donees, transferees or other
successors in interest, will be sold in one or more transactions (which may
involve block transactions) on the American Stock Exchange or on such other
market on which the Common Stock may from time to time be trading, in
privately-negotiated transactions, through the writing of options on the
Shares, short sales or any combination thereof. The sale price to the public
may be the market price prevailing at the time of sale, a price related to
such prevailing market price or such other price as the Selling Stockholders
determine from time to time. The Shares may also be sold pursuant to Rule 144.
The Selling Stockholders shall have the sole and absolute discretion not to
accept any purchase offer or make any sale of Shares if they deem the purchase
price to be unsatisfactory at any particular time.
The Selling Stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the Shares directly
to market makers acting as principals and/or broker-dealers acting as agents
for themselves or their customers. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of the Shares whom such broker-
dealers may act as agent or to whom they may as principal, or both (which
compensation as to particular broker-dealer may be in excess of customary
commissions). Market makers and block purchasers purchasing the Shares will do
so for their own account and at their own risk. It is possible that a Selling
Stockholder will attempt to sell Shares in block transactions to market makers
or other purchasers at a price per share which may be below the then market
price. In addition, the Selling Stockholders or their successors in interest
may enter into hedging transactions with broker-dealers who may engage in
short sales of shares of Common Stock in the course of hedging the positions
they assume with a Selling Stockholder. There can be no assurance that all or
any of the Shares offered hereby will be issued to, or sold by, the Selling
Stockholders. The Selling Stockholders and any brokers, dealers or agents,
upon effecting the sale of any of the Shares offered hereby, may be deemed
"underwriters" as that term is defined under the Securities Act or the
Exchange Act, or the rules and regulations thereunder.
The Selling Stockholders and any other persons participating in the sale
or distribution of the Shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Shares by the Selling
Stockholders or any other such person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions. The foregoing may affect the marketability of the Shares.
The Company has agreed to indemnify RGC and Aberfoyle Capital Limited,
Selling Stockholders, or their transferees or assignees, against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments those Selling Stockholders or their respective pledgees, donees,
transferees or other successors in interest, may be required to make in
respect thereof.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
outstanding 21,175,577 shares of Common Stock (including 269,663 shares
issuable upon the exercise of the Warrants, an estimated 7,353,521 shares
issuable upon conversion of the Series A Preferred Stock. An additional
number of shares of Common Stock, currently undeterminable, may be issued and
may be then registered in the future to satisfy full conversion of the Series
A Preferred Stock. See "Risk Factors-Potential Dilution-Outstanding Preferred
Stock". Of these shares, 10,770,807 shares will be freely tradeable without
restriction or further registration under the Securities Act. Of the remaining
shares, 10,404,770 will be "restricted securities" ("Restricted Shares")
within the meaning of Rule 144 under the Securities Act. In addition,
approximately 817,143 shares of Common Stock may be issued upon the conversion
of the outstanding Debentures, the conversion price for which is $4.38 per
share. See "Notes to Consolidated Financial Statements - Note 8 Long Term
Debt." Sales of any of these shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock. See "Risk Factors Factors Relating to the Company Shares Eligible
for Future Sale; Control by Significant Stockholder."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed 1% of the number of shares of Common Stock then
outstanding or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the making of a filing with the Commission
with respect to such sale. Such sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 calendar days preceding a sale, and who has beneficially owned
for at least three years the shares proposed to be sold, would be entitled to
sell such shares under Rule 144(k) as currently in effect without regard to
the requirements as stated above. The Company is unable to estimate accurately
the number of Restricted Shares that ultimately will be sold under Rule 144
because the number of shares will depend in part on the market price for the
Common Stock, the personal circumstances of the sellers and other factors.
CERTAIN LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Cohen Brame & Smith Professional Corporation.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and 1997, and for the three years in the period ended December 31, 1997
included in this Prospectus, have been included herein in reliance on the
report, which includes an explanatory paragraph concerning substantial doubt
regarding the Company's ability to continue as a going concern, of
PricewaterhouseCoopers LLP (Los Angeles, California), independent accountants,
given upon the authority of that firm as experts in accounting and auditing.
The information appearing in this Prospectus with respect to the
Company's proved reserves at December 31, 1995, 1996 and 1997, and to the
extent stated herein, was estimated by Netherland, Sewell & Associates, Inc.
and Sproule Associates Limited, independent petroleum engineers. Such
information is included herein on the authority of such firms as experts in
petroleum engineering.
APPENDIX A
GLOSSARY
The following defined terms have the indicated meanings when used in this
Prospectus:
Bbl or barrel: 42 United States gallons liquid volume, usually used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf: One billion cubic feet of gas.
BOE or Barrels of oil equivalent: a conversion of gas to oil at a ratio of
6,000 cubic feet of gas to one Bbl of oil, usually. Then oil and gas are added
together for total BOE.
BOEPD: Barrels of oil equivalent per day.
Bopd: Barrels of oil per day.
BTU: British Thermal Unit, which is a heating equivalent measure for natural
gas and is an alternate measure of natural gas reserves, as opposed to Mcf,
which is strictly a measure of natural gas volume. Typically prices quoted for
natural gas are designated as price per MMBTU, the same basis on which natural
gas is contracted for sale.
Completion: The installation of permanent equipment for the production of
crude oil or gas, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
Developed acreage: The number of acres of oil and gas leases held or owned,
which are allocated or assignable to producing wells or wells capable of
production.
Development well: A well which is drilled to and completed in a known-
producing formation adjacent to a producing well in a previously discovered
field and in a stratigraphic horizon known to be productive.
EBITDA: Earnings before interest expense, provision (benefit) for taxes on
income, depletion, depreciation and amortization.
Ecopetrol: Empresa Colombiana de Perroles, the Colombian state-owned oil
company.
Exploration: The search for economic deposits of minerals, petroleum and other
natural earth resources by any geological, geophysical or geochemical
technique.
Exploration well: A well drilled either in search of a new, as-yet-
undiscovered oil or gas reservoir or to greatly extend the known limits of a
previously discovered reservoir, as indicated by reasonable interpretation of
available data, with the objective of completing that reservoir.
Field: A geographic area in which a number of oil or gas wells produce from a
continuous reservoir.
Finding cost: a calculation, for a specified time, by dividing the sum of
acquisition, exploration and development costs by the amount of proved
reserves added as a result of acquisition, drilling and other activities
during the same period (including the amount of any proved reserves added from
properties previously acquired and including reserve revisions).
GAAP: Generally accepted accounting principles, consistently applied.
MBbl: One thousand barrels of oil.
MBOE: One thousand barrels of oil equivalent.
Mbopd: One thousand barrels of oil per day.
Mcf: One thousand cubic feet of natural gas.
Mcfd: One thousand cubic feet of natural gas per day.
Mineral interest: Possessing the right to explore, right of ingress and
egress, right to lease and right to receive part or all of the income from
mineral exploitation, i.e., bonus, delay rentals and royalties.
MMBbl: One million barrels of oil.
MMBOE: One million barrels of oil equivalent.
MMcf: One million cubic feet of natural gas.
MMcfd: One million cubic feet of natural gas per day.
Net acres or net wells: The sum of fractional ownership working interests in
gross acres or gross wells.
Net revenue interest: A share of a Working Interest that does not bear any
portion of the expense of drilling and completing a well that represents the
holder's share of production after satisfaction of all royalty, overriding
royalty, oil payments and other nonoperating interests.
Oil wells or gas wells: Those wells which generate revenue from oil production
or gas production, respectively.
Operator: The person or company actually operating an oil or gas well.
Proved developed reserves: Proved Reserves which can be expected to be
recovered through existing wells with existing equipment and operating
methods.
Proved reserves: The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation
test. The area of a reservoir considered proved includes (A) that
portion delineated by drilling and defined by gas-oil and/or oil-
water contacts, if any; and (B) the immediately adjoining portions
not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological and
engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are
included in the "proved" classification when successful testing by
a pilot project, or the operation of an installed program in the
reservoir, provides support for the engineering analysis on which
the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil,
natural gas, and natural gas liquids, the recovery of which is
subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors; (C) crude oil,
natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas
liquids, that may be recovered from oil shales, coal, gilsonite
and other such sources.
Proved undeveloped reserves: Proved Reserves which can be expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled.
Proved reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production from the
existing productive formation. Under no circumstances should estimates for
proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual
tests in the area and in the same reservoir.
PV-10 Value: The estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%. These amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses such as general and administrative expense, debt service,
future income tax expense or depreciation, depletion and amortization.
Recompletion: The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reserve replacement cost: With respect to proved reserves, a three-year
average calculated by dividing total acquisition, exploration and development
costs by net reserves added during the period.
Reservoir: A porous and permeable underground formation containing a natural
accumulation of producible crude oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
SAGD wells: Oil wells drilled using technology known as "steam assisted
gravity drainage," which involves drilling two horizontal wells in a parallel
configuration, one above the other, and within a short distance of each other.
Steam is injected into the upper wellbore which creates a steam chamber and
heats the oil so that it may flow by gravity to the lower producing wellbore,
where it is extracted.
Working interest: The operating interest that gives the owner the right to
drill, produce, and conduct operating activities on the property and a share
of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration, development and operations and all
risks in connection therewith.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1997 and September 30,
1998 (unaudited) F-3
Consolidated Statements of Operations for the three
years ended December 31, 1995, 1996 and 1997 and the
nine months ended September 30, 1997 and 1998 (unaudited) F-4
Consolidated Statements of Stockholders'
Equity for the three years ended December 31, 1995, 1996
and 1997 and the nine months ended September 30, 1997 and
1998 (unaudited) F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1995, 1996 and 1997 and the
nine months ended September 30, 1997 and 1998 (unaudited) F-6
Notes to Consolidated Financial Statements F-7
Supplemental Information About Oil and
Gas Producing Activities (unaudited) F-31
Supporting Financial Statement Schedule:
Report of Independent Accountants F-37
Schedule II Valuation and Qualifying Accounts,
years ended December 31, 1995, 1996 and 1997 F-38
Schedules other than that listed above have been
omitted since they are either not required, are
not applicable or the required information is
included in the footnotes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Saba Petroleum Company
We have audited the accompanying consolidated balance sheets of Saba
Petroleum Company and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Saba
Petroleum Company and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's near term liquidity may not be sufficient
to satisfy their short term obligations, which raises substantial doubt about
their ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/PricewaterhouseCoopers L.L.P.
PricewaterhouseCoopers L.L.P.
Los Angeles, California
April 15, 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1996 1997 1998
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $734,036 $1,507,641 $1,186,671
Accounts receivable, net
of allowance for doubtful
accounts of $65,000 (1996),
$69,000 (1997) and $78,000. 7,361,326 6,459,074 5,386,432
Other current assets 3,485,924 4,589,501 2,750,105
______________ ____________ _____________
Total current assets 11,581,286 12,556,216 9,323,208
______________ ____________ _____________
Property and equipment
(Note 8):
Oil and gas properties
(full cost method) 44,494,387 76,562,279 79,717,781
Land 1,888,578 2,685,605 3,175,568
Plant and equipment 3,799,307 5,682,800 5,998,985
______________ ____________ _____________
50,182,272 84,930,684 88,892,334
Less accumulated
depletion and
depreciation (15,323,780) (22,325,276) (45,470,788)
______________ _____________ _____________
Total property and
equipment 34,858,492 62,605,408 43,421,546
______________ ____________ _____________
Other assets:
Deposits on properties 42,529 - -
Notes receivable, less
current portion 936,257 1,385,092 32,125
Deferred financing costs 1,123,250 553,030 459,530
Due from affiliates 103,559 235,608 2391467
Deposits and other 471,513 321,592 445,519
______________ ____________ ______________
Total other assets 2,677,108 2,495,322 1,176,320
______________ ____________ ______________
$49,116,886 $77,656,946 $53,921,074
============== ============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $5,377,137 $10,104,519 $12,488,875
Income taxes payable 1,981,064 733,887 1,413,494
Current portion of
long-term debt 1,805,556 13,441,542 25,172,694
_____________ ____________ ____________
Total current liabilities 9,163,757 24,279,948 39,075,063
_____________ ____________ ____________
Long-term debt, net of
current portion 20,811,980 19,609,855 5,347,411
Other liabilities 108,295 78,069 1,584,914
Deferred taxes 590,285 784,930 93,060
Minority interest in
consolidated subsidiary 727,359 752,570 621,366
Preferred stock - $.001
par value, authorized
50,000,000 shares;
issued and outstanding
10,000 (1997) and 8,000
(1998) shares - 8,511,450 7,169,170
Commitments and
contingencies (Note 15)
Stockholders' equity:
Common stock - $.001 par
value, authorized 150,000,000
shares; issued and outstanding
10,081,026 (1996) and 10,883,908
(1997) shares and 11,052,393
(1998) shares 10,081 10,884 11,052
Capital in excess of
par value 12,891,002 17,321,680 16,971,131
Retained earnings (deficit) 4,802,845 7,200,292 (16,709,302)
Deferred compensation - (803,000) -
Cumulative translation
adjustment 11,282 (89,732) (242,791)
___________ ____________ _____________
Total stockholders'
equity 17,715,210 23,640,124 30,090
___________ ____________ _____________
$49,116,886 $77,656,946 $53,921,074
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended
September 30,
Years ended December 31,
1995 1996 1997 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and
gas sales $16,941,247 $31,520,757 $33,969,151 $25,282,361 $15,768,650
Other 753,008 1,681,587 2,026,611 1,495,839 2,914,512
____________ __________ __________ ____________ __________
Total
revenues 17,694,255 33,202,344 35,995,762 26,778,200 18,683,162
____________ __________ __________ ____________ __________
Expenses:
Production
costs 10,561,552 14,604,291 16,607,027 12,249,901 10,139,965
General and
administrative 2,005,192 3,919,435 5,124,771 3,467,984 4,973,828
Depletion,
depreciation
and
amortization 2,826,684 5,527,418 7,264,956 5,011,562 5,500,339
Writedown of
oil and gas
properties - - - - 17,852,367
__________ __________ __________ _________ ___________
Total
expenses 15,393,428 24,051,144 28,996,754 20,729,447 38,466,499
__________ __________ __________ _________ ___________
Operating income
(loss) 2,300,827 9,151,200 6,999,008 6,048,753 (19,783,337)
__________ __________ ___________ __________ ___________
Other income
(expense):
Interest income 16,924 114,302 165,949 99,006 126,047
Other (26,614) 92,149 (535,426) (294,847) (1,250,884)
Interest expense,
net of interest
capitalized
of $27,369
(1995) (1,364,110) (2,401,856) (2,304,517) (1,421,144)(2,518,573)
Gain on issuance
of shares of
subsidiary 124,773 8,305 4,036 5,533 -
_____________ ___________ __________ _________ _________
Total other
income
(expense) (1,249,027) (2,187,100) (2,669,958) (1,611,452)(3,643,410)
____________ ____________ ___________ __________ __________
Income (loss)
before income
taxes 1,051,800 6,964,100 4,329,050 4,437,301 (23,426,747)
Provision
(benefit) for
taxes on income 449,636 2,957,983 1,875,720 1,799,807 149,356
Minority interest
in earnings (loss)
of consolidated
subsidiary 55,632 241,401 55,883 89,994 (77,886)
___________ __________ __________ ___________ ________
Net income
(loss) $546,532 $3,764,716 $2,397,447 $2,547,500$(23,498,217)
___________ __________ __________ ___________ __________
Comprehensive
income
(loss) $569,012 $3,753,518 $2,296,433 $2,530,365$(23,651,276)
=========== =========== ========== ============ ==========
Net earnings
(loss) per
common share:
Basic $0.07 $0.43 $0.23 $0.24 $(2.17)
Diluted $0.06 $0.37 $0.22 $0.23 $(2.17)
Weighted average
common shares
outstanding:
Basic 8,327,495 8,803,941 10,649,766 10,595,598 10,993,524
Diluted 8,699,233 11,825,453 12,000,940 12,011,912 10,993,524
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
Total
Common Capital In Cumulative Unearned Retained Stock-
Stock Excess Of Translation Compensation Earnings holders
Shares Amount Par Value Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994 8,238,514 $8,238 $5,764,219 $ - $ - $510,870 $6,283,327
Minority
interest
in
subsidiary (19,273) (19,273)
Exercise of
options 116,666 117 189,466 189,583
Issuance of
Common Stock
for
compen-
sation 24,000 24 25,476 25,500
Issuance of
Common
Stock 150,000 150 599,850 600,000
Cumulative
translation
adjustment 22,480 22,480
Unearned
compensation (8,500) (8,500)
Contributed
surplus 208,600 208,600
Net income 546,532 546,532
________ _______ _________ ________ _______ _________ _________
Balance at
December
31, 1995 8,529,180 8,529 6,787,611 22,480 (8,500) 1,038,129 7,848,249
Issuance
and
exercise
of options 118,000 118 646,982 647,100
Issuance of
Common
Stock 14,000 14 41,986 42,000
Cumulative
translation
adjustment (11,198) (11,198)
Unearned
compensation 8,500 8,500
Debenture
conver-
sions 1,419,846 1,420 5,414,423 5,415,843
Net
income 3,764,716 3,764,716
_________ _______ __________ ________ ________ __________ __________
Balance at
December 31,
1996 10,081,026 10,081 12,891,002 11,282 - 4,802,845 17,715,210
Issuance
and
exercise
of options 154,000 154 1,409,842 (803,000) 606,996
Issuance of
warrants 622,000 622,000
Cumulative
translation
adjustments (101,014) (101,014)
Debenture
conver-
sions 648,882 649 2,398,836 2,399,485
Net
income 2,397,447 2,397,447
_________ _____ ________ _________ ________ ___________ __________
Balance at
December 31,
1997 10,883,908 10,884 17,321,680 (89,732)(803,000) 7,200,292 23,640,124
Issuance
and
exercise
of options 163,000 163 (371,436) 803,000 431,727
Preferred
stock
dividend (411,377) (411,377)
Cumulative
translation
adjustments (153,059) (153,059)
Debenture
conversions 5,485 5 20,887 20,892
Net loss (23,498,217)(23,498,217)
______ _______ _______ ________ _______ ___________ ___________
Balance at
September 30,
1998(un-
audited)11,052,393 $11,052$16,971,131$(242,791) - $(16,709,302) $30,090
========== ======= ========== ======== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended
Years ended December 31, September 30,
1995 1996 1997 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss) $546,532 $3,764,716 $2,397,447$2,547,500$(23,498,217)
Adjustments to
reconcile net
income (loss)to net
cash provided by
operations:
Depletion,
depreciation and
amortization 2,826,684 5,527,418 7,264,956 5,011,562 5,500,339
Writedown of oil
and gas properties - - 254,937 - 17,852,367
Amortization of
unearned compensation 17,000 8,500 - - -
Deferred tax provision
(benefit) (39,000) 366,389 248,645 654,000 (616,263)
Compensation expense
attributable to
non-employee option - 91,600 106,000 - 349,227
Minority interest
in earnings (loss)
of consolidated
subsidiary 55,632 241,403 55,883 89,994 (77,886)
Gain on issuance
of shares of
subsidiary (124,773) (8,305) (4,036) (5,533) -
Changes in:
Accounts
receivable (1,999,984)(2,919,287) 859,286(3,260,779) 510,358
Other assets (2,452,503) (572,233) (24,304) 5,204 723,463
Accounts payable
and accrued
liabilities 2,396,976 (237,328) 4,768,747 8,216,016 2,498,446
Income taxes
payable and
other liabilities 509,343 650,644 (973,681)(1,281,441) 1,441,524
_____________________________________________________
Net cash provided
by operating
activities 1,735,907 6,913,517 14,953,880 11,976,523 4,683,358
_______________________________________________________
Cash flows from
investing activities:
Deposit (purchase)
of restricted
certificate of
deposit (1,750,000) 1,750,000 - - -
Expenditures for
oil and gas
properties (12,807,412)(12,171,392)(32,874,800)(26,729,697)(5,677,036)
Expenditures
for equipment,
net (2,660,120) (585,893) (2,039,234) (2,344,326) (542,232)
Proceeds from
sale of oil
and gas
properties 157,933 256,646 234,141 - 5,254,066
(Increase)
decrease in
notes receivable - (1,172,639) (2,114,953) (2,141,992) -
Proceeds from
notes receivable 302,968 67,384 629,109 403,479 366,146
_______________________________________________________
Net cash used
in investing
activities (16,756,631)(11,855,894)(36,165,737)(30,812,536) (599,056)
_______________________________________________________
Cash flows from
financing activities:
Proceeds from notes
payable and
long-term debt 34,814,900 17,085,315 28,725,454 28,649,983 4,241,925
Principal
payments on
notes payable
and long-term
debt (19,136,299)(12,296,839)(15,972,780)(10,546,557)(6,968,048)
Redemption of
preferred stock - - - - (1,702,280)
Preferred stock
dividends paid - - - - (51,288)
Increase in
deferred financing
costs (1,854,421) (165,777) - - -
Net change in
accounts with
affiliated
companies (47,120) (21,251) (131,562) - -
Net proceeds from
exercise of options
and issuance of
common stock 789,583 422,500 227,500 227,500 82,500
Proceeds from
issuance of
preferred stock,
net - - 8,511,450 - -
Issuance of
warrants - - 622,000 - -
Increase in
contributed
surplus 208,600 - - - -
Capital
subscription of
minority interest 74,778 12,805 8,535 - -
________________________________________________________
Net cash
provided by
(used in)
financing
activities 14,850,021 5,036,753 21,990,597 18,330,926(4,397,191)
__________________________________________________________
Effect of exchange
rate changes on
cash and cash
equivalents 12,006 (627) (5,135) (1,553) (8,081)
__________________________________________________________
Net increase
(decrease) in
cash and cash
equivalents (158,697) 93,749 773,605 (506,640) (320,970)
Cash and cash
equivalents at
beginning of year 798,984 640,287 734,036 734,036 1,507,641
___________________________________________________________
Cash and cash
equivalents at
end of year $640,287 $734,036 $1,507,641 $227,396$1,186,671
===========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
General
Saba Petroleum Company ("Saba" or the "Company") is a Delaware corporation
formed in 1979 as a natural resources company. Saba is an international oil
and gas producer with principal producing properties located in the
continental United States, Canada and Colombia. Until 1994, all of the
Company's principal assets were located in the United States. In 1994 and
1995, the Company acquired interests in producing properties in Canada and
Colombia. For the years ended December 31, 1996 and 1997, approximately 50.4%
and 38.3% of the Company's gross revenues from oil and gas production were
derived from its international operations. Saba's principal United States oil
and gas producing properties are located in California, Louisiana, Michigan,
New Mexico and Wyoming. As of December 31, 1997, 53.8% of the Company's
outstanding Common Stock was owned directly, or indirectly, by the Company's
Chief Executive Officer.
Management's Plans
The Company's financial statements for the year ended December 31, 1997 have
been prepared on a going-concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course
of business. The Company reported a working capital deficit of $11.7 million
at December 31, 1997, due principally to the classification of $12.3 million
of long-term debt presently scheduled for repayment to the Company's principal
lender during the next year. The Company is in a capital intensive business,
and during 1997, the Company's capital expenditures for drilling activities
did not produce expected increases in proved oil and gas reserves, which, when
coupled with the decline in oil and gas prices, reduced the quantity of proved
reserves against which the Company could borrow and the projected cash flow
with which to service debt. The Company's immediate needs for capital will
intensify should the Company be successful in one or more of the exploratory
projects it is undertaking, in that the Company will incur additional capital
expenditures to drill more wells and create transportation and marketing
infrastructure. Major exploratory projects often require substantial capital
investments and a significant amount of time before generating revenue. The
Company's exploratory prospect in Indonesia requires a three-year work
commitment of $17.0 million. The Company is in negotiation with several
potential joint venture partners to participate in this project.
The Company is taking action to satisfy its working capital requirements. It
has retained investment banking counsel to advise it on such matters as asset
divestitures and a proposed business combination (see footnote 17). It is in
discussions with institutions to secure capital either by the placement of
debt or equity. Discussions have been held with the Company's principal lender
to restructure existing indebtedness to allow sufficient time for the
contemplated business combination to be concluded. The Company is also in
negotiations for the disposition of non-core oil and gas assets and possibly
the sale of real estate assets. The proceeds of such sales, should they be
concluded, would be applied to the reduction of bank debt. Management believes
that should such asset divestitures be timely concluded, short term
obligations to the bank will be satisfied to the extent that the remainder of
debt will be restructured to significantly reduce the working capital deficit.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Interim Financial Information
The consolidated financial statements at September 30,1998, and for the nine
months ended September 30, 1997 and 1998, are unaudited but 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. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting 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 and cash
flows for the nine months ended September 30, 1997 and 1998.
Fair Value of Financial Instruments
Cash and Cash Equivalents - The Company considers all liquid investments
with an original maturity of three months or less to be cash equivalents. The
carrying amount approximates fair value because of the short maturity of those
instruments.
Other Financial Instruments The Company does not hold or issue
financial instruments for trading purposes. The Company's financial
instruments consist of notes receivable and long-term debt. The fair value of
the Company's notes receivable and long-term debt, excluding the Debentures,
is estimated based on current rates offered to the Company for similar issues
of the same remaining maturates. The fair value of the Debentures is based on
quoted market prices.
Derivative Instruments The Company does not utilize derivative
instruments in the management of its foreign exchange, commodity price or
interest rate market risks.
The fair value of the Company's notes receivable and long-term debt,
excluding the Debentures, at December 31, 1996 and 1997 and September 30,
1998, approximates carrying value. The carrying value and fair value of the
Debentures at December 31, 1996 and 1997 are as follows:
<TABLE>
1996 1997
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
9% convertible
senior
subordinated
Debentures-due
2005 $6,438,000 $36,374,700 $3,599,000 $6,298,250
</TABLE>
The carrying value and fair value of the Debentures at September 30, 1998
was $3,575,000 and $3,003,000, respectively.
Oil and Gas Properties
The Company's oil and gas producing activities are accounted for using the
full cost method of accounting. Accordingly, the Company capitalizes all
costs, in separate cost centers for each country, incurred in connection with
the acquisition of oil and gas properties and with the exploration for and
development of oil and gas reserves. Such costs include lease acquisition
costs, geological and geophysical expenditures, costs of drilling both
productive and non-productive wells, and overhead expenses directly related to
land acquisition and exploration and development activities. Proceeds from the
disposition of oil and gas properties are accounted for as a reduction in
capitalized costs, with no gain or loss recognized unless such disposition
involves a significant change in reserves in which case the gain or loss is
recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development, site restoration, dismantlement and abandonment
costs, net of estimated salvage values, is provided using the equivalent unit-
production method based upon estimates of proved oil and gas reserves and
production which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized but
are individually assessed for impairment. The cost of any impaired property
is transferred to the balance of oil and gas properties being depleted.
In accordance with the full cost method of accounting, the net capitalized
costs of oil and gas properties are not to exceed their related estimated
future net revenues discounted at 10 percent, net of tax considerations, plus
the lower of cost or estimated fair market value of unproved properties.
Substantially all of the Company's exploration, development and production
activities are conducted jointly with others and, accordingly, the financial
statements reflect only the Company's proportionate interest in such
activities.
Plant and Equipment
Plant, consisting of an asphalt refining facility, is stated at the
acquisition price of $500,000 plus the cost to refurbish the equipment.
Depreciation is calculated using the straight-line method over its estimated
useful life. Equipment is stated at cost. Depreciation, which includes
amortization of assets under capital leases, is calculated using the straight-
line method over the estimated useful lives of the equipment, ranging from
three to fifteen years. Depreciation expense in the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, was
$155,900, $293,245, $477,239, $301,640 and $449,429, respectively. Normal
repairs and maintenance are charged to expense as incurred. Upon disposition
of plant and equipment, any resultant gain or loss is recognized in current
operations.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life.
The implementation in 1995 of Statement of Financial Accounting ("SFAS") No.
121, "Accounting for the Impairment of long-lived Assets and for long-lived
Assets to Be Disposed Of," has had no impact on the financial statements.
Deferred Financing Costs
The costs related to the issuance of debt are capitalized and amortized using
the effective interest method over the original terms of the related debt. At
September 30, 1998, the Company had unamortized costs in the amount of
$456,726 and $2,804 net of accumulated amortization of $1,545,566 and $13,297
relating to its Debentures and bank credit facilities, respectively.
Amortization expense in 1995, 1996 and 1997 and for the nine months ended
September 30, 1997 and 1998, was $63,600, $241,827, $134,598, $116,855 and
$90,208, respectively.
Stock-Based Compensation
In 1996, the Company implemented the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement sets forth-
alternative standards for recognition of the cost of stock-based compensation
and requires that a company's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them. As allowed in this statement, the Company continues
to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in recording
compensation related to its plans.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability
method of computing deferred income taxes. Deferred tax assets and liabilities
are established for the temporary differences between the financial reporting
bases and the tax bases of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at year-end
rates of exchange; income and expenses are translated at the weighted average
rates of exchange during the year. The resultant cumulative translation
adjustments are included as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in net income. Such
gains (losses) in 1995, 1996 and 1997 were ($7,000), $41,000 and ($230,000),
respectively.
Earnings per Common Share
Basic earnings per common share are based on the weighted average number of
shares outstanding during each year. The calculation of diluted earnings per
common share includes, when their effect is dilutive, certain shares subject
to stock options and additionally assumes the conversion of the 9% convertible
senior subordinated Debentures due December 15, 2005, using the conversion
price of $4.38 per common share.
Sale of Subsidiary Stock
The Company accounts for a change in its proportionate share of a subsidiary's
equity resulting from the issuance by the subsidiary of its stock in current
operations in the consolidated financial statements.
Two-For-One Forward Stock Split
On November 21, 1996, The Company's Board of Directors approved a two-for-one
forward stock split effected as a stock dividend on all outstanding shares of
Common Stock. The Company's outstanding stock option awards and Debentures
were also adjusted accordingly. The record date established for such stock
split was December 9, 1996 with a payment date of December 16, 1996. All share
and per share amounts have been adjusted to give retroactive effect to this
split for all periods presented.
Reclassification
Certain previously reported financial information has been reclassified to
conform to the current year's presentation.
2. Acquisitions
In September 1995, the Company acquired a 25% interest in the Teca and Nare
oil fields ("Teca/Nare Fields") and a 50% interest in the Velasquez-Galan
pipeline, all of which are located in Colombia, South America. The Company's
gross acquisition cost for the acquired interests was $12.25 million, which
was reduced by the Company's share of net revenue credits from the properties
from the effective date of January 1, 1995 to the closing date ($3.95
million), leaving a net purchase price of $8.3 million. In addition, the
Company assumed an oil imbalance obligation of approximately $1.25 million at
the closing date. In December 1995, the Company acquired a 50% interest in
the Cocorna oil field in Colombia at a net acquisition cost of $533,000. In
connection with the acquisition of the Teca/Nare Fields, the Colombia
government owned oil company (Ecopetrol) required that Omimex, the operator of
the properties, obtain a letter of credit for the benefit of Ecopetrol in the
amount of $3.5 million to secure payments due third party vendors at the
Teca/Nare Fields. Such letter of credit was issued in November 1995. In
connection with the issuance of the letter of credit, Omimex required that the
Company pledge collateral consisting of a $1.75 million certificate of
deposit. The letter of credit expired by its own terms in 1996 and the
collateral was returned to the Company.
The acquisition cost of the properties has been assigned to various accounts
in the accompanying balance sheet (primarily oil and gas properties), and the
results of operations of the properties are included in the accompanying
financial statements from the respective dates of acquisition of each
property.
The following unaudited proforma financial information presents the results of
operations of the Company as if the acquisitions had occurred as of the
beginning of 1995. The proforma financial information does not necessarily
reflect the results of operations that would have occurred had the properties
been acquired at the beginning of the period.
<TABLE>
Year Ended
December 31,
1995
(unaudited)
<S> <C>
Total revenues $27,677,526
Total operating expenses, including
general and administrative and depletion,
depreciation and amortization (20,036,052)
Interest expense (1,984,594)
Other income (expense) (9,690)
__________
Income before income taxes 5,647,190
Provision for taxes on income 2,767,123
__________
Net income $2,880,067
==========
Net earnings per common share (basic) $0.33
==========
</TABLE>
The following unaudited summary of gross revenue and direct operating expenses
of the acquired properties for the nine month period ended September 30, 1995
includes all adjustments (consisting of normal recurring accruals only) which
management considers necessary to present fairly the gross revenues and direct
operating expenses of the acquired properties for the nine months ended
September 30, 1995.
<TABLE>
Nine Months
Ended
September 30,
1995
(unaudited)
<S> <C>
Gross Revenues:
Sales of oil $8,871,288
Pipeline revenues 1,516,876
__________
Total gross revenues 10,388,164
__________
Direct operating expenses:
Operating expenses (1) 2,537,423
Pipeline operating expenses (1) 990,054
Production and other taxes (2) 474,211
__________
Total direct operating expenses 4,001,688
__________
Excess of gross revenues over
direct operating expenses $6,386,476
==========
</TABLE>
__________________________
(1) Excludes depreciation, depletion and amortization expenses.
(2) Includes war and pipeline transportation taxes; does not include
provision for income taxes.
In October 1995, all of the issued shares of Capco Resource Properties Ltd.
("CRPL"), the Company's 100% owned subsidiary, were exchanged for 13,437,322
voting common shares of Beaver Lake Resources Corporation ("BLRC"), a publicly
traded corporation located in Alberta, Canada.
The net assets of BLRC were deemed to be acquired at their net book value
(which approximated fair market value) at the date of acquisition.
Net assets acquired were as follows:
<TABLE>
<S> <C>
Working capital deficiency $(105,981)
Oil and gas properties 316,420
__________
$210,439
==========
</TABLE>
On the same date as the share exchange with the Company, BLRC acquired
interests in certain oil and gas properties in exchange for 1,443,204 shares
of its common stock. Property interests of $399,527 were acquired and
production notes receivable in the amount of $157,311 were deemed to be paid.
In addition, as part of a private placement of 1,200,000 shares in 1995, the
Company purchased 1,000,000 common shares of BLRC at a cost of approximately
$370,000. In 1996 and 1997, BLRC issued 35,000 shares and 23,010 shares,
respectively, of common stock to minority shareholders. As a result of these
transactions, the Company owned 74.2% of the outstanding common stock of BLRC
at December 31, 1997.
The sales of shares of common stock by the subsidiary resulted in net gains in
1995, 1996 and 1997 of $124,773, $8,305 and $4,036, respectively, which the
Company has reported in current operations. Deferred income taxes have not
been recorded in conjunction with these transactions as the Company plans to
maintain a majority ownership position in the subsidiary.
3. Notes Receivable
Notes receivable are comprised of the following at December 31, 1996 and 1997:
<TABLE>
1996 1997
<S> <C> <C>
Canadian prime plus 0.75% (6.75% at
December 31, 1997) production notes
receivable, with interest paid currently,
collateralized by producing oil and gas
properties $120,385 $65,012
Prime plus 0.75% (9.25% at December 31, 1997)
promissory note from an officer of the Company
with quarterly interest only installments,
due October 31, 1998, collateralized by vested
stock options to purchase the Common Stock of
the Company 300,000 283,742
Prime plus 0.75% (9.25% at December 31, 1997)
note receivable from joint venture partner
with principal payments through October 2000
and interest payments at the end of twenty-four
and forty-eight months, collateralized by
producing oil and gas properties 739,206 414,205
9% note receivable from affiliated company,
with principal and interest due in full on
December 31, 1998, collateralized by the
Chief Executive Officer's vested but
unexercised options to purchase the Common
Stock of the Company 101,667 101,667
11.5% note receivable from a joint venture
partner, with principal and interest payments
through June, 2002 collateralized by producing
oil and gas properties - 1,737,554
10% note receivable from unaffiliated companies
due on demand and collateralized by personal
guarantees from the borrowers' Chief Executive
Officers - 175,000
Other 79,917 43,940
__________ ___________
1,341,175 2,821,120
Less current portion (included in other
current assets) 404,918 1,436,028
__________ ____________
$936,257 $1,385,092
========== ============
</TABLE>
Oil and Gas Properties, Land, Plant and Equipment
Oil and gas properties, land, plant and equipment at December 31, 1996 and
1997 are as follows:
<TABLE>
United
Oil and gas properties States Canada Colombia Total
<S> <C> <C> <C> <C>
Unevaluated oil and gas
Properties $843,351 $ - $ - $843,351
Proved oil and gas
properties 29,933,734 4,999,809 8,717,493 43,651,036
___________ _________ ___________ _____________
Total capitalized
costs 30,777,085 4,999,809 8,717,493 44,494,387
Less accumulated
depletion and
depreciation 11,038,022 824,752 2,921,559 14,784,333
___________ __________ __________ ____________
Capitalized costs,
net $19,739,063 $4,175,057 $5,795,934 $29,710,054
=========== ========== ========== ============
Other property and
equipment
Land $1,583,344 $ - $305,234 $1,888,578
Plant and equipment 2,222,464 69,081 1,507,762 3,799,307
__________ ___________ __________ ____________
3,805,808 69,081 1,812,996 5,687,885
Less accumulated
depreciation 337,816 26,874 174,757 539,447
__________ ___________ __________ ____________
$3,467,992 $42,207 $1,638,239 $5,148,438
========== =========== ========== ============
December 31, 1997
Oil and gas properties
Unevaluated oil and gas
Properties $5,555,350 $ - $ - $5,555,350
Proved oil and gas
properties 53,107,650 7,770,588 10,128,691 71,006,929
___________ ___________ ___________ ___________
Total capitalized
costs 58,663,000 7,770,588 10,128,691 76,562,279
Less accumulated
depletion and
depreciation 15,489,222 1,265,331 4,550,919 21,305,472
___________ ___________ ___________ ___________
Capitalized costs,
net $43,173,778 $6,505,257 $5,577,772 $55,256,807
=========== =========== =========== ===========
Other property and
equipment
Land $2,380,371 $ - $305,234 $2,685,605
Plant and equipment 3,799,515 81,200 1,802,085 5,682,800
___________ __________ __________ ___________
6,179,886 81,200 2,107,319 8,368,405
Less accumulated
depreciation 634,225 43,416 342,163 1,019,804
___________ __________ __________ ___________
$5,545,661 $37,784 $1,765,156 $7,348,601
=========== ========== ========== ===========
</TABLE>
At December 31, 1997, plant and equipment and accumulated depreciation
included $620,248 and $ 73,972, respectively, for assets acquired under
capital leases.
Costs incurred in oil and gas property acquisition, exploration, and
development activities are as follows:
<TABLE>
United
States Canada Colombia Total
December 31, 1996
<S> <C> <C> <C> <C>
Exploration $1,832,579 $150,262 $ - $1,982,841
Development 5,572,690 734,269 - 6,306,959
Acquisition of
proved properties 3,149,644 257,717 474,231 3,881,592
___________ __________ __________ ___________
Total costs incurred $10,554,913 $1,142,248 $474,231 $12,171,392
=========== ========== ========== ===========
December 31, 1997
Exploration $5,581,637 $2,082,419 $ - $7,664,056
Development 13,680,108 277,991 1,411,198 15,369,297
Acquisition of
proved properties 9,035,274 488,345 - 9,523,619
__________ __________ ___________ ____________
Total costs
incurred $28,297,019 $2,848,755 $1,411,198 $32,556,972
========== =========== ============ ============
</TABLE>
Oil and gas depletion expense in the years ended December 31, 1995, 1996
and 1997 and the nine months ended September 30, 1997 and 1998 was $2,605,419,
$4,979,361, $6,610,554, $4,541,631 and $4,958,031 or $1.80, $2.22, $2.64,
$2.42 and $2.86 per produced barrel of oil equivalent, respectively.
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.
5. Statement of Cash Flows
Following is certain supplemental information regarding cash flows for
the years ended December 31, 1995, 1996 and 1997, and for the nine months
ended September 30, 1997 and 1998:
<TABLE>
December 31 September 30
1995 1996 1997 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest paid $1,388,369 $2,309,475 $2,088,252 $1,429,000 $2,086,100
Income taxes
paid $ -- $1,150,029 $2,531,157 $2,480,000 $ 42,700
</TABLE>
Non-cash investing and financing transactions:
In January 1995, the Company awarded 24,000 shares of Common Stock with a fair
market value of $25,500 to an employee.
The acquisition cost of oil and gas properties which were acquired in
September 1995 included an oil imbalance obligation in the amount of
$1,248,866 which was assumed by the Company.
In October 1995, the Company's Canadian subsidiary issued common stock to
acquire a corporation at a recorded net cost of $210,439.
In October 1995, interests in oil and gas properties with a cost of $399,527
were acquired by the issuance of 1,443,204 shares of common stock of the
Company's Canadian subsidiary and cancellation of notes receivable in the
amount of $157,311.
In February 1996, the company issued 14,000 shares of Common Stock to a
director of the Company in settlement of an obligation in the amount of
$42,000.
Debentures in the principal amount of $6,212,000, less related costs of
$796,157, were converted into 1,419,846 shares of Common Stock during the year
ended December 31, 1996.
The Company incurred a credit to Stockholders' Equity in the amount of $91,600
resulting from the issuance of stock options to a consultant during the year
ended December 31, 1996.
The Company incurred a credit to Stockholders' Equity in the amount of
$133,000 attributable to the income tax effect of stock options exercised
during the year ended December 31, 1996.
Cumulative foreign currency translation gains (losses) of $18,216, ($15,655)
and ($131,050) were recorded during the years ended December 31, 1995, 1996
and 1997, respectively.
The Company realized gains in 1995, 1996 and 1997 of $124,773, $8,305 and
$4,036, respectively, as a result of the issuance of common stock by a
subsidiary.
The Company incurred capital lease obligations in the amount of $598,827 to
acquire equipment during the year ended December 31, 1997.
Debentures in the principal amount of $2,839,000, less related costs of
$439,515, were converted into 648,882 shares of Common Stock during the nine
year ended December 31, 1997.
The Company incurred a credit to Stockholders' Equity in the amount of
$909,000 resulting from the granting of stock options to a consultant during
the year ended December 31, 1997.
The Company incurred a credit to Stockholders' Equity in the amount of
$273,496 attributable to the income tax effect of stock options exercised
during the year ended December 31, 1997.
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 $17,620 and
$198,297 were recorded during the nine month periods ended September 30, 1997
and 1998, respectively.
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.
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 1996 and 1997 are as
follows:
<TABLE>
1996 1997
<S> <C> <C>
Trade accounts payable $3,545,599 $6,705,897
Undistributed revenue payable 341,614 780,475
Insurance and tax assessments payable 618,032 760,177
Other accrued expenses 871,892 1,857,970
_____________ ______________
Total $5,377,137 $10,104,519
============= ==============
</TABLE>
7. Income Taxes
The components of income (loss) before income taxes and after minority
interest in earnings of consolidated subsidiary for the years ended December
31, 1995, 1996 and 1997 are as follows:
<TABLE>
1995 1996 1997
<S> <C> <C> <C>
United States $(523,572) $383,453 $457,166
Canada 134,138 693,439 262,852
Colombia 1,385,602 5,645,807 3,553,149
__________ __________ _____________
Total $996,168 $6,722,699 $4,273,167
========== ========== =============
</TABLE>
Components of income tax expense (benefit) for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal $(112,364) $149,600 $291,581
State 45,000 259,994 21,201
Foreign 556,000 2,182,000 1,310,987
_________ ___________ ____________
488,636 2,591,594 1,623,769
_________ ___________ ____________
Deferred:
Federal (44,350) 207,787 114,114
State 5,350 158,602 35,265
Foreign - - 102,572
________ ___________ ____________
(39,000) 366,389 251,951
________ ___________ ____________
$449,636 $2,957,983 $1,875,720
======== =========== ============
</TABLE>
The provision (benefit) for income taxes differs from the amount that
would result from applying the federal statutory rate for the years ended
December 31, 1995, 1996 and 1997 as follows:
<TABLE>
1995 1996 1997
<S> <C> <C> <C>
Expected tax provision
(benefit) 34.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 3.3 4.1 1.3
Effect of foreign earnings 2.6 5.6 7.6
Other 5.2 .3 1.0
________ _______ __________
45.1% 44.0% 43.9%
======== ======= ==========
</TABLE>
The tax effected temporary differences which give rise to the deferred tax
provision consist of the following:
<TABLE>
1995 1996 1997
<S> <C> <C> <C>
Property and equipment $337,900 $481,700 $(92,500)
Effect of state taxes (12,300) (120,000) 171,800
Net operating losses 209,500 (2,200) 39,400
Foreign tax credits (640,000) (845,811) (648,394)
Alternative minimum tax
credits (38,100) (61,200) 2,300
Change in valuation
allowance 155,000 897,500 817,700
Other (51,000) 16,400 (38,355)
___________ _________ __________
$(39,000) $366,389 $251,951
=========== ========= ==========
</TABLE>
The components of the tax effected deferred income tax asset (liability) as of
December 31,1996 and 1997 are as follows:
<TABLE>
1996 1997
<S> <C> <C>
Property and equipment $(1,458,300) $(1,365,800)
State taxes 171,800 -
Net operating losses 39,400 -
Foreign tax credits 1,600,800 2,249,200
Alternative minimum tax credits 196,400 194,100
Other 35,200 73,500
_____________ _______________
585,300 1,151,000
Valuation allowance (1,052,500) (1,870,200)
_____________ _______________
Net deferred income tax liability $(467,200) $(719,200)
============= ===============
</TABLE>
At December 31, 1996 and 1997, $123,000 and $69,000 of current deferred
taxes are included in other current assets, respectively.
At December 31, 1997, the Company had approximately $2,249,200 of foreign
tax credit carryovers, which will begin to expire in the year 2000. A
$1,870,200 valuation allowance has been provided for a portion of the foreign
tax credits which are not likely to be realized during the carryforward
period. The Company also has alternative minimum tax credit carryforwards for
federal and state purposes of approximately $194,100. The credits carry over
indefinitely and can be used to offset future regular tax.
In general, Section 382 of the Internal Revenue Code includes provisions
which limit the amount of net operating loss carryforwards and other tax
attributes that may be used annually in the event that a greater than 50%
ownership change (as defined) takes place in any three year period.
8. Long-Term Debt
Long-term debt at December 31, 1996 and 1997 and September 30, 1998
consists of the following:
<TABLE>
September 30,
1996 1997 1998
9% convertible senior subordinated (unaudited)
<S> <C> <C> <C>
Debentures due 2005 $6,438,000 $3,599,000 $3,575,000
Revolving loan agreement with a bank 12,100,000 17,410,000 15,600,000
Term loan agreements with a bank 450,000 8,803,769 4,501,769
Demand loan agreement with a bank 1,605,136 2,362,809 1,461,433
Capital lease obligations - 525,819 515,766
Promissory note - 350,000 345,290
Promissory note 450,000 - -
Term loan with a bank - - 369,559
Promissory note-Omimex - - 4,151,288
Promissory notes - Capco 1,574,400 - -
___________ __________ ___________
22,617,536 33,051,397 30,520,105
Less current portion 1,805,556 13,441,542 25,172,694
___________ __________ ___________
$20,811,980 $19,609,855 $5,347,411
=========== ========== ===========
</TABLE>
On December 26, 1995, the Company issued $11,000,000 of 9% convertible senior
subordinated debentures ("Debentures") due December 15, 2005. 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 Debentures were not redeemable by the Company prior to
December 15, 1997. Mandatory sinking fund payments of 15% of the original
principal, adjusted for conversion prior to the date of payments, are required
annually commencing December 15, 2000. The Debentures are uncollateralized and
subordinated to all present and future senior debt, as defined, of the Company
and are effectively subordinated to all liabilities of subsidiaries of the
Company. 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. On February 7, 1996, the Company issued an
additional $1,650,000 of Debentures pursuant to the exercise of an allotment
option by the underwriting group. Net proceeds to the Company were
approximately $1.5 million and a portion was utilized to reduce the
outstanding balance under the Company's revolving line of credit.
Certain terms of the Debentures contain requirements and restrictions on the
Company with regard to the following limitations on Restricted Payments (as
defined in the Indenture), on transactions with affiliates, and on oil and gas
property divestitures; Change of Control (as defined), which will require
immediate redemption; maintenance of life insurance coverage of $5,000,000 on
the life of the Company's former Chief Executive Officer, Ilyas Chaudhary; and
the limitations of fundamental changes and certain trading activities, on
Mergers and Consolidations (as defined) of the Company, and on ranking of
future indebtedness. Debentures in the amount of $6,212,000 were converted
into 1,419,846 shares of Common Stock during the year ended December 31, 1996.
An additional $2,839,000 of Debentures were converted into 648,882 shares of
Common Stock during the year ended December 31, 1997.
Debentures in the amount of $24,000 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 .025%, 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 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 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 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 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 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 13.5%, and is classified as a current liability.
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.
The 9% promissory notes - Capco were due to the Company's parent company,
Capco Resources Ltd. and to Capco Resources, Inc., formerly wholly owned by
Capco Resources Ltd. And now majority owned by Capco Resources Ltd. The loan
proceeds were utilized by the Company principally in connection with the
acquisition of producing oil and gas properties in Colombia. The notes were
paid in 1997.
Maturities of long term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $13,441,542
1999 5,144,241
2000 5,195,129
2001 4,834,485
2002 2,457,000
Thereafter 1,979,000
______________
$33,051,397
==============
</TABLE>
9. Related Party Transactions
Related party transactions are described as follows:
In 1995, 1996 and 1997, the Company charged its affiliates $92,900,
$26,300 and $18,600, respectively, for reimbursement of certain general and
administrative expenses.
In 1995, the Company charged an affiliate $7,600 and was charged $30,000
by affiliates for interest on short-term advances.
In 1995, the Company received remittances from affiliates totaling
$107,300 in payment of prior and current period charges for general and
administrative expenses and cash advances.
In 1995, the Company received a short-term advance in the amount of
$10,500 from an affiliate.
In 1995, the Company loaned $101,700 to a company controlled by the
Company's Chief Executive Officer at an interest rate of 9% per annum. The
loan is collateralized by the officer's vested, but unexercised, Common Stock
options.
In 1995, the Company borrowed $350,000 from a company controlled by a
director of the Company. The entire amount, plus interest at the rate of 10%
per annum, was repaid in December 1995.
In 1995, affiliated companies loaned a total of $2,221,900 to the
Company, at an interest rate of 9% per annum, in connection with the
acquisition of producing oil and gas properties in Colombia. Of this amount,
$600,000 was converted to equity by the issuance of 150,000 shares of Common
Stock of the Company. The balance of the borrowings is due April 1, 2006 and
is subordinated to the same extent as the Debentures are subordinated. The
Company incurred interest expense in the amount of $67,600 in 1995 as a result
of this indebtedness.
In 1996, the Company provided a short-term advance to an affiliate in the
amount of $10,000.
In 1996, the Company received remittances in the amount of $120,200 and
made payments in the amount of $90,900 for reimbursement of prior period
account balances.
In 1996, the Company charged affiliates $19,400 and was charged $152,300
by affiliates for interest on promissory notes.
In 1996, the Company loaned $30,000 to a director of the Company, on an
unsecured basis, at an interest rate of 9% per annum.
In 1996, the Company loaned $300,000 to the Chief Executive Officer of
the Company at an interest rate of prime plus 0.75% due in quarterly
installments. The loan is collateralized by the officer's vested, but
unexercised, Common Stock options.
In 1997 the Company charged interest in the amount of $45,343 to
affiliates and was charged interest in the amount of $60,220 by affiliates.
The Company paid the affiliates a total of $142,000 for such interest charges,
which included amounts charged, but unpaid, at the end of the previous year.
In 1997 the Company received $10,000 in repayment of a short-term advance
to an affiliate, and $61,193 from the Chief Executive Officer for accrued
interest and principal on his loan from the Company.
In 1997 the Company charged an affiliate $23,335 for charges incurred in
connection with a potential property acquisition, and $93,642 for an advance
and related expenses against an indemnification provided by the affiliate.
During the year 1997, the Company billed an affiliate a total of $18,814
and received payments of $91,983 which included amounts billed in the prior
year, in connection with the affiliate's participation in drilling and
production activities in one of the Company's oil properties.
In 1997, the Company incurred airplane charter expenses in the amount of
$72,774 from non-affiliated airplane leasing services, for the use of an
airplane owned by the Company's Chief Executive Officer.
10. Preferred Stock
On December 31, 1997, the Company sold 10,000 shares of Series A 6%
Convertible Preferred Stock ("Preferred Stock") for $10 million. The
Preferred Stock bears a cumulative dividend of 6% per annum, payable
quarterly, and, at the option of the Company, can be paid either in cash or
through the issuance of shares of the Company's Common Stock. The Preferred
Stock is senior to all other classes of the Company's equity securities. The
conversion price of the Preferred Stock is based on the future price of the
Company's Common Stock, without discount, but will be no greater than $9.345
per share. Conversion of the Preferred Stock cannot begin until May 1, 1998.
Three years from date of issuance, any remaining Preferred Stock will
automatically convert into the Company's Common Stock. The Preferred Stock is
redeemable, at the option of the Company, at various prices commencing at 115%
of the issue price plus any accrued, but unpaid, dividends. Under certain
circumstances, the holders of the Preferred Stock may require that the Company
redeem the Preferred Stock at an amount per share equal to the greater of (i)
115% of the stated value of the shares plus any accrued, but unpaid, dividends
and (ii) the market value of the shares of the Company's common stock
underlying the Preferred Stock on the date of redemption. Those circumstances
include the Company's failure to issue and transfer shares of Common Stock to
the Preferred Stockholder upon conversion of the Preferred Stock; the
Company's failure to remove a restrictive legend from the common stock when
required to do so; the Company's failure to obtain effectiveness with the
Securities and Exchange Commission of a registration statement covering the
shares of common stock underlying the Preferred Stock prior to June 28, 1998;
the Company's assignment for the benefit of creditors, or consent to the
appointment of a receiver for the Company or for all or substantially all of
its property; the institution by or against the Company or any of the
Company's subsidiaries of a bankruptcy or insolvency proceeding, which
continues undismissed for 45 days; and the Company's failure to maintain a
listing on AMEX. Should the Company choose to redeem the issue, the Preferred
Stock holder will be entitled to receive 200,000 warrants to purchase the
Company's Common Stock. Upon liquidation of the Company, the holders of the
Preferred Stock are entitled to receive an amount equal to the stated value
per share of the Preferred Stock ($1,000) plus all accrued and unpaid
dividends. In connection with the sale of the Preferred Stock, warrants to
purchase 224,719 shares of Common Stock were issued to the purchaser of the
Preferred Stock and warrants to purchase 44,944 shares of Common Stock were
issued as a fee for the placement of the issue. The warrants are exercisable
over a three year period at a price of $10.68. The fair value of the warrants
at December 31, 1997, was estimated at $622,000 using the Black-Scholes
pricing model.
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).
11. Common Stock and Stock Options
In January 1995, the Company awarded 24,000 shares of Common Stock to an
employee pursuant to the terms of an employment agreement. The cost of the
stock award, based on the stock's fair market value at the award date, was
charged to stockholders' equity and was amortized against earnings over the
contract term.
In July 1995, the Company cancelled its Incentive and Nonqualified Stock
Option Plans. No options were granted under either plan prior to cancellation.
During the year 1995, the Company issued options to acquire 200,000
shares of the Company's Common Stock to a consultant. The options had an
exercise price of $1.63 and were exercisable for a period of one year,
beginning January 2, 1995. Options to acquire 116,666 shares of Common Stock
were exercised during the year ended December 31, 1995. In July 1995, the
consulting arrangement was terminated and the balance of the options was
cancelled. The Company also issued options to acquire 200,000 shares of the
Company's Common Stock to an employee under the terms of an employment
agreement.
In April 1996 and June 1996, the Company's Board of Directors and
shareholders, respectively, approved the Company's 1996 Incentive Equity Plan
("Plan"). The purpose of the Plan is to enable the Company to provide
officers, other key employees and consultants with appropriate incentives and
rewards for superior performance. Subject to certain adjustments, the maximum
aggregate number of shares of the Company's Common Stock that may be issued
pursuant to the Plan, and the maximum number of shares of Common Stock granted
to any individual in any calendar year, shall not in the aggregate exceed
1,000,000 and 200,000, respectively.
During the year 1996, the Company issued options to acquire 100,000
shares of the Company's Common Stock to a consultant. The options had an
exercise price of $4.00 and were exercisable over a period of 180 days,
beginning May 21, 1996. The options were fully exercised during the year 1996.
The Company also issued options to acquire 20,000 shares of the Company's
Common Stock to an employee under the terms of an employment agreement.
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.
As of December 31, 1997 and September 30, 1998, the Company had
outstanding options for 548,000 and 480,000 shares, respectively, 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 154,000 and 58,000 shares of
Common Stock were exercised in 1997 and 1998, respectively, and options to
acquire 40,000 and 10,000 shares of Common Stock were cancelled in 1997 and
1998, respectively. Options to acquire 344,000 and 380,000 shares of Common
Stock were exercisable at December 31, 1997 and September 30, 1998,
respectively.
Information regarding the shares under option and weighted average
exercise price for the years ended December 31, 1995, 1996 and 1997 is as
follows:
<TABLE>
1995 1996 1997
Wt. Avg. Wt. Avg. Wt. Avg.
Shares Ex. Pr. Shares Ex. Pr. Shares Ex. Pr.
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 890,000 $1.42 740,000 $1.40 742,000 $1.49
Granted 400,000 $1.56 120,000 $4.06 640,000 $15.50
Exercised (116,666) $1.63 (118,000) $3.58 (154,000) $1.47
Cancelled (433,334) $1.52 - - (55,000) $5.31
_________ _________ __________
End Of Year 740,000 $1.40 742,000 $1.49 1,173,000 $8.95
========= ========== ==========
Options
exercisable
at end of year 176,000 $1.34 306,000 $1.37 344,000 $1.38
========= ======= ======== ======= ========= =======
Weighted average
fair value of
options granted
during the year $0.29 $1.17 $6.99
_____ _______ ______
</TABLE>
The fair value of each option granted during 1995, 1996 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: (a) risk-free interest rates ranging from
4.9% to 7.9%, (b) expected volatility ranging from 43.2% to 58.4%, (c) average
time to exercise ranging from six months to five years, and (d) expected
dividend yield of 0.0%.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
Options Outstanding Options Exercisable
Number Out- Average Weighted Number Weighted
Range of standing at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1997 Life
<S> <C> <C> <C> <C> <C>
$1.25 - $1.38 308,000 (1) $1.29 240,000 $1.29
$1.50 220,000 (2) $1.50 100,000 $1.50
$4.38 20,000 not stated $4.38 4,000 $4.38
$15.50 625,000 9.4 years $15.50 - $ -
___________ __________
$1.25 -
$15.50 1,173,000 344,000
============ ===========
</TABLE>
(1) No contractual expiration date for 163,000 options; balance of 145,000
options, to the extent they are vested, expire one year following
termination of option holder's employment.
(2) No contractual expiration date for 180,000 options; remaining
contractual life for 40,000 options is ten months.
The Company accounts for stock based compensation to employees under the
rules of Accounting Principles Board Opinion No 25. The compensation cost for
options granted in 1995, 1996 and 1997 was $30,800, $30,136, and $482,793,
respectively. If the compensation cost for the Company's 1995, 1996 and 1997
grants to employees had been determined consistent with SFAS No. 123, the
Company's net income and net earnings per common share (basic) for 1995, 1996
and 1997 would approximate the proforma amounts set forth below:
<TABLE>
1995 1996 1997
As Reported Proforma As Reported Proforma As Reported Proforma
<C> <C> <C> <C> <C> <C> <C>
Net income $546,532 $522,785 $3,764,716 $3,745,218 $2,397,447 $2,094,736
Net earnings
per common
share (basic) $0.07 $0.06 $0.43 $0.43 $0.23 $0.20
</TABLE>
On May 30, 1997, the Company's Board of Directors authorized, on a
deferred basis, the issuance of 200,000 shares of Common Stock to the
Company's President, the issuance of such shares being contingent upon the
officer remaining in the employ of the Company for a period of two years
succeeding the expiration of his existing employment contract at December 31,
1999, with such shares to be issued in two equal installments at the end of
each of the two succeeding years.
Additionally, the Board of Directors authorized the issuance of 100,000
shares of performance shares to the Company's President, issuable at the end
of calendar year 1998 provided that certain operating results are reported by
the Company at the end of that year.
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 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.
12. Earnings Per Share
(In thousands, except per share data)
<TABLE>
1995 1996 1997
Income Shares Per Income Shares Per Income Shares Per
share Share Share
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income
available to
common
stockholders
- basic EPS $547 8,327 $0.07 $3,765 8,804 $0.43 $2,397 10,650 $0.23
Effect of dilutive
securities:
Contingently
issuable shares 330 371 350
Convertible
Debentures 9 41 559 2,650 203 1,001
______ _______ _____ _____ ______ ______
Income available
to common
stockholders
and assumed
conversions
- diluted EPS $556 8,699 $0.06 $4,324 11,825 $0.37$2,600 12,001 $0.22
====== ===== ======= ======= ====== ===== ===== ====== =====
</TABLE>
13. Quarterly Financial Data (unaudited)
The following is a tabulation of unaudited quarterly operating results
for the years 1996 and 1997 and for the nine months ended September 30, 1998:
<TABLE>
Net Basic Net Diluted Net
Total Gross Income Income (Loss) Income (Loss)
Revenues Profit (Loss) Per Share Per Share
1996
<S> <C> <C> <C> <C> <C>
First
Quarter $7,387,290 $2,506,692 $755,488 $0.09 $0.08
Second
Quarter 8,002,828 2,717,416 734,375 0.09 0.08
Third
Quarter 7,762,922 2,530,891 730,869 0.08 0.07
Fourth
Quarter 10,049,304 3,970,582 1,543,984 0.17 0.14
___________ __________ ___________
$33,202,344 $11,725,581 $3,764,716
=========== ============ ==========
1997
First
Quarter $9,563,474 $3,912,379 $1,441,582 $0.14 $0.12
Second
Quarter 8,271,953 1,945,168 507,300 0.05 0.05
Third
Quarter 8,942,773 2,424,537 598,618 0.06 0.05
Fourth
Quarter 9,217,562 2,200,062 (150,053) (0.01) (0.01)
____________ ____________ __________
$35,995,762 $10,482,146 $2,397,447
============= ============ ==========
1998
First
Quarter $6,473,469 $749,183$(12,016,500) $(1.12) $(1.12)
Second
Quarter 6,405,776 1,277,308 (9,577,165) (0.88) (0.88)
Third
Quarter 5,803,917 1,016,367 (1,904,552) (0.18) (0.18)
____________ ____________ ___________
$18,683,162 $3,042,858$(23,498,217)
============ ============ ===========
</TABLE>
14. Retirement Plan
The Company sponsors a defined contribution retirement savings plan
("401(k) Plan") to assist all eligible U.S. employees in providing for
retirement or other future financial needs. The Company currently provides
matching contributions equal to 50% of each employee's contribution, subject
to a maximum of 4% of employee earnings. The Company's contributions to the
401(k) Plan were $25,745, $44,014 and $41,762 in 1995, 1996 and 1997,
respectively.
15. Commitments and Contingencies
The Company is a defendant in various legal proceedings, which arise in
the normal course of business. Based on discussions with legal counsel,
management does not believe that the ultimate resolution of such actions will
have a significant effect on the Company's financial statements or operations.
Leases
The Company leases office space, vehicles and office equipment under non-
cancelable operating leases expiring in the years 1998 through 2002. Future
minimum lease payments under all leases are as follows:
<TABLE>
Year Ending December 31,
<S> <C>
1998 $308,660
1999 233,521
2000 86,503
2001 35,697
2002 13,105
___________
$677,486
===========
</TABLE>
Rent expense amounted to $129,470, $246,013 and $248,596 for the years
ended December 31, 1995, 1996 and 1997, respectively.
Concentration of Credit Risk and Major Customers
The Company invests its cash primarily in deposits with major banks.
Certain deposits may, at times, be in excess of federally insured limits
($2,461,583 and $3,951,106 at December 31, 1996 and December 31, 1997,
respectively, according to bank records). The Company has not incurred losses
related to such cash balances.
The Company's accounts receivable result from its activities in the oil
and gas industry. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of joint interest partners
comprising the Company's customer base. Ongoing credit evaluations of the
financial condition of joint interest partners are performed and generally, no
collateral is required. The Company maintains reserves for potential credit
losses and such losses have not exceeded management's expectations. Included
in accounts receivable at December 31, 1996 and 1997 are the following amounts
due from unaffiliated parties (each accounting for 10% or more of accounts
receivable):
<TABLE>
1996 1997
<S> <C> <C>
Customer A $2,566,700 $1,482,600
============ ==============
Customer B $1,267,100 $931,965
============ ==============
Customer C $899,600 $745,567
============ ==============
</TABLE>
Sales to major unaffiliated customers (customers accounting for 10
percent or more of gross revenue), all representing purchasers of oil and gas
and related transportation tariffs and the applicable geographic area for each
customer, for each of the years ended December 31, 1995, 1996 and 1997 are as
follows:
<TABLE>
Geographic Area 1995 1996 1997
<S> <C> <C> <C> <C>
Customer A Colombia $4,505,000 $13,594,000 $10,769,000
=========== ============= ============
Customer B United States $2,926,000 $4,117,000 $7,738,280
=========== ============= ============
Customer C United States $2,150,000 $ - $ -
=========== ============= ============
</TABLE>
All sales to the geographic area of Colombia are to the government owned oil
company.
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
Company believes that it is in compliance with existing laws and regulations.
Environmental Contingencies
Pursuant to the purchase and sale agreement of an asphalt refinery in
Santa Maria, California, the sellers agreed to perform certain remediation and
other environmental activities on portions of the refinery property through
June 1999. Because the purchase and sale agreement contemplates that the
Company might also incur remediation obligations with respect to the refinery,
the Company engaged an independent consultant to 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 all required remediation will be completed by the
seller within the five year period. Environmental compliance surveys such as
those the Company has had performed are limited in their scope and should not
be expected to disclose all environmental contamination as may exist.
In accordance with the Articles of Association for the Cocorna
Concession, 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.
Following their inspection of the Concession, Colombian officials claim that
the Company and the operator were obligated to treat the water for disposal on
the Concession with a water treatment plant. While the Company and the
operator occupied the Concession, the plant was not built and the water was
instead transferred to one of the water Association contract areas for
treatment in conjunction with the water produced in that area. Colombian
officials are requiring that the plant be built. The Company believes that the
operator is testing methods to treat the water. There can be no assurance as
to the amount of the future expenditures of the Company associated with the
environmental requirements for the Cocorna Concession.
In 1993, the Company acquired a producing mineral interest 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 bears 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 $1 million. 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 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 were obtained. The Company has been 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 is presently considering whether to attempt to secure new leases. A
preliminary estimate of the cost of abandoning the wells and restoring the
well sites is approximately $800,000. The Company is currently unable to
assess its exposure to third parties if the Company elects to plug such wells
without first obtaining necessary consent.
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. The cost of such operation will be significant and
will occur, from time to time, as properties are abandoned.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The occurrence
of such environmental compliance costs could be materially adverse to the
Company. No assurance can be given that the costs of closure of any of the
Company's other oil and gas properties would not have a material adverse
effect on the Company.
16. Business Segments
The Company considers that its operations are principally in one industry
segment that of acquisition, exploration, development and production of oil
and gas reserves. A summary of the Company's operations by geographic area for
the years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
Corporate
(Dollars in United &
thousands) States Canada Colombia Other Total
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1995
Total revenues $11,538 $1,577 $4,505 $74 $17,694
Production costs 7,431 901 2,229 - 10,561
Other operating
expenses 398 243 51 - 692
Depreciation,
depletion and
amortization 1,735 156 823 113 2,827
Income tax
expense
(benefit) 849 147 645 (1,191) 450
_________ ________ _________ _________ _______
Results of
operations
from oil and
gas producing
activities $1,125 $130 $757
=========== ========== ===========
Interest and
other expenses
(net) 2,617 2,617
____________ _________
Net income
(loss) $(1,465) $547
============ =========
Identifiable
assets at
December 31,
1995 $19,525 $3,963 $13,514 $2,749 $39,751
========== ======== ========= ========= =========
Year ended
December 31, 1996
Total revenues $15,907 $3,105 $13,594 $596 $33,202
Production costs 8,160 1,172 5,272 - 14,604
Other operating
expenses 759 536 213 - 1,508
Depreciation,
depletion and
Amortization 2,565 353 2,275 334 5,527
Income tax
expense
(benefit) 1,561 - 2,917 (1,520) 2,958
__________ ________ __________
Results of
operations
from oil and
gas producing
activities $2,862 $1,044 $2,917
========== ========== ============
Interest and
other expenses
(net) 4,840 4,840
___________ __________
Net income (loss) $(3,058) $3,765
=========== ==========
Identifiable
assets at
December 31,
1996 $28,730 $5,346 $12,473 $2,568 $49,117
========== ========== =========== ======== =========
Year ended
December 31, 1997
Total revenues $21,359 $2,582 $10,769 $1,286 $35,996
Production
costs 10,461 1,080 5,066 - 16,607
Other
operating
expenses 4,112 472 246 295 5,125
Depreciation,
depletion and
amortization 4,541 543 1,797 384 7,265
Income tax
expense
(benefit) 752 158 1,495 (529) 1,876
____________ ___________ _________
Results of
operations
from oil and
gas producing
activities $1,493 $329 $2,165
============= ============ ==========
Interest and
other expenses
(net) 2,726 2,726
_________ ___________
Net income
(loss) $(1,590) $2,397
========= ===========
Identifiable
assets at
December 31,
1997 $46,886 $7,460 $11,047 $12,263 $77,656
========== ========= ========= ========= ==========
</TABLE>
17. Subsequent Events (unaudited)
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 Company's
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. On December 3, 1998, the Company and HVI agreed to
extend the closing date of the Common Stock Purchase Agreement to January 31,
1999. 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 in cash. The Company understands
that the exclusive right was extended for 30 days pursuant to HVI's non-
refundable payment to RGC of an additional $500,000 to be applied to the
purchase price. HVI however did not exercise its right to acquire the
additional 6,310 shares of Series A Preferred Stock prior to the expiration of
the extension period. HVI currently is negotiating with RGC to extend and
amend the Preferred Stock Transfer Agreement to enable HVI to acquire the
additional 6,310 shares of Series A Preferred Stock held by RGC. HVI had
agreed to convert the Preferred Stock and accrued dividends to Common Stock at
the rate of $2.50 per share of Common Stock. 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 issued to HVI under the Common Stock Purchase
Agreement.
On December 7, 1998, HVI and the Company disclosed that the Board of Directors
of the Company approved HVI's proposal to merger with the Company. A majority
of the Company's disinterested Board members voted in favor of the proposed
merger. Under the proposed merger, the Company's stockholders will receive one
share of HVI common stock for each 6 shares of the Company's common stock
outstanding. That exchange ratio is based upon (i) a total of 11,385,726
shares of Saba common stock outstanding (11,052,393 shares outstanding as of
December 2, 1998 plus 333,333 shares issued to HVI on December 7, 1998), (ii)
a price of $2.02 for the Company's common stock based on a 55 percent premium
over the average closing price of the Company's common stock from November 2,
1998 through December 2, 1998, and (iii) the average closing price of HVI's
common stock of $12.14 during the same period.
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.
The Company's obligation to repay the principal sum of approximately $4.2
million, plus interest, as evidenced by a promissory note secured by a 50%
interest in a 118-mile pipeline in Colombia owned by Sabacol, Inc., a wholly-
owned subsidiary of the Company, became due and payable in its entirety on
December 14, 1998. The promissory note was not paid in full by December 14,
1998.
On December 15, 1998, the Company disclosed that Sabacol filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in the Central
District of California on December 11, 1998. Sabacol's assets, located
solely in Colombia, consist of a 50% interest in a 118-mile pipeline and
varying interests in heavy oil producing properties. At the time of filing,
Sabacol had a net book value of approximately $5.3 million with liabilities of
$4.6 million. For the nine months ended September 30, 1998, the average daily
production of Sabacol's interest in the Colombian properties was 2300 Bopd and
gross revenues were approximately $5.9 million with a negative cash flow.
Sabacol had filed the bankruptcy petition to protect its asset base and to
provide adequate time to develop a re-organization plan. Sabacol intends to
file a reorganization plan that may include the disposition of its Colombian
assets. A new management team has been appointed for Sabacol to protect its
assets and develop an effective re-organization plan. There is no assurance,
however, that a reorganization plan beneficial to Sabacol will be consummated.
The filing is not expected to have any material adverse effect on the Company
and does not change any terms of the proposed merger with Horizontal Ventures,
Inc.
The Company has deferred the semi-annual interest payment of $162,000 due in
December 1998 on the Debentures. The Company intends to make the interest
payment within the thirty day cure period provided by the Debenture and avoid
default.
In December 1998, the Company entered into a letter of intent with Capco
Development, Inc. to sell all of the outstanding stock of its wholly-owned
subsidiary, Saba Energy of Texas, Inc. ("SETI"), for a contract price of $5
million and a closing scheduled for December 31, 1998, subject to certain
conditions and adjustments. At the closing, those properties of SETI that
will be part of the sale shall include certain interests located in Michigan,
New Mexico, Oklahoma, Texas, Utah, and Wyoming and excluding interests
located in Louisiana.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
Estimated Proved Reserves
Estimates of the Company's proved developed and undeveloped oil and gas
reserves for its working and royalty interest wells were prepared by
independent engineers. The estimates are based upon engineering principles
generally accepted in the petroleum industry and take into account the effect
of past performance and existing economic conditions. Reserve estimates vary
from year to year because they are based upon judgmental factors involved in
interpreting and analyzing production performance, geological and engineering
data and changes in prices, operating costs and other economic, regulatory,
and operating conditions. Changes in such factors can have a significant
impact on the estimated future recoverable reserves and estimated future net
revenue by changing the economic lives of the properties. Proved undeveloped
oil and gas reserves include only those reserves which are expected to be
recovered on undrilled acreage from new wells which are reasonably certain of
production when drilled, or from presently existing wells which could require
relatively major expenditures to effect recompletion. Presented below is a
summary of proved reserves of the Company's oil and gas properties:
<TABLE>
United
States Canada (1) Colombia Total
<S> <C> <C> <C> <C>
Year ended December
31, 1995
Proved reserves:
Beginning of year 6,671,341 464,390 - 7,135,731
Acquisition,
exploration and
Development of
minerals in place 1,295,876 289,113 5,473,310 7,058,299
Revisions of
previous estimates(2) (691,553) 264,497 - (427,056)
Production (710,271) (85,800) (430,808) (1,226,879)
Sales of minerals
in place (2,798) (6,000) - (8,798)
_____________ __________ _________ ________
End of year 6,562,595 926,200 5,042,502 12,531,297
============= ============ =========== ========
Proved developed
reserves, end of year 5,385,856 750,500 4,731,369 10,867,725
============= ============= =========== ========
Gas (Thousands of
cubic feet)
Proved reserves:
Beginning of year 7,225,973 2,565,800 - 9,791,773
Acquisition,
exploration and
Development of
minerals in place 1,333,669 464,028 - 1,797,697
Revisions of
previous estimates 1,519,718 7,832,888 - 9,352,606
Production (938,577) (398,616) - (1,337,193)
Sales of minerals
in place (37,734) (88,100) - (125,834)
_____________ ____________ __________ _________
End of year 9,103,049 10,376,000 - 19,479,049
============= ============ =========== ==========
Proved developed
reserves, end of year 8,190,986 2,051,000 - 10,241,986
======================================================
(1) See references (1) and (2) on page F-37
Year ended December
31, 1996
Oil (Barrels)
Proved reserves:
Beginning of year 6,562,595 926,200 5,042,502 12,531,297
Acquisition,
exploration and
development of
minerals in place 4,501,828 103,837 - 4,605,665
Revisions of
previous estimates 5,950,525 24,771 5,595,772 11,571,068
Production (803,070) (134,008) (1,031,207) (1,968,285)
Sales of minerals
in place (60,820) - - (60,820)
_____________ __________ ____________ ________
End of year 16,151,058 920,800 9,607,067 26,678,925
============= ========== ============ ========
Proved developed
reserves, end of year 7,993,854 710,000 4,692,140 13,395,994
============= ========== ============ ========
Gas (Thousands of
cubic feet)
Proved reserves:
Beginning of year 9,103,049 10,376,000 - 19,479,049
Acquisition,
exploration and
development of
minerals in place 4,186,184 924,033 - 5,110,217
Revisions of
previous estimates(2) 1,046,326 48,213 - 1,094,539
Production (1,089,576) (561,042) - (1,650,618)
Sales of minerals
in place (132,018) (236,204) - (368,222)
______________ __________ _________ _________
End of year 13,113,965 10,551,000 - 23,664,965
============== =========== ========== ==========
Proved developed
reserves, end
of year 11,520,707 2,654,000 - 14,174,707
============== =========== ========== ==========
Year ended December
31, 1997
Oil (Barrels)
Proved reserves:
Beginning of year 16,151,058 920,800 9,607,067 26,678,925
Acquisition,
exploration and
development of
minerals in place 4,200,193 9,640 1,600,225 5,810,058
Revisions of
previous estimates (6,139,246) (24,055) 2,247,541 (3,915,760)
Production (1,120,645) (99,685) (886,651) (2,106,981)
Sales of minerals
in place (2,541,157) - - (2,541,157)
______________ ___________ ___________ _________
End of year 10,550,203 806,700 12,568,182 23,925,085
============== ============ =========== =========
Proved developed
reserves, end of year 8,048,356 603,600 7,964,016 16,615,972
============= ============ =========== =========
(1) See references (1) and (2) on page F-37
Year ended
December 31, 1997 (continued)
Gas (Thousands of cubic feet)
Proved reserves:
Beginning of year 13,113,965 10,551,000 - 23,664,965
Acquisition,
exploration and
development of
minerals in place 13,337,886 1,190,546 - 14,528,432
Revisions of
previous estimates(2) (4,477,286) (23,832) - (4,501,118)
Production (1,673,914) (733,714) - (2,407,628)
Sales of minerals
in place 9,805 - - 9,805
___________ ___________ _________ __________
End of year 20,310,456 10,984,000 - 31,294,456
=========== =========== ========== ===========
Proved developed
reserves, end of year 13,988,220 3,412,000 - 17,400,220
=========== =========== ========== ===========
</TABLE>
(1) The proved reserve information on December 31, 1995, 1996 and 1997
includes the following proved reserve amounts attributable to the
approximately 26% minority interest resulting from the CRPL business
combination with BLRC in October 1995. See Note 2 of Notes to Consolidated
Financial Statements.
(2) Revisions of previous estimates are primarily the result of product
prices changes during the respective year-ends presented above.
<TABLE>
1995 1996 1997
<S> <C> <C> <C>
Oil (Bbls) 237,237 236,911 208,417
Gas (Mcf) 2,657,709 2,714,646 2,837,793
Barrels of Oil
Equivalent (BOE) 680,189 689,352 681,382
Standardized measure of
discounted future net
cash flows $1,893,643 $2,840,628 $2,351,565
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserve
The following information at December 31, 1995, 1996 and 1997 has been
prepared in accordance with Statement of Financial Accounting Standards No.
69, which requires the standardized measure of discounted future net cash
flows to be based on sales prices, costs and statutory income tax rates in
effect at the time the projections are made and a 10 percent per year discount
rate. The projections should not be viewed as estimates of future cash flows
nor should the "standardized measure" be interpreted as representing current
value to the Company (dollars in thousands).
<TABLE>
December 31, 1995
United
States Canada (1) Colombia Total
<S> <C> <C> <C> <C>
Future cash inflows $100,559 $25,411 $52,335 $178,305
Future production
costs (56,871) (8,979) (30,193) (96,043)
Future development
costs (3,997) (3,064) (1,675) (8,736)
Future income tax
expenses (10,872) (3,204) (5,623) (19,699)
____________ _____________ ___________ _________
Future net cash
flows 28,819 10,164 14,844 53,827
10 percent annual
discount for estimated
timing of cash flows (9,585) (2,771) (2,406) (14,762)
Standardized measure
of discounted future
net cash flows $19,234 $7,393 $12,438 $39,065
========== =========== ========= ========
December 31, 1996
Future cash inflows $324,206 $39,985 $157,552 $521,743
Future production costs (143,964) (13,247) (63,458) (220,669)
Future development
costs (24,432) (587) (22,153) (47,172)
Future income tax
expenses (36,539) (9,529) (22,172) (68,240)
__________ __________ ___________ _________
Future net cash
flows 119,271 16,622 49,769 185,662
10 percent annual
discount for estimated
timing of cash flows (45,942) (5,581) (17,650) (69,173)
__________ __________ __________ __________
Standardized measure
of discounted
future net cash flows $73,329 $11,041 $32,119 $116,489
=========== =========== ========== ===========
December 31, 1997
Future cash inflows $184,240 $30,826 $167,418 $382,484
Future production costs (87,803) (11,639) (71,327) (170,769)
Future development costs (18,263) (1,604) (8,269) (28,136)
Future income tax
expenses (15,773) (4,307) (36,022) (56,102)
____________ ___________ ___________ ___________
Future net cash flows 62,401 13,276 51,800 127,477
10 percent annual
discount for estimated
timing of cash flows (16,572) (4,174) (16,878) (37,624)
____________ ____________ ___________ ___________
Standardized measure
of discounted
future net cash flows $45,829 $9,102 $34,922 $89,853
=========== ============ =========== ===========
</TABLE>
(1) See reference (1) on page F-37
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows during 1995, 1996 and 1997 (dollars in
thousands).
<TABLE>
1995
United
States Canada (1) Colombia Total
<S> <C> <C> <C> <C>
Balance at beginning
of year $18,779 $2,348 $ - $21,127
Acquisitions,
discoveries and
extensions 6,561 2,123 17,848 26,532
Sales and transfers
of oil and gas
produced, net of
production costs (3,873) (670) (1,837) (6,380)
Changes in estimated
future development costs 2,329 (2,716) - (387)
Net changes in prices,
net of production costs (1,682) 1,614 - (68)
Sales of reserves in place (11) (115) - (126)
Development costs incurred
during the period 126 - - 126
Changes in production
rates and other (3,358) (2,757) - (6,115)
Revisions of previous
quantity estimates (1,452) 7,313 - 5,861
Accretion of discount 2,367 332 - 2,699
Net change in income
taxes (552) (79) (3,573) (4,204)
____________ __________ __________ _________
Balance at end of year $19,234 $7,393 $12,438 $39,065
============= =========== ========== =========
1996
United
States Canada (1) Colombia Total
Balance at beginning
of year $19,234 $7,393 $12,438 $39,065
Acquisitions,
discoveries and
extensions 43,988 1,604 - 45,592
Sales and transfers
of oil and gas
produced, net of
production costs (7,590) (1,845) (7,605) (17,040)
Changes in estimated
future development costs (15,038) 2,430 (16,233) (28,841)
Net changes in prices,
net of production costs 14,951 5,680 20,390 41,021
Sales of reserves in place (667) (77) - (744)
Development costs incurred
during the period 330 120 - 450
Changes in production
rates and other 16 (490) (2,236) (2,710)
Revisions of previous
quantity estimates 32,023 436 32,781 65,240
Accretion of discount 2,467 748 1,601 4,816
Net change in income
taxes (16,385) (4,958) (9,017) (30,360)
__________ ____________ __________ __________
Balance at end of year $73,329 $11,041 $32,119 $116,489
========== ============ =========== ==========
(1) See reference (1) on page F-37
1997
United
States Canada (1) Colombia Total
Balance at beginning
of year $73,329 $11,041 $32,119 $116,489
Acquisitions,
discoveries and
extensions 31,593 726 8,368 40,687
Sales and transfers
of oil and gas
produced, net of
production costs (10,497) (1,254) (5,611) (17,362)
Changes in estimated
future development costs 9,920 (1,108) 9,231 18,043
Net changes in prices,
net of production costs (51,463) (4,739) (15,151) (71,353)
Sales of reserves in
place (4,314) - - (4,314)
Development costs
incurred during the
period 1,601 70 (719) 952
Changes in production
rates and other (9,298) (927) 2,076 (8,149)
Revisions of previous
quantity estimates (20,764) (126) 9,761 (11,129)
Accretion of discount 9,515 1,540 4,471 15,526
Net change in income
taxes 16,207 3,879 (9,622) 10,464
__________ __________ __________ _________
Balance at end of year $45,829 $9,102 $34,923 $89,854
========== ========== ========== =========
</TABLE>
(1) See reference (1) on page F-37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Saba Petroleum Company
Our report on the consolidated financial statements of Saba Petroleum Company
and subsidiaries, which includes an explanatory paragraph regarding the
Company's ability to continue as a going concern, is included on page F-2 of
this Form S-1/A. In connection with our audits of such consolidated financial
statements, we have also audited the related consolidated financial statement
schedule listed in the index on page F-1 of this Form S-1/A.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required
to be included therein. This information should be read in conjunction with
the explanatory paragraph of our report referred to above.
/s/PricewaterhouseCoopers, LLP
Los Angeles, California
April 15, 1998
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1996 and 1997
(dollars in thousands)
Additions
Balance at Charged Charged Deductions Balance at
beginning to to other from close of
of period income accounts reserves period
1995
<S> <C> <C> <C> <C> <C>
Amounts deducted
from applicable assets:
Accounts receivable $62 $12 $(17) $ - $ 57
Deferred income taxes - 155 - - 155
Other non current
assets 85 18 17 78 42
Reserves included in
other non current
liabilities:
Restoration and
reclamation 64 26 - - 90
1996
Amounts deducted
from applicable assets:
Accounts receivable $57 $12 $ - $4 $65
Deferred income taxes 155 897 - - 1,052
Other non current
assets 42 12 - 19 35
Reserves included in
other non current
liabilities:
Restoration and
reclamation 90 28 - 30 88
1997
Amounts deducted
from applicable assets:
Accounts receivable $65 $12 $ - $8 $69
Deferred income
taxes 1,052 818 - - 1,870
Other non current
assets 35 - - - 35
Reserves included
in other non current
liabilities:
Restoration and
reclamation 88 34 - 44 78
</TABLE>
<TABLE>
<CAPTION>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA BALANCE SHEET
SEPTEMBER 30, 1998
UNAUDITED
- ----------------------------------------------------------------------------
SABA HVI ADJUSTMENTS REF COMBINED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH $1,186,671 $838,547 7,179,870 A $9,205,088
A/R 5,464,432 86,755 5,551,187
ALLOWANCE (78,000) (74,092) (152,092)
OTHER 2,750,105 3,272 2,753,377
------------------------------------- -----------------
TOTAL
CURRENT
ASSETS 9,323,208 854,482 17,357,560
O&G
PROPERTIES 79,717,781 7,042,862 86,760,643
LAND 3,175,568 135,826 3,311,394
PLANT &
EQUIPMENT 5,998,985 1,393,610 7,392,595
ACCUM DEPLET
& DEPREC. (45,470,788) (824,151) (46,294,939)
OTHER 1,176,320 325,267 1,501,587
GOODWILL 28,594,938 B 28,594,938
------------------------------------ ----------------
TOTAL
ASSETS 53,921,074 8,927,896 98,623,778
===================================== ================
A/P &
ACCRUED
LIAB 12,488,875 59,672 12,548,547
INCOME
TAXES
PAYABLE 1,413,494 - 1,413,494
CURRENT-
LT DEBT 25,172,694 15,771 25,188,465
BRIDGE
FINANCING: 15,879,000 C 15,879,000
------------------------------------- ----------------
TOTAL
CURRENT
LIABILITIES 39,075,063 75,443 55,029,506
LT DEBT,
NET 5,347,411 52,283 5,399,694
OTHER 1,584,914 1,584,914
DEFERRED
TAXES 93,060 93,060
MINORITY
INTEREST 621,366 621,366
PREFERRED
STOCK 7,169,170 (6,273,024) D 896,146
------------------------------------- ----------------
TOTAL
LIABILITIES 53,890,984 127,726 63,624,686
SABA:
- ------------------------------
COMMON
STOCK 11,052 (11,052) E -
APIC 16,971,131 (16,971,131) E -
ACCUM
DEFICIT (16,709,302) 16,709,302 E -
CTA (242,791) - 242,791 E -
--------------------
HVI:
- ------------------------------
COMMON
STOCK 11,672,519 26,207,922 F 37,880,441
APIC - -
ACCUM
DEFICIT (2,872,349) (9,000) G (2,881,349)
----------------- -----------------
TOTAL
EQUITY 30,090 8,800,170 34,999,092
===================================== =================
TOTAL EQUITY
& LIAB $53,921,074 $8,927,896 $98,623,778
===================================== =================
OUTSTANDING
SHARES:
SABA
COMMON 11,052,393 (11,052,393) H -
SABA
PREFERRED 8,000 (8,000) I -
HVI COMMON 1,570,981 2,688,658 F 4,259,639
=================
</TABLE>
<TABLE>
<CAPTION>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA STATEMENT OF OPERATIONS
DECEMBER 31, 1997
UNAUDITED
---------------------------------------------------------------
SABA HVI COMBINED
---------------------------------------------------------------
<S> <C> <C> <C>
O&G SALES $33,969,151 $211,696 $34,180,847
OTHER 2,026,611 - 2,026,611
------------------------------------------------------------------
TOTAL
REVENUES 35,995,762 211,696 36,207,458
PRODUCTION
COSTS 16,607,027 247,979 16,855,006
G&A 5,124,771 780,373 5,905,144
DD&A 7,264,956 - 7,264,956
WRITE-DOWN
OF PROPERTIES - - -
-----------------------------------------------------------------
TOTAL
EXPENSES 28,996,754 1,028,352 30,025,106
-----------------------------------------------------------------
OPERATING
INCOME
(LOSS) 6,999,008 (816,656) 6,182,352
LOSS ON
SALE OF
ASSETS (21,062) (21,062)
INTEREST
INCOME 165,949 11,873 177,822
OTHER (535,426) (535,426)
INTEREST
EXPENSE (2,304,517) (25,271) (2,329,788)
GAIN OF
ISSUANCE OF
SHARES-SUB 4,036 - 4,036
-----------------------------------------------------------------
TOTAL OTHER (2,669,958) (34,460) (2,704,418)
-----------------------------------------------------------------
LOSS
BEFORE
TAXES 4,329,050 (851,116) 3,477,934
INCOME TAX
PROVISION 1,875,720 - 1,875,720
MINORITY
INTEREST
IN LOSS 55,883 - 55,883
=================================================================
NET
INCOME
(LOSS) $ 2,397,447 $ (851,116) $ 1,546,331
=================================================================
COMPREHENSIVE
LOSS $ 2,296,433 $ - $ 2,296,433
=================================================================
WTD
SHARES
BASIC 10,649,766 591,053 4,259,639
WTD
SHARES
DILUTED 12,000,940 - -
INCOME (LOSS)
PER SHARE $ 0.23 $ (1.44) $ 0.36
=================================================================
</TABLE>
<TABLE>
<CAPTION>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA STATEMENT OF OPERATIONS
SEPTEMBER 30, 1998
UNAUDITED
----------------------------------------------------------------
SABA HVI COMBINED
----------------------------------------------------------------
<S> <C> <C> <C>
O&G
SALES $ 15,768,650 $ 129,852 $ 15,898,502
OTHER 2,914,512 - 2,914,512
---------------------------------------------------------------
TOTAL
REVENUES 18,683,162 129,852 18,813,014
PRODUCTION
COSTS 10,139,965 119,334 10,259,299
G&A 4,973,828 1,270,978 6,244,806
DD&A 5,500,339 - 5,500,339
WRITE-DOWN
OF
PROPERTIES 17,852,367 - 17,852,367
---------------------------------------------------------------
TOTAL
EXPENSES 38,466,499 1,390,312 39,856,811
---------------------------------------------------------------
OPERATING
LOSS (19,783,337) (1,260,460) (21,043,797)
INTEREST
INCOME 126,047 - 126,047
OTHER (1,250,884) 72,011 (1,178,873)
INTEREST
EXPENSE (2,518,573) - (2,518,573)
---------------------------------------------------------------
TOTAL
OTHER (3,643,410) 72,011 (3,571,399)
---------------------------------------------------------------
LOSS
BEFORE
TAXES (23,426,747) (1,188,449) (24,615,196)
INCOME
TAX
PROVISION 149,356 - 149,356
MINORITY
INTEREST
IN LOSS (77,886) - (77,886)
===============================================================
NET
LOSS $ (23,498,217) $ (1,188,449) $ (24,686,666)
===============================================================
COMPREHENSIVE
LOSS (23,651,276) - (23,651,276)
===============================================================
WTD
SHARES
BASIS 10,993,524 1,570,981 4,259,639
WTD
SHARES
DILUTED 10,993,524
LOSS
PER SHARE $ (2.14) $ (0.76) $ (5.80)
===============================================================
</TABLE>
Notes to Pro Forma Condensed Combined Financial Statements
- ----------------------------------------------------------
Statements of Operations
- ------------------------
No pro forma adjustments have been made to give effect to the combined
income tax expense and/or benefit. Nor have any adjustments been made to give
effect to any increase or decrease in operating and general and administrative
costs that may occur as a result of the merger. There has been no
adjustment made for interest expense that may or may not occur as the
result of HVI obtaining short-term bridge financing to finance HVI's
acquisition of common shares of SABA prior to the merger.
Balance Sheet
- -------------
A. HVI purchased 690 shares of SABA Series A convertible preferred stock
from RGC for $750,000, $250,000 cash and $500,000 promissory note to a
third party subsequently converted to bridge financing. HVI purchased from
SABA 2,500,000 of SABA's common stock for $7,500,000 cash. HVI obtained
bridge financing to fund the purchase. HVI purchased 80,000 common shares of
SABA in the open market for cash $70,130. Total cash inflows to SABA =
$7,500,000, total cash outflows of HVI = $320,130, net pro forma cash
adjustment = $7,179,870.
B. Assumes that net book value of SABA $13,803,114 at time of
merger approximated fair value. HVI's total investment in SABA prior to merger
was$30,260,130 for 10,527,112 common shares. Total outstanding SABA shares
prior to merger 18,619,060, resulting in 8,091,948 non-HVI-owned SABA
shares. Per terms of merger agreement, HVI issued one share of its common
stock for six shares of outstanding SABA common shares, resulting in the
issuance of 1,348,658 HVI common shares. Market price of HVI shares at
September 30, 1998 was $9.00 resulting in purchase price of $12,137,922.
Total purchase price of 100% of SABA outstanding shares was $42,398,052
resulting in an excess of purchase price over fair value of SABA's net assets
of $28,594,938, recorded as goodwill.
C. HVI plans to obtain bridge financing to fund the following purchases of
SABA preferred and common stock. $500,000 to pay of short-term note payable
to a third party related to the purchase of 690 shares of convertible SABA
preferred stock, $6,859,000 to pay off a short-term note payable to a third
party related to the purchase of 6,310 shares of convertible SABA preferred
stock, exercise of a third party call option to purchase 500,000 shares of
SABA common stock for $1,020,000, purchase of 333,333 SABA common shares
from SABA for $1,000,000 and exercise of option to purchase 2,166,667 shares
of SABA common stock for $6,500,000.
D. Assumes the conversion of 7,000 shares of Series A preferred stock.
Face value of 8,000 shares = $7,169,170, therefore outstanding face value
related to 7,000 shares = $6,273,024. The preferred shares were converted
to 5,066,667 common shares for a total value of $7,600,000 as approved by
SABA board of directors, resulting in a loss of $1,326,976 charged to
accumulated deficit.
Notes to Pro Forma Condensed Combined Financial Statements continued
- --------------------------------------------------------------------
E. Total equity of SABA $30,090 purchased by HVI in merger transaction.
Adjustments to equity prior to merger include: issuance of 7,567,000 SABA
common shares for $15,100,000, of which $7,600,000 was value assigned for
conversion of preferred shares (see Note D), and $7,500,000 cash (see Note
A), less the charge to accumulated deficit (see Note D) of $1,326,976
resulting in total equity or net book value of $13,803,114.
F. Issuance of 1,340,000 common shares valued at market on November 23,
1998 of $10.50 per share totaling $14,070,000 to Saba Acquisub, Inc. in
exchange for all outstanding shares of Saba Acquisub whose only asset was
2,960,445 common shares of SABA. Issuance of 1,348,658 shares in merger with
SABA valued at $12,137,922 (see Note B), for total increase to equity of
$26,207,922.
G. Loss on the conversion of SABA preferred shares to SABA common
shares. HVI's investment in the preferred shares was $7,609,000, and the
conversion was valued at $7,600,000 (see Note D).
H. Assumes return to treasury and cancellation of all outstanding SABA
common shares upon effective date of merger.
I. Assumes 1,000 outstanding SABA series A preferred shares will be
redeemed at face value of $896,146. The unaudited pro forma condensed
combined balance sheet reflects the liability for the amount due to the
preferred shareholder.
___________________________________________________________________________
No dealer, salesperson or other person has been authorized to give any
information or to make any representation in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof or that there has been no change in the
affairs of the Company since such date.
TABLE OF CONTENTS
Page
Available Information
Prospectus Summary
Cautionary Statement Regarding Forward
Looking Statements
Risk Factors
Use of Proceeds
Price Range of Common Stock and
Dividend Policy
Selected Financial Data
Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Business of the Company
Management
Principal and Selling Stockholders
Description of Capital Stock
Plan of Distribution
Shares Eligible for Future Sale
Certain Legal Matters
Experts
Glossary
Index to Financial Statements F-1
2,756,340 Shares
SABA PETROLEUM COMPANY
Common Stock
______________
PROSPECTUS
______________
____________________________________________________________________________
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses in connection with the issuance and distribution of
the Common Stock other than underwriting discounts and commissions, all of
which will be borne by the Company.
Commission registration fee $4,328
NASD filing fee
American Stock Exchange listing fee 17,500
Blue Sky fees and expenses
Printing and engraving expenses 15,000
Legal fees and expenses 70,000
Accounting fees and expenses 5,000
Transfer agent and registrar fees 40,000
Other 3,000
_____________
TOTAL $154,828
=============
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware GCL permits a corporation to indemnify its
directors and officers against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties, if such directors or officers acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reason to believe their conduct was unlawful. In a derivative action,
i.e., one by or in the right of the corporation, indemnification may be made
only for expenses actually and reasonably incurred by directors and officers
in connection with the defense or settlement of an action or suit, and only
with respect to a matter as to which they shall have acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and
only to the extent that the court in which the action or suit was brought
shall determine upon application that the defendant officers or directors are
reasonably entitled to indemnity for such expenses despite such adjudication
of liability. The Company's Bylaws provide that it shall indemnify its
directors, officers, employees and agents to the fullest extent permitted by
the Delaware GCL.
In addition, the Company's Certificate of Incorporation provides that to
the fullest extent permitted by the Delaware GCL, a director of the Company
shall not be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director. Under the Delaware GCL, liability
of a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases, and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of this provision in
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situation described in
clauses (i) through (iv) above. The provision does not limit or eliminate the
rights of the Company or any stockholders to seek non-monetary relief such as
an injunction or rescission in the event of a breach of a director's duty of
care.
Pursuant to Section 145 of the Delaware GCL, the Company maintains
directors' and officers' liability insurance coverage.
Item 15. Recent Sales of Unregistered Securities.
On September 15, 1994, the Company issued 44,440 unregistered shares of
Common Stock to Magnum Petroleum, Inc. in exchange for interests in oil and
gas properties valued at approximately $66,660. The Common Stock was exempt
from registration pursuant to Regulation D of the Securities Act and Section
4(2) of the Securities Act. On December 30, 1994, the Company issued 300,000
unregistered shares to Capco in connection with the acquisition of Capco
Resource Properties Ltd. The Common Stock was exempt from registration
pursuant to Section 4(2) of the Securities Act.
In January 1995, the Company issued 24,000 unregistered shares of Common
Stock, pursuant to a consulting agreement with Burt Cormany. The Common Stock
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On December 31, 1997, the Company issued 10,000 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") in exchange for
$10 million. The Series A Preferred Stock bears a cumulative dividend of 6%
per annum and is convertible at the option of the holder into shares of Common
Stock at a price equal to the lower of $9.345 or the average closing bid price
for any three consecutive trading days during the 30 trading day period ending
one trading day prior to the date the conversion notice is sent to the
Company. In general, conversion of the Series A Preferred Stock can occur
after 120 days from its issuance, in monthly increments of 20% of the amount
issued. The Series A Preferred Stock may be converted into a maximum of
2,165,898 shares of the Common Stock (subject to increase in the event of
certain dilutive events), until either shareholder or regulatory approval is
obtained, which the Company may be obligated to seek. The issuance was exempt
from registration under Rule 506 of Regulation D of the Securities Act.
The Series A Preferred Stock is redeemable by the Company at any time and
must be redeemed upon the occurrence of certain events. The Company may redeem
the Series A Preferred Stock at 115% of its stated value plus accrued
dividends and the issuance of a five year warrant to purchase 200,000 shares
of the Common Stock at 105% of the average closing bid price for the five
consecutive trading days preceding the date fixed for redemption. However,
the holder has the ability to convert all or any of the Series A Preferred
Stock into Common Stock. The Series A Preferred Stock is senior to all other
classes of the Company's equity securities and is accorded preferential status
with regard to dividend and liquidation rights. The conversion of the Series A
Preferred Stock could have a dilutive effect on the Company's Common Stock.
The Series A Preferred Stock generally carries no voting rights other than
with respect to the future issuance of Preferred Stock. Horizontal Ventures,
Inc. has agreed with the Company that upon HVI's acquisition of 7,000, or
greater, shares of the Series A Preferred Stock, HVI will convert shares of
the Series A Preferred Stock into shares of the Company's Common Stock at a
price of $2.50 per share upon any such conversion. There is not however any
assurance such Common Stock will be issued.
On October 8, 1998, the Company entered into a Common Stock Purchase
Agreement which was amended December 3, 1998 pursuant to which the Company
will sell and issue to Horizontal Ventures, Inc. by January 31, 1999 an
aggregate of 2,500,000 shares of the Company's Common Stock in exchange for
cash in the aggregate amount of $7,500,000. The issuance of the Common Stock
in that transaction, if any, will be exempt from registration under Section
4(2) of the Securities Act.
Item 16. Exhibits.
3(i).1 Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 4.1 to the Company's Registration Statement on
Form S-8, dated August 21, 1997 (File No. 001-13880) and
incorporated herein by reference)
3(I).1(a) Certificate of Designations, Preferences, and Rights of Series A
Convertible Preferred Stock dated December 31, 1997 (filed as
Exhibit 3(i).1(a) to the Company's Registration Statement on Form
S-1, dated January 27, 1998 (File No. 333-45023) and incorporated
herein by reference)
3(ii).1 ByLaws of the Company (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8, dated August 21, 1997 (File
No. 333-34035) and incorporated herein by reference)
4.1 Form of Indenture (including form of Debenture) (filed as Exhibit
4.1 to the Company's Registration Statement on Form SB-2 (File No.
33-94678) and incorporated herein by reference)
5.1 Opinion of Cohen Brame & Smith Professional Corporation regarding
legality*
10.1 Form of Indemnification Agreement entered into with officers and
directors of the Company (filed as Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.2 Employment Agreement with Ilyas Chaudhary (filed as Exhibit 10.3
to the Company's Registration Statement on Form SB-2 (File No. 33-
94678) and incorporated herein by reference)
10.3 Employment Agreement with Walton C. Vance (filed as Exhibit 10.31
to the Company's annual report on Form 10-KSB for the year ended
December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.4 First Amendment, Letter Agreement with Bradley T. Katzung (filed
as Exhibit 10.33 to the Company's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.5 Second Amendment to Employment Agreement with Bradley T. Katzung
(Filed as Exhibit 10.5 to the Company's annual report on Form 10-K
for the year ended December 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.6 Employment Agreement with Burt Cormany (filed as Exhibit 10.1 to
the Company's quarterly report on Form 10-QSB for the quarter
ending March 31, 1997 (File No. 001-13880) and incorporated herein
by reference)
10.7 Employment Agreement with Alex Cathcart, dated March 1, 1997,
(filed as Exhibit 10.38 to the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997 (file No.001-13880) and
incorporated herein by reference)
10.8 Retainer Agreement with Rodney C. Hill, A Professional
Corporation, dated March 16, 1997 (filed as Exhibit 10.39 to the
Company's Quarterly Report Form 10-Q for the quarter ended June
30, 1997(File No. 001-13880) and incorporated herein by reference)
10.9 Amendment to Retainer Agreement with Rodney C. Hill, A
Professional Corporation dated March 13, 1998 (Filed as Exhibit
10.9 to the Company's annual report on Form 10-K for the year
ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.10 Saba Petroleum Company 1996 Equity Incentive Plan (filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-8,
dated August 21, 1997 (File No. 333-34035) and incorporated herein
by reference)
10.11 Saba Petroleum Company 1997 Stock Option Plan for Non-Employee
Directors (filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-8, dated August 21, 1997 (File No. 333-34035)
and incorporated herein by reference)
10.12 First Amended and Restated Loan Agreement between the Company and
Bank One, Texas, N.A. (filed as Exhibit 10.1 to the Company's
quarterly report on Form 10-QSB for the quarter ended
September 30, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.13 Amendment Number One to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit
10.20 to the Company's annual report on Form 10-KSB for the year
ended December 31, 1996 (File No. 1-12322) and incorporated herein
by reference)
10.14 Amendment Number Two to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit
10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.15 Amendment Number Three to First Amended and Restated Loan
Agreement between the Company and Bank One, Texas, N.A. (filed as
Exhibit 10.2 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.16 Amendment Number Four to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit 10
to the Company's Current Report on Form 8-K filed September 24,
1997 (File No. 001-13880) and incorporated herein by reference)
10.17 Corrections relating to Second Amendment dated August 28, 1997,
and Fourth Amendment dated September 9, 1997 to the First Amended
and Restated Loan Agreement between the Company and Bank One,
Texas, N.A. (filed as Exhibit 10.4 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1997 (File
No. 001-13880) and incorporated herein by reference)
10.18 Amendment Number Five to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit
10.4 to the Company's Current Report on Form 8-K filed January 15,
1998 (File No. 001-13880) and incorporated herein by reference)
10.19 Consent Letter to Preferred Stock Transaction by Bank One, Texas,
N.A. dated December 31, 1997 (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed January 15, 1998 (File
No. 001-13880) and incorporated herein by reference)
10.20 Amendment of the First Amended and Restated Loan Agreement between
the Company and Bank One, Texas, N.A., dated December 31, 1997
(filed as Exhibit 10.3 to Saba's Report Form 8-K filed January 15,
1998 (File No. 001-13880) and incorporated herein by reference)
10.21 Amendment Number Seven to First Amended and Restated Loan
Agreement between the Company and Bank One, Texas, N.A. (Filed as
Exhibit 10.21 to the Company's annual report on Form 10-K for the
year ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.22 Stock Purchase Agreement (filed as an exhibit to the Company's
Current Report on Form 8-K dated January 10, 1995 (File No. 1-
12322) and incorporated herein by reference)
10.23 Processing Agreement between Santa Maria Refining Company and
Petro Source Refining Corporation (filed as Exhibit 10.6 to the
Company's Registration Statement on Form SB-2 (File No. 33-94678)
and incorporated herein by reference)
10.24 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire Teca and Nare fields (filed
as Exhibit 10.7 to the Company's Registration Statement on Form
SB-2 (File No. 33-94678) and incorporated herein by reference)
10.25 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire Cocorna Field (filed as
Exhibit 10.8 to the Company's Registration Statement on Form SB-2
(File No. 33-94678) and incorporated herein by reference)
10.26 Agreement among Saba Petroleum Company and Cabot Oil and Gas
Corporation to acquire Cabot Properties (filed as Exhibit 10.9 to
the Company's Registration Statement on Form SB-2 (File No. 33-
94678) and incorporated herein by reference)
10.27 Agreement among Saba Petroleum Company, Beaver Lake Resources
Corporation and Capco Resource Properties Ltd. (filed as Exhibit
10.10 to the Company's Registration Statement on Form SB-2 (File
No. 33-94678) and incorporated herein by reference)
10.28 Amendment to Agreement among the Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire the Teca and Nare fields
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
dated September 14, 1995 (File No. 1-12322) and incorporated
herein by reference)
10.29 Promissory Notes of the Company (filed as Exhibit 10.13 to the
Company's Registration Statement on Form SB-2 (File No. 33-94678)
and incorporated herein by reference)
10.30 CRI Stock Purchase Termination Agreement (filed as Exhibit 10.14
to the Company's Registration Statement on Form SB-2 (File No. 33-
94678) and incorporated herein by reference)
10.31 Form of Common Stock Conversion Agreement between Capco and the
Company (filed as Exhibit 10.15 to the Company's Registration
Statement on Form SB-2 (File No. 33-94678) and incorporated herein
by reference).
10.32 Form of Agreement regarding exercise of preemptive rights between
Capco and the Company (filed as Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.33 Letter Agreement, as amended, between Omimex de Colombia, Ltd. and
the Company (filed as Exhibit 10.17 to the Company's Registration
Statement on Form SB-2 (File No. 33-94678) and incorporated herein
by reference)
10.34 Promissory Note of Mr. Chaudhary (filed as Exhibit 10.2 to the
Company's quarterly report on Form 10-QSB for the quarter ended
June 30, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.35 Form of Stock Option Agreements between Mr. Chaudhary and Messrs.
Hickey and Barker (filed as Exhibit 10.3 to the Company's
quarterly report on Form 10-QSB for the quarter ended June 30,
1996 (File No. 001-13880) and incorporated herein by reference)
10.36 Form of Stock Option Termination Agreements between the Company
and Messrs. Hagler and Richards (filed as Exhibit 10.4 to the
Company's quarterly report on Form 10-QSB for the quarter ended
June 30, 1996 (File No. 001-13880) and incorporated by reference)
10.37 Agreement Minutes concerning Colombia oil sales contract between
Omimex as operator and Ecopetrol (filed as Exhibit 10.21 to the
Company's annual report on Form 10-KSB for the year ended December
31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.38 Operating Agreement between Omimex and Sabacol-Velasquez property
(filed as Exhibit 10.22 to the Company's annual report on Form
10-KSB for the year ended December 31, 1996 (File No. 001-13880)
and incorporated herein by reference)
10.39 Operating Agreement between Omimex and Sabacol-Cocorna and Nare
properties (filed as Exhibit 10.23 to the Company's annual report
on Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.40 Operating Agreement between Omimex and Sabacol-Velasquez-Galan
Pipeline (filed as Exhibit 10.24 to the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.41 Operating Agreement between Omimex and Sabacol-Cocorna Concession
property (filed as Exhibit 10.25 to the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.42 Life insurance contract on life of Ilyas Chaudhary (filed as
Exhibit 10.26 to the Company's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.43 Life insurance contract on life of Ilyas Chaudhary (filed as
Exhibit 10.27 to the Company's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.44 Agreement for Assignment of Leases between the Company and Geo
Petroleum, Inc. (filed as an exhibit to the Company's amended
annual report on Form 10-KSB/A for the year ended December 31,
1996 (File No. 001-13880) and incorporated herein by reference)
10.45 Amendment to Agreement for Assignment of Leases between the
Company and Geo Petroleum, Inc. (Filed as Exhibit 10.45 to the
Company's annual report on Form 10-K for the year ended December
31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.46 Agreement to Provide Collateral between Capco and Saba Petroleum
Company (filed as Exhibit 10.29 to the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.47 Purchase and Sale Agreement between DuBose Ventures, Inc.,
Rockbridge Oil & Gas, Inc., Saba Energy of Texas, Incorporated and
Energy Asset Management Corporation to acquire properties in
Jefferson Parish, LA (filed as Exhibit 10.30 to the Company's
annual report on Form 10-KSB for the year ended December 31, 1996
(File No. 001-13880) and incorporated herein by reference)
10.48 Beaver Lake Resources Corporation March 1997 Re-Financing
Agreement (filed as Exhibit 10.3 to the Company's quarterly report
on Form 10-QSB for the quarter ending March 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.49 Production Sharing Contract between Perusahaan Pertambangan Minyak
Dan Gas Bumi Nagara (Pertamina) and Saba Jatiluhur Limited (filed
as Exhibit 10.5 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.50 Agreements among the Company, Amerada Hess Corporation and Hamar
Associates II, LLC dated November 1, 1997 (Filed as Exhibit 10.50
to the Company's annual report on Form 10-K for the year ended
December 31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.51 Agreements among the Company, Chevron U.S.A. Production Company
and Nahama Natural Gas (Filed as Exhibit 10.51 to the Company's
annual report on Form 10-K for the year ended December 31, 1997
(File No. 001-13880) and incorporated herein by reference)
10.52 Exchange Agreement between the Company and Energy Asset Management
Company, L.L.C. dated March 6, 1998 (Filed as Exhibit 10.52 to the
Company's annual report on Form 10-K for the year ended December
31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.53 Office Lease Agreement, 3201 Airpark Drive, Santa Maria,
California (filed as Exhibit 10.2 to the Company's quarterly
report on Form 10-QSB for the quarter ending March 31, 1997 (File
No. 001-13880) and incorporated herein by reference)
10.54 Office Lease Agreement, 17526 Von Karman Avenue, Irvine,
California (Filed as Exhibit 10.54 to the Company's annual report
on Form 10-K for the year ended December 31, 1997 (File No. 001-
13880) and incorporated herein by reference)
10.55 Purchase and Sale Agreement between the Company and Statoil
Exploration (US) Inc. dated August 19, 1997 (filed as an exhibit
to the Company's Current Report on Form 8-K dated September 24,
1997 (File No. 001-13880) and incorporated herein by reference)
10.56 Securities Purchase Agreement dated December 31, 1997 (filed as
Exhibit 10.1 to Saba's Report Form 8-K filed January 15, 1998
(File No. 001-13880) and incorporated herein by reference)
10.57 Registration Rights Agreement dated as of December 31, 1997(filed
as Exhibit 3(I).1(a) to the Company's Registration Statement on
Form S-1, dated January 27, 1998 (File No. 333-45023) and
incorporated herein by reference)
10.58 Stock Purchase Warrant (Closing Warrant) dated December 31,
1997(filed as Exhibit 3(I).1(a) to the Company's Registration
Statement on Form S-1, dated January 27, 1998 (File No. 333-45023)
and incorporated herein by reference)
10.59 Stock Purchase Warrant (Redemption Warrant) dated December 31,
1997(filed as Exhibit 3(I).1(a) to the Company's Registration
Statement on Form S-1, dated January 27, 1998 (File No. 333-45023)
and incorporated herein by reference)
10.60 Finder Agreement dated as of December 31, 1997 (Filed as Exhibit
10.60 to the Company's annual report on Form 10-K for the year
ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.61 Stock Purchase Warrant (Finder Warrant) dated as of December 31,
1997 (Filed as Exhibit 10.61 to the Company's annual report on
Form 10-K for the year ended December 31, 1997 (File No. 001-
13880) and incorporated herein by reference)
10.62 Preliminary Agreement To Enter Into A Business Combination dated
March 18, 1998 by and among the Company and Omimex Resources, Inc.
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
dated March 30, 1998 (File No. 001-13880) and incorporated herein
by reference)
10.63 Press Release announcing the Proposed Combination between the
Company and Omimex Resources, Inc. dated March 18, 1998 (filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
March 30, 1998 (File No. 001-13880) and incorporated herein by
reference)
10.64 Agreement and Plan of Reorganization dated as of June 1, 1998 by
and among the Company and Omimex Resources, Inc. et al. (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
June 16, 1998 (File No. 001-13880) and incorporated herein by
reference).
10.65 Consent letter to provisions of Section 1.7 of the Agreement and
Plan or Reorganization by Bank One, Texas, NA, dated June 2, 1998
(filed as Exhibit 10.2 to the Company's Current Report on form 8-K
dated June 16, 1998 (File No. 001-13880) and incorporated herein
by reference).
10.66 Amendment to First Amended and Restated Loan Agreement dated
September 23, 1996, as amended, among the Company et al. and Bank
One, Texas, NA dated June 9, 1998 (filed as Exhibit 10.3 to the
Company's Current Report on form 8-K dated June 16, 1998 (File No.
001-13880) and incorporated herein by reference).
10.67 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. (filed as Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1998
(File No. 001-13880) and incorporated herein by reference).
10.68 Preferred Stock Transfer Agreement dated October 7, 1998 between
Horizontal Ventures, Inc. and RGC International Investors, LDC and
consented to by the Company (filed as Exhibit 7.1 to the Schedule
13D of Horizontal Ventures, Inc. dated October 14, 1998 concerning
its ownership of the Company's securities and incorporated herein
by reference).
10.69 Common Stock Purchase Agreement dated October 8, 1998 between the
Company and Horizontal Ventures, Inc. (filed as Exhibit 7.2 to the
Schedule 13D of Horizontal Ventures, Inc. dated October 14, 1998
concerning its ownership of the Company's securities and
incorporated herein by reference).
10.70 Letter Agreement dated October 8, 1998 between the Company and
Horizontal Ventures, Inc. (filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K dated October 6, 1998 (File No. 001-
13880) and incorporated herein by reference).
10.71 Employment Agreement with Imran Jattala dated July 23, 1998.
(filed as Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1998 (File No. 001-13880)
and incorporated herein by reference).
10.72 First Amendment to Common Stock Purchase Agreement dated October
8, 1998 between the Company and Horizontal Ventures, Inc. dated
December 4, 1998 (filed as Exhibit ___ to the Company's Current
Report on Form 8-K dated December ___, 1998 (File No. 001-13880)
and incorporated herein by reference).
16.1 Letter from Jackson & Rhodes P.C. to the Company (filed as an
exhibit to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1994 (File No. 1-12322) and incorporated herein
by reference)
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the
Company's Registration Statement on Form S-1 dated January 21,
1998 and incorporated herein by reference)
23.1 Consent of PricewaterhouseCoopers LLP (Los Angeles, California)*
23.2 Consent of Netherland, Sewell & Associates, Inc.*
23.3 Consent of Sproule Associates Limited*
23.4 Consent of Cohen Brame & Smith Professional Corporation (included
in Exhibit 5.1)*
___________________________
* Filed herewith
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this Registration
Statement as of the time The Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered therein, and that,
the offering of the securities at that time as the initial bona fide
offering thereof of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If
any public offering by the underwriters is to be made on terms differing from
those set forth on the cover page of the prospectus, a post-effective
amendment will be filed to set forth the terms of such offering.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of any
delayed offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by
Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Santa
Maria, State of California on December 22, 1998.
SABA PETROLEUM COMPANY
By:/s/ WILLIAM N. HAGLER
_____________________
William N. Hagler
Chairman of the Management
Committee
By:/s/ IMRAN JATTALA
_____________________
Imran Jattala
Chief Financial Officer and
Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
Signatures Title Date
/s/ ALEX S. CATHCART Director 12/22, 1998
________________________
Alex S. Cathcart
/s/ WILLIAM N. HAGLER Director 12/22, 1998
_________________________
William N. Hagler
/s/ RANDEEP S. GREWAL Director 12/22, 1998
_________________________
Randeep S. Grewal
/s/ DR. CHARLES KOHLHASS Director 12/22, 1998
___________________________
Dr. Charles Kohlhass
SABA PETROLEUM COMPANY
EXHIBIT INDEX
3. Exhibits:
3(i).1 Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 4.1 to the Company's Registration Statement on
Form S-8, dated August 21, 1997 (File No. 001-13880) and
incorporated herein by reference)
3(i).1(a) Certificate of Designations, Preferences, and Rights of Series A
Convertible Preferred Stock dated December 31, 1997 (filed as
Exhibit 3(i).1(a) to the Company's Registration Statement on Form
S-1, dated January 27, 1998 (File No. 333-45023) and incorporated
herein by reference)
3(ii).1 ByLaws of the Company (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8, dated August 21, 1997 (File
No. 333-34035) and incorporated herein by reference)
4.1 Form of Indenture (including form of Debenture) (filed as Exhibit
4.1 to the Company's Registration Statement on Form SB-2 (File No.
33-94678) and incorporated herein by reference)
5.1 Opinion of Cohen Brame & Smith Professional Corporation regarding
legality**
10.1 Form of Indemnification Agreement entered into with officers and
directors of the Company (filed as Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.2 Employment Agreement with Ilyas Chaudhary (filed as Exhibit 10.3
to the Company's Registration Statement on Form SB-2 (File No. 33-
94678) and incorporated herein by reference)
10.3 Employment Agreement with Walton C. Vance (filed as Exhibit 10.31
to the Company's annual report on Form 10-KSB for the year ended
December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.4 First Amendment, Letter Agreement with Bradley T. Katzung (filed
as Exhibit 10.33 to the Company's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.5 Second Amendment to Employment Agreement with Bradley T. Katzung
(Filed as Exhibit 10.5 to the Company's annual report on Form 10-K
for the year ended December 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.6 Employment Agreement with Burt Cormany (filed as Exhibit 10.1 to
the Company's quarterly report on Form 10-QSB for the quarter
ending March 31, 1997 (File No. 001-13880) and incorporated herein
by reference)
10.7 Employment Agreement with Alex Cathcart, dated March 1, 1997,
(filed as Exhibit 10.38 to the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997 (file No.001-13880) and
incorporated herein by reference)
10.8 Retainer Agreement with Rodney C. Hill, A Professional
Corporation, dated March 16, 1997 (filed as Exhibit 10.39 to the
Company's Quarterly Report Form 10-Q for the quarter ended June
30, 1997(File No. 001-13880) and incorporated herein by reference)
10.9 Amendment to Retainer Agreement with Rodney C. Hill, A
Professional Corporation dated March 13, 1998 (Filed as Exhibit
10.9 to the Company's annual report on Form 10-K for the year
ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.10 Saba Petroleum Company 1996 Equity Incentive Plan (filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-8,
dated August 21, 1997 (File No. 333-34035) and incorporated herein
by reference)
10.11 Saba Petroleum Company 1997 Stock Option Plan for Non-Employee
Directors (filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-8, dated August 21, 1997 (File No. 333-34035)
and incorporated herein by reference)
10.12 First Amended and Restated Loan Agreement between the Company and
Bank One, Texas, N.A. (filed as Exhibit 10.1 to the Company's
quarterly report on Form 10-QSB for the quarter ended
September 30, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.13 Amendment Number One to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit
10.20 to the Company's annual report on Form 10-KSB for the year
ended December 31, 1996 (File No. 1-12322) and incorporated herein
by reference)
10.14 Amendment Number Two to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit
10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.15 Amendment Number Three to First Amended and Restated Loan
Agreement between the Company and Bank One, Texas, N.A. (filed as
Exhibit 10.2 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.16 Amendment Number Four to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit 10
to the Company's Current Report on Form 8-K filed September 24,
1997 (File No. 001-13880) and incorporated herein by reference)
10.17 Corrections relating to Second Amendment dated August 28, 1997,
and Fourth Amendment dated September 9, 1997 to the First Amended
and Restated Loan Agreement between the Company and Bank One,
Texas, N.A. (filed as Exhibit 10.4 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1997 (File
No. 001-13880) and incorporated herein by reference)
10.18 Amendment Number Five to First Amended and Restated Loan Agreement
between the Company and Bank One, Texas, N.A. (filed as Exhibit
10.4 to the Company's Current Report on Form 8-K filed January 15,
1998 (File No. 001-13880) and incorporated herein by reference)
10.19 Consent Letter to Preferred Stock Transaction by Bank One, Texas,
N.A. dated December 31, 1997 (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed January 15, 1998 (File
No. 001-13880) and incorporated herein by reference)
10.20 Amendment of the First Amended and Restated Loan Agreement between
the Company and Bank One, Texas, N.A., dated December 31, 1997
(filed as Exhibit 10.3 to Saba's Report Form 8-K filed January 15,
1998 (File No. 001-13880) and incorporated herein by reference)
10.21 Amendment Number Seven to First Amended and Restated Loan
Agreement between the Company and Bank One, Texas, N.A. (Filed as
Exhibit 10.21 to the Company's annual report on Form 10-K for the
year ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.22 Stock Purchase Agreement (filed as an exhibit to the Company's
Current Report on Form 8-K dated January 10, 1995 (File No. 1-
12322) and incorporated herein by reference)
10.23 Processing Agreement between Santa Maria Refining Company and
Petro Source Refining Corporation (filed as Exhibit 10.6 to the
Company's Registration Statement on Form SB-2 (File No. 33-94678)
and incorporated herein by reference)
10.24 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire Teca and Nare fields (filed
as Exhibit 10.7 to the Company's Registration Statement on Form
SB-2 (File No. 33-94678) and incorporated herein by reference)
10.25 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire Cocorna Field (filed as
Exhibit 10.8 to the Company's Registration Statement on Form SB-2
(File No. 33-94678) and incorporated herein by reference)
10.26 Agreement among Saba Petroleum Company and Cabot Oil and Gas
Corporation to acquire Cabot Properties (filed as Exhibit 10.9 to
the Company's Registration Statement on Form SB-2 (File No. 33-
94678) and incorporated herein by reference)
10.27 Agreement among Saba Petroleum Company, Beaver Lake Resources
Corporation and Capco Resource Properties Ltd. (filed as Exhibit
10.10 to the Company's Registration Statement on Form SB-2 (File
No. 33-94678) and incorporated herein by reference)
10.28 Amendment to Agreement among the Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire the Teca and Nare fields
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
dated September 14, 1995 (File No. 1-12322) and incorporated
herein by reference)
10.29 Promissory Notes of the Company (filed as Exhibit 10.13 to the
Company's Registration Statement on Form SB-2 (File No. 33-94678)
and incorporated herein by reference)
10.30 CRI Stock Purchase Termination Agreement (filed as Exhibit 10.14
to the Company's Registration Statement on Form SB-2 (File No. 33-
94678) and incorporated herein by reference)
10.31 Form of Common Stock Conversion Agreement between Capco and the
Company (filed as Exhibit 10.15 to the Company's Registration
Statement on Form SB-2 (File No. 33-94678) and incorporated herein
by reference).
10.32 Form of Agreement regarding exercise of preemptive rights between
Capco and the Company (filed as Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.33 Letter Agreement, as amended, between Omimex de Colombia, Ltd. and
the Company (filed as Exhibit 10.17 to the Company's Registration
Statement on Form SB-2 (File No. 33-94678) and incorporated herein
by reference)
10.34 Promissory Note of Mr. Chaudhary (filed as Exhibit 10.2 to the
Company's quarterly report on Form 10-QSB for the quarter ended
June 30, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.35 Form of Stock Option Agreements between Mr. Chaudhary and Messrs.
Hickey and Barker (filed as Exhibit 10.3 to the Company's
quarterly report on Form 10-QSB for the quarter ended June 30,
1996 (File No. 001-13880) and incorporated herein by reference)
10.36 Form of Stock Option Termination Agreements between the Company
and Messrs. Hagler and Richards (filed as Exhibit 10.4 to the
Company's quarterly report on Form 10-QSB for the quarter ended
June 30, 1996 (File No. 001-13880) and incorporated by reference)
10.37 Agreement Minutes concerning Colombia oil sales contract between
Omimex as operator and Ecopetrol (filed as Exhibit 10.21 to the
Company's annual report on Form 10-KSB for the year ended December
31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.38 Operating Agreement between Omimex and Sabacol-Velasquez property
(filed as Exhibit 10.22 to the Company's annual report on Form
10-KSB for the year ended December 31, 1996 (File No. 001-13880)
and incorporated herein by reference)
10.39 Operating Agreement between Omimex and Sabacol-Cocorna and Nare
properties (filed as Exhibit 10.23 to the Company's annual report
on Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.40 Operating Agreement between Omimex and Sabacol-Velasquez-Galan
Pipeline (filed as Exhibit 10.24 to the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.41 Operating Agreement between Omimex and Sabacol-Cocorna Concession
property (filed as Exhibit 10.25 to the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.42 Life insurance contract on life of Ilyas Chaudhary (filed as
Exhibit 10.26 to the Company's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.43 Life insurance contract on life of Ilyas Chaudhary (filed as
Exhibit 10.27 to the Company's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.44 Agreement for Assignment of Leases between the Company and Geo
Petroleum, Inc. (filed as an exhibit to the Company's amended
annual report on Form 10-KSB/A for the year ended December 31,
1996 (File No. 001-13880) and incorporated herein by reference)
10.45 Amendment to Agreement for Assignment of Leases between the
Company and Geo Petroleum, Inc. (Filed as Exhibit 10.45 to the
Company's annual report on Form 10-K for the year ended December
31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.46 Agreement to Provide Collateral between Capco and Saba Petroleum
Company (filed as Exhibit 10.29 to the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 (File No. 001-
13880) and incorporated herein by reference)
10.47 Purchase and Sale Agreement between DuBose Ventures, Inc.,
Rockbridge Oil & Gas, Inc., Saba Energy of Texas, Incorporated and
Energy Asset Management Corporation to acquire properties in
Jefferson Parish, LA (filed as Exhibit 10.30 to the Company's
annual report on Form 10-KSB for the year ended December 31, 1996
(File No. 001-13880) and incorporated herein by reference)
10.48 Beaver Lake Resources Corporation March 1997 Re-Financing
Agreement (filed as Exhibit 10.3 to the Company's quarterly report
on Form 10-QSB for the quarter ending March 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.49 Production Sharing Contract between Perusahaan Pertambangan Minyak
Dan Gas Bumi Nagara (Pertamina) and Saba Jatiluhur Limited (filed
as Exhibit 10.5 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.50 Agreements among the Company, Amerada Hess Corporation and Hamar
Associates II, LLC dated November 1, 1997 (Filed as Exhibit 10.50
to the Company's annual report on Form 10-K for the year ended
December 31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.51 Agreements among the Company, Chevron U.S.A. Production Company
and Nahama Natural Gas (Filed as Exhibit 10.51 to the Company's
annual report on Form 10-K for the year ended December 31, 1997
(File No. 001-13880) and incorporated herein by reference)
10.52 Exchange Agreement between the Company and Energy Asset Management
Company, L.L.C. dated March 6, 1998 (Filed as Exhibit 10.52 to the
Company's annual report on Form 10-K for the year ended December
31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.53 Office Lease Agreement, 3201 Airpark Drive, Santa Maria,
California (filed as Exhibit 10.2 to the Company's quarterly
report on Form 10-QSB for the quarter ending March 31, 1997 (File
No. 001-13880) and incorporated herein by reference)
10.54 Office Lease Agreement, 17526 Von Karman Avenue, Irvine,
California (Filed as Exhibit 10.54 to the Company's annual report
on Form 10-K for the year ended December 31, 1997 (File No. 001-
13880) and incorporated herein by reference)
10.55 Purchase and Sale Agreement between the Company and Statoil
Exploration (US) Inc. dated August 19, 1997 (filed as an exhibit
to the Company's Current Report on Form 8-K dated September 24,
1997 (File No. 001-13880) and incorporated herein by reference)
10.56 Securities Purchase Agreement dated December 31, 1997 (filed as
Exhibit 10.1 to Saba's Report Form 8-K filed January 15, 1998
(File No. 001-13880) and incorporated herein by reference)
10.57 Registration Rights Agreement dated as of December 31, 1997(filed
as Exhibit 3(I).1(a) to the Company's Registration Statement on
Form S-1, dated January 27, 1998 (File No. 333-45023) and
incorporated herein by reference)
10.58 Stock Purchase Warrant (Closing Warrant) dated December 31,
1997(filed as Exhibit 3(I).1(a) to the Company's Registration
Statement on Form S-1, dated January 27, 1998 (File No. 333-45023)
and incorporated herein by reference)
10.59 Stock Purchase Warrant (Redemption Warrant) dated December 31,
1997(filed as Exhibit 3(I).1(a) to the Company's Registration
Statement on Form S-1, dated January 27, 1998 (File No. 333-45023)
and incorporated herein by reference)
10.60 Finder Agreement dated as of December 31, 1997 (Filed as Exhibit
10.60 to the Company's annual report on Form 10-K for the year
ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.61 Stock Purchase Warrant (Finder Warrant) dated as of December 31,
1997 (Filed as Exhibit 10.61 to the Company's annual report on
Form 10-K for the year ended December 31, 1997 (File No. 001-
13880) and incorporated herein by reference)
10.62 Preliminary Agreement To Enter Into A Business Combination dated
March 18, 1998 by and among the Company and Omimex Resources, Inc.
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
dated March 30, 1998 (File No. 001-13880) and incorporated herein
by reference)
10.63 Press Release announcing the Proposed Combination between the
Company and Omimex Resources, Inc. dated March 18, 1998 (filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
March 30, 1998 (File No. 001-13880) and incorporated herein by
reference)
10.64 Agreement and Plan of Reorganization dated as of June 1, 1998 by
and among the Company and Omimex Resources, Inc. et al. (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
June 16, 1998 (File No. 001-13880) and incorporated herein by
reference).
10.65 Consent letter to provisions of Section 1.7 of the Agreement and
Plan or Reorganization by Bank One, Texas, NA, dated June 2, 1998
(filed as Exhibit 10.2 to the Company's Current Report on form 8-K
dated June 16, 1998 (File No. 001-13880) and incorporated herein
by reference).
10.66 Amendment to First Amended and Restated Loan Agreement dated
September 23, 1996, as amended, among the Company et al. and Bank
One, Texas, NA dated June 9, 1998 (filed as Exhibit 10.3 to the
Company's Current Report on form 8-K dated June 16, 1998 (File No.
001-13880) and incorporated herein by reference).
10.67 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. (filed as Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1998
(File No. 001-13880) and incorporated herein by reference).
10.68 Preferred Stock Transfer Agreement dated October 7, 1998 between
Horizontal Ventures, Inc. and RGC International Investors, LDC and
consented to by the Company (filed as Exhibit 7.1 to the Schedule
13D of Horizontal Ventures, Inc. dated October 14, 1998 concerning
its ownership of the Company's securities and incorporated herein
by reference).
10.69 Common Stock Purchase Agreement dated October 8, 1998 between the
Company and Horizontal Ventures, Inc. (filed as Exhibit 7.2 to the
Schedule 13D of Horizontal Ventures, Inc. dated October 14, 1998
concerning its ownership of the Company's securities and
incorporated herein by reference).
10.70 Letter Agreement dated October 8, 1998 between the Company and
Horizontal Ventures, Inc. (filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K dated October 6, 1998 (File No. 001-
13880) and incorporated herein by reference).
10.71 Employment Agreement with Imran Jattala dated July 23, 1998.
(filed as Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1998 (File No. 001-13880)
and incorporated herein be reference).
10.72 First Amendment to Common Stock Purchase Agreement dated October
8, 1998 between the Company and Horizontal Ventures, Inc. dated
December 4, 1998 (filed as Exhibit __ to the Company's Current
Report on Form 8-K dated December ___, 1998 (File No. 001-13880)
and incorporated herein by reference).
16.1 Letter from Jackson & Rhodes P.C. to the Company (filed as an
exhibit to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1994 (File No. 1-12322) and incorporated herein
by reference)
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the
Company's Registration Statement on Form S-1 dated January 21,
1998 and incorporated herein by reference)
23.1 Consent of PricewaterhouseCoopers LLP (Los Angeles, California)*
23.2 Consent of Netherland, Sewell & Associates, Inc.*
23.3 Consent of Sproule Associates Limited*
23.4 Consent of Cohen Brame & Smith Professional Corporation (included
in Exhibit 5.1)*
* Filed herewith
EXHIBIT 5.1
OPINION OF COHEN BRAME & SMITH PROFESSIONAL CORPORATION
COHEN BRAME & SMITH
Professional Corporation
Attorneys at Law
One Norwest Center, Suite 1800
1700 Lincoln Street
Denver, CO 80203
December 22, 1998
Saba Petroleum Company
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
Re: Form S-1 Registration Statement relating to shares of $.001 par value
Common Stock for Selling Security Holders
Ladies and Gentlemen:
We have acted as counsel for Saba Petroleum Company (the "Company") in
connection with the Form S-1 Registration Statement to be filed by the Company
with the Securities and Exchange Commission relating to the shares of the
Company's $.001 par value common stock (the "Common Stock") being offered for
sale by certain holders of the Company's securities. As such counsel, we have
examined and relied upon such records, documents, certificates and other
instruments as in our judgment are necessary or appropriate to form the basis
for the opinions hereinafter set forth.
Based upon the foregoing, we are of the opinion that the shares of
Common Stock being offered when sold in accordance with the terms set forth in
the Registration Statement will be validly issued and outstanding, fully paid
and nonassessable.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Registration Statement.
Very truly yours,
/s/ Cohen Brame & Smith
Professional Corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-45023) of our reports, which contained an explanatory paragraph
regarding the company's ability to continue as a going concern, dated April
15, 199, on our audits of the consolidated financial statements and
consolidated financial statement schedule of Saba Petroleum Company. We also
consent to the reference to our firm under the caption "Experts."
/s/ PricewaterhouseCooper LLP
Los Angeles, California
December 21, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference into the Amendment
No.2 to the Registration Statement on Form S-1 being filed by Saba Petroleum
Company (the "Company") of all references to our firm and to the use of
information from our report dated March 12, 1998, setting forth our estimates
of certain of the Company's proved oil and gas reserves, as of December 31,
1997, in the United States and Colombia. We hereby further consent to the
reference to our firm under the heading "Experts" and such Registration
Statement.
NETHERLAND, SEWELL AND ASSOCIATES, INC.
/s/ Frederick D. Sewell
By: _________________________________________
Frederick D. Sewell
President
Dallas, Texas
December 9, 1998
Exhibit 23.3
December 15, 1998
Saba Petroleum Company
Ste. 201, 3201 Skyway Drive
Santa Maria, CA 93455
Re: Consent of Sproule Associates Limited
Dear Sirs:
The undersigned hereby consents to be named as the source for certain oil and
gas reserve information presented in the Form S-1 of Saba Petroleum Company
(the "Registrant") as filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1933, as amended.
Sincerely,
/s/ R. Kenneth MacLeod
___________________________
R. Kenneth MacLeod
Vice-President, Engineering
U.S. and International
