As filed with the Securities and Exchange Commission on December 22, 1998
Securities Act Registration No. 333-
Securities Exchange Act Registration No. 0-20760
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HORIZONTAL VENTURES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 1311 84-1091986
- ---------------------------- --------------------------- ---------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Identification
or organization) Code Number) Number)
630 Fifth Avenue, Suite 1501, New York, NY 10111
(212) 218-4680
------------------------------------------------------------
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
Randeep S. Grewal
Chairman and Chief Executive Officer
Horizontal Ventures, Inc.
630 Fifth Avenue, Suite 1501
New York, NY 10111
(212) 218-4680
-------------------------------------------------------
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
Copies to:
Roger V. Davidson, Esq. Susan M. Whalen, Esq.
Cohen Brame & Smith Professional Corporation Saba Petroleum Company
1700 Lincoln Street, Suite 1800 3201 Airpark Drive, Suite 201
Denver, CO 80203 Santa Maria, CA 93455
(303) 837-8800 (805) 347-8700
(303) 894-0475 (FAX) (805) 347-1072 (FAX)
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement and all other conditions to the merger contemplated by the Agreement
and Plan of Merger dated December 18, 1998 described in the enclosed Joint Proxy
Statement/Prospectus have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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.[ ]
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<TABLE>
<CAPTION>
Calculation of Registration Fee
================================================================================================================
Title of each class of securities Amount to be Proposed maximum Proposed maximum
to be registered Registered offering price per Aggregate Amount of
share(1) Offering price Registration
Fee
================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, no par value 1,300,000 (1) N/A $7,800,000(2) $2,169
================================================================================================================
</TABLE>
(1) Represents the estimated number of shares of common stock, no par value per
share, of the Registrant ("HVI Common Stock") issuable upon consummation of
the merger (the "Merger") of Saba Petroleum Company ("Saba") with and into
a subsidiary of the Registrant. The Registrant does not expect the number
of shares actually issued in the Merger to exceed the number indicated.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act of 1933, as amended (the "Securities
Act"), and computed pursuant to Rules 457(f)(1) and 457(c) under the
Securities Act on the basis of $1.00 (the average of the high and low
prices of Saba Common Stock as reported on the American Stock Exchange for
December 18, 1998) multiplied by 7,800,000 (the maximum aggregate number of
shares of Saba Common Stock to be acquired in the Merger, including
approximately 60.000 shares subject to issuance pursuant to outstanding
stock options and warrants).
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 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
Horizontal Ventures, Inc. Saba Petroleum Company
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 5, 1999
-----------------------------
PROSPECTUS OF HORIZONTAL VENTURES, INC.
The Boards of Directors of Horizontal Ventures, Inc. and Saba Petroleum
Company have approved a merger agreement that would result in Saba becoming a
wholly owned subsidiary of HVI. HVI currently owns 34.7% Saba's common stock.
If the merger is completed, Saba shareholders other than HVI will receive,
for each six shares of Saba common stock, one share of HVI common stock. The
shares of HVI common stock that will be owned by the pre-merger Saba
shareholders other than HVI will represent approximately 30% of the outstanding
HVI common stock after the merger. The shares of HVI common stock owned by
pre-merger HVI shareholders will represent approximately 70% of the outstanding
HVI common stock after the merger.
The merger agreement cannot be completed unless the HVI shareholders
approve the issuance of up to an aggregate of approximately 1,300,000 shares of
HVI common stock pursuant to the merger agreement and the Saba shareholders
approve the merger agreement. We have each scheduled special meetings for our
shareholders to vote on the HVI share issuance and the merger agreement. HVI has
also proposed to change the name of the combined companies to GREKA Energy
Corporation and to authorize the issuance of up to an additional 2,000,000
shares of its common stock for possible future acquisitions.
The dates, times and places of the special meetings are as follows:
For HVI shareholders: For Saba shareholders:
--------------------- ----------------------
Friday, February 5, 1999, 10:00 a.m. Friday, February 5, 1999, 2:00 p.m.
3201 Airpark Drive, Suite 201 3201 Airpark Drive, Suite 201
Santa Maria, California Santa Maria, California
You are cordially invited to attend. Whether or not you plan to attend yous
company's special meeting, it is important that your shares be voted. Please
take the time to vote by completing and mailing the enclosed proxy card to us.
The HVI Board of Directors recommends voting "FOR" the HVI share issuance, the
name change to GREKA Energy Corporation and the authorization of the issuance of
up to an additional 2,000,000 shares of common stock. The Saba Board of
Directors recommends voting "FOR" the merger agreement. HVI will vote its 34.7%
of Saba's common stock in favor of the merger agreement.
This document gives you detailed information about the proposed merger. HVI
has provided the information about HVI and Saba has provided the information
about Saba. In addition, please see "Where You Can Find More Information" on
page ____ for additional information about HVI and Saba which is on file with
the SEC.
Randeep S. Grewal William N. Hagler
Chairman and Chief Executive Officer Chairman of the Executive Committee
Horizontal Ventures, Inc. Saba Petroleum Company
-----------------------------
See "RISK FACTORS" beginning on page __ for a discussion of certain factors that
should be considered by the HVI shareholders and the Saba shareholders in
determining whether to approve the HVI share issuance or the merger agreement
and the transactions contemplated thereby.
-----------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the merger described in this Joint Proxy
Statement/Prospectus or the HVI common stock to be issued in the merger, nor
have they determined if this Joint Proxy Statement/Prospectus is accurate or
adequate. Furthermore, the Securities and Exchange Commission has not determined
the fairness or the merits of the merger. Any representation to the contrary is
a criminal offense.
-----------------------------
This Joint Proxy Statement/Prospectus is dated January __, 1999 and is
first being mailed to the shareholders of HVI and Saba on or about January ___,
1999.
<PAGE>
HORIZONTAL VENTURES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 5, 1999
Date: Friday, February 5, 1999
Time: 10:00 a.m. (local time)
Place: 3201 Airpark Drive, Suite 201
Santa Maria, California
At the Special Meeting, the shareholders of Horizontal Ventures, Inc. will
vote on the proposal to approve the issuance of up to an aggregate of 1,300,000
shares of HVI common stock pursuant to the Agreement and Plan of Merger dated
December 18, 1998 among HVI, HVI Acquisition Corporation (a wholly owned
subsidiary of HVI), and Saba Petroleum Company. Under the merger agreement, Saba
will become a wholly owned subsidiary of HVI and each shareholder of Saba other
that HVI will receive, for each six shares of Saba common stock, one share of
HVI common stock. Additionally, shareholders will be asked to approve a name
change to GREKA Energy Corporation and for futher approval to issue up to an
additional 2,000,000 shares of common stock for possible future acquisitions.
It is important that your shares be voted. Please vote as soon as possible
by completing the enclosed proxy card and returning it in the enclosed envelope.
If you decide to attend the meeting in person, you can revoke your proxy and
vote at that time. Shareholders of record at the close of business (5:00 p.m.
New York City time) on December 21, 1998 are entitled to one vote for each share
held. A list of these shareholders is available for inspection at HVI's offices
at 630 Fifth Avenue, Suite 1501, New York, New York.
The Board of Directors of HVI has determined that the issuance of HVI
common stock pursuant to the merger agreement is in the best interests of the
HVI shareholders, has approved the merger agreement, and recommends that
shareholders vote "FOR" approval of the HVI share issuance under the merger
agreement at the Special Meeting, the name change to GREKA Energy Corporation
and the authorization of the issuance of up to an additonal 2,000,000 shares of
common stock.
By Order of the Board of Directors,
Randeep S. Grewal
Chairman and Chief Executive Officer
New York, New York
January ___, 1999
- --------------------------------------------------------------------------------
It is important that the enclosed proxy card be signed, dated and promptly
returned in the enclosed envelope so that your shares will be represented
whether or not you plan to attend the special meeting. You should review this
document before completing the enclosed proxy card.
- --------------------------------------------------------------------------------
<PAGE>
SABA PETROLEUM COMPANY
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 5, 1999
Date: Friday, February 5, 1999
Time: 2:00 p.m. (local time)
Place: 3201 Airpark Drive, Suite 201
Santa Maria, California
At the Special Meeting, the shareholders of Saba Petroleum Company will
vote upon a proposal to approve the Agreement and Plan of Merger dated December
18, 1998 among Horizontal Ventures, Inc., HVI Acquisition Corporation (a wholly
owned subsidiary of HVI), and Saba. Under the merger agreement, Saba will become
a wholly owned subsidiary of HVI and each shareholder of Saba other than HVI
will receive, in exchange for each six shares of Saba common stock, one share of
HVI common stock.
It is important that your shares be voted. Please vote as soon as possible
by completing the enclosed proxy card and returning it in the enclosed envelope.
If you decide to attend the meeting in person, you can revoke your proxy and
vote at that time. Shareholders of record at the close of business (5:00 p.m.
New York City time) on December 21, 1998 are entitled to one vote for each share
held. A list of these shareholders is available for inspection at Saba's offices
at 3201 Airpark Drive, Suite 201, Santa Maria, California.
The Board of Directors of Saba has determined that the merger agreement is
in the best interests of the Saba shareholders, has approved the merger
agreement, and recommends that shareholders vote "FOR" approval of the merger
agreement at the Special Meeting.
By Order of the Board of Directors,
Susan M. Whalen
Secretary
Santa Maria, California
January ___, 1999
- --------------------------------------------------------------------------------
It is important that the enclosed proxy card be signed, dated and promptly
returned in the enclosed envelope so that your shares will be represented
whether or not you plan to attend the special meeting. You should review this
document before completing the enclosed proxy card.
You should not send stock certificates with your proxy card.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS......................................................
Questions and Answers ......................................................................
The Companies...............................................................................
HVI Special Meeting.........................................................................
Saba Special Meeting........................................................................
The Merger Agreement........................................................................
Comparative Per Share Data..................................................................
Comparative Market Price Information........................................................
Selected Historical Financial Data of Saba..................................................
Selected Pro Form Combined Financial Data...................................................
RISK FACTORS.....................................................................................
The 1 Share for 6 Shares Exchange Ratio Will Not Change.....................................
No Fairness Opinions from Independent Financial Advisors....................................
Uncertainties in Integrating Business Operations............................................
Substantial Dilution of Voting Interest of Shareholders.....................................
Interests of Certain Persons in the Merger Agreement........................................
HVI Operating Losses........................................................................
Volatility of Oil and Gas Prices and Markets................................................
Replacement of HVI Reserves.................................................................
Uncertainty of Estimates of HVI Reserves and Future Net Revenues............................
HVI Operating Hazards and Uninsured Risks...................................................
Substantial HVI Capital Requirements........................................................
HVI Acquisition Risks.......................................................................
Competition.................................................................................
Governmental Regulation and Environmental Risks.............................................
No Dividends on HVI Common Stock............................................................
Possible Volatility of Market Value of HVI Common Stock.....................................
Future Issuances of Stock by HVI Without Shareholder Approval...............................
Effect of Price Declines on Saba............................................................
Saba Bank Credit Facility...................................................................
Going Concern Qualification in Auditors Opinion for Saba....................................
Capital Requirements of Exploratory and Development Operations of Saba.....................
Restriction of Payment of Dividends by Saba ................................................
Saba Dependence on Key Personnel ...........................................................
Volatility of Saba Common Stock ............................................................
Saba Series A Preferred Stock...............................................................
Saba Dependence on Key Customers............................................................
Saba Dependence on Operator.................................................................
Wells Operated Under Joint Operating Agreements.............................................
Environmental Obligations...................................................................
Saba Refinery Matters.......................................................................
Saba Property Matters.......................................................................
Economic and Political Risks of Foreign Operations by Saba..................................
International Operations - General
Saba Colombian Operations...................................................................
THE MERGER.......................................................................................
General.....................................................................................
Background of the Merger....................................................................
HVI's Reasons for the Transactions; Recommendation of the HVI Board.........................
Saba's Reasons for the Acquisition; Recommendation of the Saba Board........................
Composition of the HVI Board................................................................
Interests of Certain Persons in the Transactions............................................
Certain Federal Income Tax Consequences.....................................................
Regulatory Matters .........................................................................
Anticipated Accounting Treatment............................................................
Other Terms of the Merger Agreement.........................................................
Percentage Ownership Interest of Saba Shareholders Following
Consummation of the Merger Agreement..................................................
Nasdaq SmallCap Market Listing..............................................................
i
<PAGE>
Page
Conversion of Shares in the Merger..........................................................
Exchange Agent; Procedure for Exchange of Certificates......................................
No Fractional Shares........................................................................
Representations and Warranties..............................................................
Conditions..................................................................................
Termination.................................................................................
Fees and Expenses...........................................................................
Amendment...................................................................................
Waiver......................................................................................
HVI REASONS FOR NAME CHANGE AND FUTURE SHARE ISSUANCE; RECOMMENDATIONS OF THE HVI BOARD .........
HVI SPECIAL MEETING..............................................................................
Date, Time and Place........................................................................
General.....................................................................................
Record Date; Vote Required..................................................................
Quorum......................................................................................
Proxies.....................................................................................
Solicitation of Proxies.....................................................................
Dissenters' Rights..........................................................................
SABA SPECIAL MEETING.............................................................................
Date, Time and Place........................................................................
General.....................................................................................
Record Date; Vote Required..................................................................
Quorum......................................................................................
Proxies.....................................................................................
Solicitation of Proxies.....................................................................
Appraisal Rights............................................................................
DESCRIPTION OF HVI SECURITIES....................................................................
HVI Common Stock............................................................................
Shares Eligible for Future Sale.............................................................
COMPARISON OF THE RIGHTS OF HOLDERS OF HVI COMMON
STOCK AND SABA COMMON STOCK.................................................................
MARKET PRICE OF HVI COMMON STOCK AND DIVIDENDS...................................................
BUSINESS OF HVI..................................................................................
HVI PROPERTIES...................................................................................
HVI LEGAL PROCEEDINGS............................................................................
HVI MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................................
HVI CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................................................
HVI MANAGEMENT...................................................................................
HVI EXECUTIVE COMPENSATION.......................................................................
SECURITY OWNERSHIP OF HVI MANAGEMENT AND OTHERS..................................................
BUSINESS OF SABA.................................................................................
SABA PROPERTIES..................................................................................
SABA LEGAL PROCEEDINGS...........................................................................
SELECTED FINANCIAL DATA OF SABA..................................................................
SABA MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................
SABA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................
SABA MANAGEMENT..................................................................................
SABA EXECUTIVE COMPENSATION......................................................................
SECURITY OWNERSHIP OF SABA MANAGEMENT AND OTHERS.................................................
CERTAIN RELATED TRANSACTIONS.....................................................................
SHAREHOLDER PROPOSALS............................................................................
EXPERTS..........................................................................................
LEGAL MATTERS....................................................................................
WHERE YOU CAN FIND MORE INFORMATION..............................................................
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS................................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES......................................... F-1
ANNEX TO THE JOINT PROXY STATEMENT/PROSPECTUS
Annex I - AGREEMENT AND PLAN OF MERGER...................................................... I-1
</TABLE>
ii
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the merger and the issuance of HVI common stock contemplated
thereby, you should read this entire document carefully, as well as additional
documents we refer you to.
Questions and Answers
Q. Why are the two companies proposing to merge?
A. Our companies are proposing to merge because we believe the combination will
provide significant benefits to our shareholders. We believe the merger will
enable us to take advantage of the complementary strategic fit of our respective
businesses by combining HVI's proprietary horizontal drilling technology with
Saba's significant oil and gas properties which are particularly suited to
exploitation by such technology. To review the background and reasons for the
merger in greater detail, see pages ____ through ____.
Q. What will I receive in the merger?
A. Saba common shareholders will receive one share of HVI common stock in
exchange for each six shares of Saba common stock they hold. HVI shareholders
will not receive anything directly, but will be shareholders of the larger
merged company.
After the merger, Saba's former common shareholders will own approximately
30% of the combined company and HVI's common shareholders before the merger will
own approximately 70% of the combined company.
We will not issue fractional shares. Instead, Saba common shareholders will
receive cash for any fractional share of HVI common stock owed to them.
Additionally, HVI will offer to repurchase the HVI shares from any new HVI
shareholder holding 2 shares of less The amount of cash will be based on the
lesser of the December 18, 1998 closing price of HVI common stock or the closing
price of HVI comon stock on the date of the merger.
For example:
* If you currently own 60 shares of Saba common stock, then after the
merger you will receive 10 shares of HVI common stock.
* If you currently own 16 shares of Saba common stock, then after the
merger you will receive 1 share of HVI common stock and a check for
the market value of the two thirds share or a check for the value of
the 1 2/3 share HVI shares on the date of the merger.
* If you currently own 12 shares or less of Saba common stock you will
receive 2 HVI shares a check the value of 2 HVI shares on the date of
the merger.
Q. What risks should I consider?
A. You should review "RISK FACTORS" on pages ____ through ___.
Q. When do you expect the merger to be completed?
A. We are working to complete the merger during February of 1999.
Q. What are the tax consequences of the merger to me?
A. While the companies have structured the Merger Agreement with the intent and
expectation that the exchange of shares by Saba shareholders will be tax-free to
Saba shareholders for federal income tax purposes, there can be no assurance
that the Merger will result in such treatment. Saba shareholders will have to
pay taxes on cash received for fractional shares or otherwise to review the tax
consequences to Saba shareholders in greater detail, see pages ______ through
______.
1
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The tax consequences of the merger to you will depend on your own situation. You
should consult your tax advisor for a full understanding of the tax consequences
of the merger to you.
Q. Will shareholders have dissenters' or appraisal rights?
A. No. Neither HVI shareholders nor Saba shareholders will have any dissenters'
or appraisal rights.
Q. Why is Saba merging into a subsidiary of HVI?
A. The merger was structured so that Saba assets and liabilities would remain
separate from those of HVI, to accommodate the companies' intent that the merger
be tax-free to Saba shareholders, and because of certain statutory requirements
under Delaware corporate law.
Q. What am I being asked to vote on?
A. HVI shareholders: You are being asked to approve the issuance of up to
1,300,000 shares of HVI common stock to Saba shareholders pursuant to the merger
agreement. You are also being asked to approve the change in HVI's name to GREKA
Energy Corporation and the authorization of the issuance of up to an additional
2,000,000 shares of common stock for possible future acquisitions.
Q. Why is HVI wanting to change its name and authorize additional shares for
future issuances?
A. Management of HVI has been advised that its current name, Horizontal
Ventures, Inc., really does not link it to the energy industry and several
investment banking firms which follow HVI's stock have suggested a name change.
The additional stock issuance request is required by the Nasdaq Stock Market
rules. By having these shares preapproved by the shareholders, management of HVI
believes that it will be able to enter into and close acquisitions of oil and
gas producing properties rapidly in one of the best buyers markets on record.
HVI's Board of Directors has unanimously approved the issuance of HVI common
stock pursuant to the merger agreement and recommends voting "FOR" the approval
of the HVI share issuance, the name change and the issuance of up to an
additional 2,000,000 shares of common stock.
A. Saba shareholders: You are being asked to approve the merger agreement which
provides that Saba will merge into a subsidiary of HVI and Saba common
shareholders other than HVI will receive one share of HVI common stock in
exchange for each six shares of Saba common stock they hold.
Saba's Board of Directors has approved the merger agreement and recommends
voting "FOR' the approval of the merger agreement.
Q. What do I need to do now?
A. Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed return envelope as soon as possible, so that your shares will be
represented at your shareholders meeting.
If you sign and send in your proxy and do not indicate how you want to vote,
your proxy will be counted as a vote in favor of the respective proposal. If you
do not vote or you abstain, it will have the effect of a vote against the
respective proposal.
The HVI special shareholders meeting will take place on Friday, February 5,
1999, at 10:00 a.m. local time, at Saba's offices at 3201 Airpark Drive, Suite
201, Santa Maria, California. The Saba special shareholders meeting will take
place on Friday, February 5, 1999, at 2:00 p.m. local time, at Saba's offices at
3201 Airpark Drive, Suite 201, Santa Maria, California. You may attend your
shareholders meeting and vote your shares in person, rather than signing and
mailing your proxy card. In addition, you may withdraw your proxy up to and
including the day of your shareholders meeting by following the directions on
page _____ and either change your vote or attend your shareholders meeting and
vote in person.
2
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Q. If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A. Your broker will vote your HVI or Saba shares only if you provide
instructions on how to vote. Other than as described above, without
instructions, your shares will not be voted. Shares that are not voted will be
counted as votes against the respective proposal.
Q. Should I send in my stock certificates now?
A. No. If you are a Saba common shareholder, after the merger is completed we
will send you written instructions for exchanging your Saba common stock
certificates for HVI common stock certificates. If you are a HVI common
shareholder, you should retain your stock certificates as the merger will not
require surrender of HVI stock certificates at any time. See pages ____ through
____ for further details.
3
<PAGE>
THE COMPANIES
HVI
630 Fifth Avenue, Suite 1501
New York, New York 10111
(212) 218-4680
HVI is an independent energy company engaged primarily in the business of
exploiting proven producing oil and gas reservoirs by utilizing a low cost
proprietary horizontal drilling technology to increase production rates.
HVI ACQUISITION CORPORATION
630 Fifth Avenue, Suite 1501
New York, New York 10111
(212) 218-4680
HVI Acquisition Corporation is a wholly owned subsidiary of HVI that has
conducted no operations other than those related to the transactions
contemplated by the Merger Agreement.
SABA
3201 Airpark Drive, Suite 201
Santa Maria, California 93455
(805) 347-8700
Saba is an independent energy company engaged in the acquisition,
development and exploration of oil and gas properties in the United States and
internationally. Saba has assembled a portfolio of over 200 potential
development drilling locations and uses advanced drilling and production
technologies such as horizontal drilling to enhance the returns from its
drilling programs. Saba also owns an asphalt refinery in Santa Maria,
California, where it currently processes approximately 4,000 barrels of oil per
day.
HVI SPECIAL MEETING
DATE, TIME AND PLACE (page _____)
The HVI Special Meeting will be held on, Friday February 5, 1999 at 10:00
a.m. local time, at Saba's principal executive offices at 3201 Airpark Drive,
Suite 201, Santa Maria, California.
PURPOSE OF THE HVI SPECIAL MEETING (page ____)
The purpose of the HVI Special Meeting is to consider and vote upon a
proposal to approve the issuance of up to 1,300,000 shares of HVI common stock
pursuant to the Merger Agreement.
The approval of the HVI share issuance by the HVI shareholders is required
by the rules of the Nasdaq SmallCap Market because the number of shares of HVI
common stock that would be issued pursuant to the Merger Agreement exceeds 20%
of the number of shares of HVI common stock that would be outstanding
immediately before the closing of the Merger Agreement.
HVI shareholders will also be asked to approve a change in HVI's name to
GREKA Energy Corporation and the authorization of the issuance of up to an
additional 2,000,000 shares of common stock for possible future acquisitions.
RECOMMENDATION OF THE HVI BOARD OF DIRECTORS (page ____)
The directors of HVI have unanimously approved the Merger Agreement and the
HVI share issuance and unanimously recommend that the shareholders of HVI vote
"FOR" approval of the HVI share issuance, the name change and the additional
issuance of up to 2,000,000 shares of common stock.
VOTE REQUIRED FOR APPROVAL AND RELATED MATTERS (page ____)
Record Date. Only holders of record of HVI Common Stock at the close of
business on December 21, 1998 (the "HVI Record Date") are entitled to receive
notice of and to vote at the HVI Special Meeting. Each such share owned at the
Record Date entitles the registered holder thereof to one vote.
4
<PAGE>
Quorum. The holders of more than one-third of the shares of HVI common
stock outstanding and entitled to vote must be present at the HVI Special
Meeting in person or represented by Proxy in order for a quorum to be present.
Required Vote. Once a quorum has been established, an affirmative vote of a
majority of the total votes cast at the HVI Special Meeting will be required for
approval of the HVI proposals. An abstention with respect to the HVI share
issuance will have the effect of a vote cast against the HVI share issuance.
Brokers who hold shares of HVI common stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners thereof. Any votes that are not cast because the
nominee-broker lacks such discretionary authority will not be counted as votes
cast on such proposal and will have no effect on the vote.
Proxies. Shares of HVI common stock represented by properly executed
proxies received at or prior to the HVI Special Meeting that have not been
revoked will be voted at the HVI Special Meeting in accordance with the
instructions contained therein. Shares of HVI common stock represented by
properly executed proxies for which no instruction is given will be voted "FOR"
approval of the HVI proposals.
SABA SPECIAL MEETING
DATE, TIME AND PLACE (page ____)
The Saba Special Meeting will be held on Friday, February 5, 1999, at 2:00
p.m. local time, at Saba's principal executive offices 3201 Airpark Drive, Suite
201, Santa Maria, California.
PURPOSE OF THE SABA SPECIAL MEETING (page ____)
The purpose of the Saba Special Meeting is to consider and vote upon a
proposal to approve the Merger Agreement.
RECOMMENDATION OF THE SABA BOARD OF DIRECTORS (page ____)
The Board of Directors of Saba has approved the Merger Agreement and the
transactions contemplated thereby and recommends that the shareholders of Saba
vote "FOR" approval of the Merger Agreement.
VOTE REQUIRED FOR APPROVAL AND RELATED MATTERS (page ____)
Record Date. Only holders of record of Saba Common Stock at the close of
business on December 21, 1998 (the "Saba Record Date") are entitled to receive
notice of and to vote at the Saba Special Meeting. Each such share owned at the
Record Date entitles the registered holder thereof to one vote.
Quorum. The holders of more than ______________ of the shares of Saba
common stock outstanding and entitled to vote must be present at the Saba
Special Meeting in person or represented by Proxy in order for a quorum to be
present.
Required Vote. Once a quorum has been established, an affirmative vote of a
majority of the outstanding shares of Saba Common Stock will be required for
approval of the Merger Agreement. An abstention with respect to the Merger
Agreement will have the effect of a vote cast against the Merger Agreement. HVI
owns 34.7% of the issued and outstanding shares of Saba Common Stock as of the
Saba Record Date and HVI will vote its shares of Saba Common Stock in favor of
the Merger Agreement.
Proxies. Shares of Saba Common Stock represented by properly executed
proxies received at or prior to the Saba Special Meeting that have not been
revoked will be voted at the Saba Special Meeting in accordance with the
instructions contained therein. Shares of Saba Common Stock represented by
properly executed proxies for which no instruction is given will be voted "FOR"
approval of the Merger Agreement.
5
<PAGE>
THE MERGER AGREEMENT
FORM OF MERGER (page ____)
Pursuant to the Merger Agreement, Saba will merge with and into HVI
Acquisition Corporation, the shares of Saba Common Stock issued and outstanding
immediately before the closing of the Merger Agreement, other than shares owned
by HVI, will be exchanged for shares of HVI Common Stock to be issued based on
an exchange ratio of one share of HVI Common Stock for six shares of Saba Common
Stock (with cash to be paid in lieu of any resulting fractional shares), the
separate corporate existence of Saba will cease, and HVI Acquisition Corporation
will be the surviving corporation, with the corporate name of HVI Acquisition
Corporation to be changed to "Saba Petroleum Company."
THE EFFECTIVE TIME (page ____)
The Merger will become effective upon the filing of the Certificate of
Merger with the Delaware Secretary of State (the "Effective Time"). Pursuant to
the Merger Agreement, the filing of the Certificate of Merger will be made as
soon as practicable after the closing of the Merger, which is to occur on the
second business day after the satisfaction or waiver of the conditions to the
Merger as set forth in the Merger
MERGER CONSIDERATION (page ____)
Upon the consummation of the Merger, the shares of Saba Common Stock issued
and outstanding immediately before the closing of the Merger Agreement, other
than shares owned by HVI, will be exchanged for shares of HVI Common Stock to be
issued based on an exchange ratio of one share of HVI Common Stock for six
shares of Saba Common Stock (with cash to be paid in lieu of any resulting
fractional shares).
Consummation of the Merger Agreement will result in the present Saba
shareholders (excluding HVI) owning 30% of the total number of issued and
outstanding shares of HVI common stock immediately after consummation of the
Merger Agreement. The Merger Agreement shall be voted upon by the shareholders
of Saba and is subject to the effectiveness of HVI's Registration Statement on
Form S-4.
CONDITIONS TO THE MERGER (page ____)
The obligations of HVI and Saba to consummate the Merger are subject to
various conditions, including obtaining requisite shareholder approval and other
conditions customary to transactions of this nature. It is anticipated that such
conditions will be satisfied by the dates of the Special Meetings and the Merger
will be consummated promptly following such meeting.
REGULATORY MATTERS (page )
The Merger is not subject to the notification and waiting period
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
ACCOUNTING TREATMENT (page ____)
We expect that the merger will be accounted for using the purchase method
of accounting, which means that the assets and liabilities of Saba will be
recorded at their fair values as of the Effective Time.
6
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents selected comparative per share data for HVI
and for Saba on both an historical and unaudited pro forma combined basis giving
effect to the acquisition by HVI of all of the issued and outstanding shares of
common stock of Saba, including the shares to be acquired pursuant to the Merger
Agreement, as if the acquisition had occurred as of the balance sheet dates
below for purposes of calculating book value per share amounts, and on January
1, 1997 and 1998 for purposes of calculating net loss per share amounts. Neither
HVI nor Saba has paid cash dividends. Accordingly, no information is provided
with respect to pro forma combined or pro forma equivalent cash dividends. You
should read these tables in conjunction with the historical financial statements
of HVI and Saba and the unaudited pro forma condensed combined financial
information appearing elsewhere in this Joint Proxy Statement/Prospectus. You
should not assume that these tables are indicative of the results of operations
or combined financial position that would have been achieved had the transaction
been completed as of the beginning of the periods presented or are indicative of
results for future operations.
At September 30,
1998
----------------
Book Value Per Common Share
HVI historical $ 5.60
Saba historical $ -
HVI/Saba pro forma combined $ 8.22
For the nine For the
months ended year ended
September 30, 1998 December 31, 1997
------------------ -----------------
Net loss per share
HVI historical $ (0.76) $ (1.44)
Saba historical
Basic $ (2.17) $ 0.23
Diluted $ (2.17) $ 0.22
HVI/Saba pro forma combined $ (5.80) $ 0.37
COMPARATIVE MARKET PRICE INFORMATION
The following table presents, for the periods indicated, the high and low
closing bid quotations per share of HVI common stock as reported on the Nasdaq
SmallCap Market, and the high and low closing sales prices per share of Saba
Common Stock as reported on the American Stock Exchange (as adjusted to reflect
a two share-for-one share stock split in the form of a stock dividend paid in
December 1996). For current price information, you should consult publicly
available sources.
<TABLE>
<CAPTION>
HVI Saba
-------------------- ---------------------
Quarter Ended Low High Low High
------------- --- ---- --- ----
<S> <C> <C> <C> <C>
March 31, 1996 ................ $ .19 $ .22 $ 3.56 $ 4.75
June 30, 1996 ................. .13 .13 3.88 8.00
September 30, 1996 ............ .25 .31 6.19
December 31, 1996 ............. .19 .25 9.25 27.12
March 31, 1997 ................ .19 .25 12.75 25.25
June 30, 1997 ................. .03 .09 10.75 17.75
September 30, 1997 ............ .03 .03 12.81 20.12
December 31, 1997 6.82* 19.00* 8.00 14.88
March 31, 1998 ................ 12.00 14.75 3.38 8.50
June 30, 1998 ................. 8.0625 10.00 1.44 4.12
September 30, 1998 ............ 7.25 9.25 .8125 2.125
</TABLE>
7
<PAGE>
*On November 8, 1997, a 1 share for 220 share reverse split approved by the U.S.
Bankruptcy court took effect, which dramatically affected the per share price of
HVI common stock.
HVI has never paid dividends on HVI common stock, and the Board of
Directors of HVI presently intends to pursue a policy of retaining earnings, if
any, for use in HVI's operations and to finance expansion of its business. On
the HVI Record Date, there were approximately 485 registered holders of HVI
common stock. Based on a broker count, HVI believes at least an additional 1200
persons are shareholders with street name positions. On December 4, 1998, the
trading date immediately preceding the announcement of the exchange ratio terms
of the Merger Agreement, the closing bid quotation per share of HVI common stock
as reported on the Nasdaq SmallCap Market was $11.00. On January ___ , 1999, the
last practicable trading day prior to the printing of this Joint Proxy
Statement/Prospectus, the closing bid quotation per share of HVI common stock as
reported on the Nasdaq SmallCap Market was $_________.
Saba has never paid cash dividends on Saba Common Stock and does not
anticipate doing so in the foreseeable future. Saba's Series A Preferred Stock,
Saba Debentures and Saba's principal revolving credit agreement restrict the
payment of dividends by Saba. On the Saba Record Date, Saba had approximately
2.850 shareholders of record. On December 4, 1998, the trading date immediately
preceding the announcement of the exchange ratio terms of the Merger Agreement,
the shares of Saba Common Stock closed at $1.375 per share. On January _____,
1999, the last practicable trading day prior to the printing of this Joint Proxy
Statement/Prospectus, the closing price per share of Saba Common Stock as
reported on the American Stock Exchange was $____________.
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA OF SABA
Nine Months Ended
Years ended December 31, September 30,
----------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
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
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
============ ============ ============ =========== ============== ========== ===========
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)
============ ============ ============ =========== ============== ========== ===========
8
<PAGE>
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 (used
in) financing activities $ 958 $ 860 $ 14,850 $ 5,037 $ 21,991 $ 18,331 $ (4,397)
OTHER FINANCIAL 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
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
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 1440 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 Saba's operating
performance.
(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 Saba in 1995 and 1996.
(5) For information on terms and interest, see the Note 8 of Notes to
Consolidated Financial Statements of Saba contained in this document.
(6) See Note 4 of the Notes to Consolidated Financial Statements of Saba
contained in this documentfor more information about the write down of oil
and gas properties.
Selected Unaudited Pro Forma Combined Financial Data
HVI and SABA
For the For the
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
Total Revenues $18,813,014 $36,207,458
Total Operating Expense (1) $39,856,811 $30,025,106
Income (Loss) from Continuing
Operations (1) $21,042,797 $ 6,182,352
Net Income (Loss) Per Share $ (5.80) $ 0.37
As of
September 30,
-------------
Total Assets $98,623,778
Total Liabilities $63,624,686
Stockholders' Equity $34,999,092
- ----------------
(1) The nine months ended December 31, 1998 includes writedown of properties of
$17,852,367.
10
<PAGE>
RISK FACTORS
In addition to the other information included in this Joint Proxy
Statement/ Prospectus (including the matters addressed in "INFORMATION REGARDING
FORWARD LOOKING STATEMENTS" on page ___), the factors described below should be
considered carefully by shareholders of HVI and Saba in determining whether to
approve the merger agreement and the other transactionsbeing voted on.
THE 1 SHARE FOR 6 SHARE EXCHANGE RATIO WILL NOT CHANGE
The Exchange Ratio, as expessed in the Merger Agreement, is a fixed ratio
so that Saba shareholders will receive 1 share of HVI common stock for each 6
shares of Saba stock they own. The number of HVI shares to be issued to the Saba
shareholders will not change even if the relative market values of the two
companies should change prior to the shareholders meeting. Changes in the share
price of each company may result from many causes such as, Wall Street's
assessment as to the likelihood of the merger being completed and general market
conditions such as the price of oil, the impact of the Asia markets and other
international events such as the bombing in Iraq. Because of all of these
variables, it is very difficult to determine precisely the comparable values of
Saba and HVI and therefore each voting shareholder must independently assess the
reasonableness of HVI's offer to Saba. The shareholders of HVI and Saba are
urged to obtain current market quotations when making this decision. See "OTHER
TERMS OF THE MERGER AGREEMENT - Conditions Precedent to the Merger."
NO FAIRNESS OPINIONS FROM INDEPENDENT FINANCIAL ADVISORS
Neither HVI nor Saba engaged an independent financial advisor to formally
evaluate the financial fairness of the Exchange Ratio. As a result, shareholders
of each company will need to make their voting and/or investment decisions
without an opinion from an independent financial advisor that the Merger
Agreement is fair to such shareholders from a financial point of view. See "THE
MERGER - HVI's Reasons for the Transactions; Recommendation of the HVI Board; -
Saba's Reasons for the Transactions."
UNCERTAINTIES IN INTEGRATING BUSINESS OPERATIONS
In determining that the Merger Agreement is in the best interests of HVI or
Saba, as the case may be, each of the HVI and Saba Boards of Directors addressed
the cost savings, operating efficiencies, revenue enhancement and other
synergies that may result from the consummation of the Merger Agreement. The
consolidation of functions and integration of departments, systems and
procedures, present significant management challenges and require special
attention. There can be no assurance that such actions will be successfully
accomplished as rapidly as currently expected or that the combined company will
realize any of the anticipated benefits of the Merger Agreement. See "THE MERGER
- - HVI's Reasons for the Transactions; - Recommendation of the HVI Board; -
Saba's Reasons for the Transactions."
SUBSTANTIAL DILUTION OF VOTING INTEREST OF SHAREHOLDERS
If the Merger is approved, the shareholders of Saba will own less of HVI
than they did in Saba. Prior to the Merger, the shareholders, other than HVI,
owned approximately 65% of Saba and after the Merger they will own approximately
30% of HVI; therefore, their voting interests will be reduced accordingly.
Howver, as a result of the Merger the shareholdlers of HVI and Saba will each
own a voting interest in a larger and financially more sound enterprise.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AGREEMENT
In considering the recommendation of the HVI Share Issuance by the HVI
Board of Directors, shareholders sould be aware that the HVI Board has
authorized the issuance of 30,000 shares of HVI common stock to Randeep S.
Growel, a member of the HVI Board, upon the Effective Date of the Merger.
Additionally Saba's former Chairman, Ilyas Chaudhary through companies owned by
him owned approximately 29% of Saba prior to HVI's introduction to Saba. This
block of voting interest is considered a control block by HVI and HVI deemed it
imperative to acquire that control block prior to the commencement of the
shareholder voting process. As a result, HVI agreed to pay a greater number of
shares to Mr. Chaudhary through his corporate entities than it has agreed to pay
to the sharesholders of Saba in general. This is a very common practice in
merger transactions. Such interests, together with other relevant factors, were
considered by the Saba Board of Directors in approving the Merger Agreement. See
"THE MERGER Interests of Certain Persons in the Transactions."
11
<PAGE>
HVI OPERATING LOSSES
During most of 1997, HVI and all of its subsidiaries were essentially
dormant pending reorganization and emergence from bankruptcy. HVI's plan of
reorganization was approved by the bankruptcy court on August 28, 1997 and the
case was closed on March 26, 1998. HVI has continued to incur operating losses
during 1998. HVI had net losses of $1,188,449 and $851,116 for the nine months
ended September 30, 1998 and the year ended December 31, 1997, respectively. HVI
had an accumulated deficit of $2,872,349 as of September 30, 1998. See page -
"MANAGEMENT'S - Discussion and Analysis."
VOLATILITY OF OIL AND GAS PRICES AND MARKETS
HVI's revenues, cash flow, profitability and future rate of growth are to
some extent dependent upon prevailing prices for oil, gas and commencing after
the Saba Merger, asphalt. HVI's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms is also to some
extent dependent on these commodities prices. Historically, oil and gas prices
and markets have been volatile and are likely to continue to be volatile in the
future. Prices for oil and gas are subject to wide fluctuations in response to
relatively minor changes in supply of and demand for oil and gas, market
uncertainty and a variety of additional factors that are beyond the control of
HVI. These factors include international political conditions, the domestic and
foreign supply of oil and gas, the level of consumer demand, weather conditions,
domestic and foreign governmental regulations, the price and availability of
alternative fuels and overall economic conditions. In addition, various factors,
including the availability and capacity of gas gathering systems and pipelines,
the effect of federal and state regulation of production and transportation,
general economic conditions, changes in supply due to drilling by other
producers and changes in demand may adversely affect HVI's ability to market its
oil and gas production and its contract services for horizontal drilling.
Significant declines in the price of oil or gas, such as the declines in oil
prices during 1998, would adversely affect HVI's revenues, operating income and
borrowing capacity and may require a reduction in the carrying value of HVI's
oil and gas properties. Asphalt prices are far less volitile and are more driven
by supply and demand. Saba's asphalt refinery is fed by Saba's and HVI's Cat
Canyon properties thus greatly reducing oil price risk from the Cat Canyon
development strategy. This is one reason HVI is interested in acquiring Saba.
REPLACEMENT OF HVI RESERVES
HVI's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Except to the
extent that HVI conducts successful exploitation and production activities or
acquires properties containing proved reserves, the estimated net proved
reserves of HVI will generally decline as reserves are produced. There can be no
assurance that HVI's planned exploitation and production projects and
acquisition activities will result in significant additional reserves or that
HVI will have continuing success drilling productive wells economically. If
prevailing oil and gas prices were to increase significantly, HVI's costs to add
new reserves could increase. The drilling of oil and gas wells involves a high
degree of risk, especially the risk of dry holes or of wells that are not
sufficiently productive to provide an economic return on the capital expended to
drill the wells. In addition, HVI's drilling operations, including its contract
services, may be curtailed, delayed or canceled as a result of numerous factors,
including title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment. See page ____
"BUSINES OF HVI - Oil and Gas Reserves."
UNCERTAINTY OF ESTIMATES OF HVI RESERVES AND FUTURE NET REVENUES
Included in this Joint Proxy Statement/Prospectus are estimates of HVI's
net proved oil and gas reserves and the future net revenues from those reserves
which have been prepared by HVI and its independent petroleum engineers. There
are numerous uncertainties inherent in estimating quantities of proved oil and
gas reserves, including many factors beyond the control of HVI. Reserve
engineering is a subjective process of estimating the underground accumulations
of oil and gas that cannot be measured in an exact manner. The estimates
incorporated by reference into this Joint Proxy Statement/Prospectus are based
on various assumptions required by the Securities and Exchange Commission,
including constant oil and gas prices, operating expenses and capital
expenditures, and, therefore, are inherently imprecise indications of future net
revenues. Actual future production, revenues, taxes, operating expenses,
development expenditures and quantities of recoverable oil and gas reserves may
vary substantially from those assumed in the estimates. Any significant variance
in these assumptions could materially affect the estimated quantity and value of
reserves incorporated by reference into this Joint Proxy Statement/Prospectus.
12
<PAGE>
In addition, the Company's reserves may be subject to downward or upward
revision based upon production history, results of future development,
availability of funds to acquire additional reserves, prevailing oil and gas
prices and other factors. In addition, the calculation of the estimated present
value of the future net revenue using a 10% discount rate as required by the
Securities and Exchange Commission is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with HVI's reserves or the oil and gas industry in general.
It is also possible that independent petroleum engineers may make different
estimates of reserves and future net revenues based on the same available data.
In calculating reserves on a barrels of oil equivalent basis, gas was converted
to oil at a certain ratio. While this convention approximates the energy
equivalent of oil and gas on a British thermal unit basis, it may not represent
the relative prices received by HVI on the sale of its oil and gas production.
The estimated future net revenues attributable to HVI's net proved reserves
are prepared in accordance with Securities and Exchange Commission guidelines,
and are not intended to reflect the fair market value of HVI's reserves. In
accordance with the rules of the Securities and Exchange Commission, HVI's
reserve estimates are prepared using period end prices received for oil and gas.
Future reductions in prices below those prevailing at December 31, 1997 would
result in the estimated quantities and present values of HVI's reserves being
reduced. See page 58 "BUSINESS OF HVI - Oil and Gas Reserves."
HVI OPERATING HAZARDS AND UNINSURED RISKS
The oil and gas business involves a variety of operating risks, including
fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to HVI due to injury and loss of life, severe damage to and
destruction of property, natural resources and equipment, pollution and other
environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. HVI maintains general liability
insurance coverage for its operations but has not obtained insurance coverage
for certain environmental hazards. The occurrence of a significant unfavorable
event not fully covered by insurance will have a material adverse effect on
HVI's financial condition and results of operations. Furthermore, HVI cannot
predict whether insurance will continue to be available at a reasonable cost or
at all. See page 64 "BUSINESS OF HVI - Operational Hazards and Insurance."
SUBSTANTIAL HVI CAPITAL REQUIREMENTS
HVI makes, and will continue to make, substantial capital expenditures for
the exploitation, production and acquisition of oil and gas reserves. HVI has
financed these expenditures primarily from private placements of HVI Common
Stock in 1997. If revenues or HVI's ability to borrow decreases as a result of
lower oil and gas prices, operating difficulties or declines in reserves, HVI
may have limited ability to fund the capital requirements to undertake or
complete future exploitation, production and acquisition programs. There can be
no assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements.
HVI ACQUISITION RISKS
HVI intends to acquire oil and gas properties such as those which are owned
by Saba. Although HVI performs a review of the acquired properties that it
believes is consistent with industry practices, such reviews are inherently
incomplete. It generally is not feasible to review in depth every individual
property involved in each acquisition. Ordinarily, HVI will focus its due
diligence efforts on the higher valued properties and will sample the remainder.
However, even an in-depth review of all properties and records may not
necessarily reveal existing or potential problems nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not be performed on every well,
and structural or environmental problems, such as ground water contamination,
are not necessarily observable even when an inspection is undertaken. HVI may be
required to assume preclosing liabilities, including environmental liabilities,
and may acquire interests in properties on an "as is" basis. There can be no
assurance that HVI's acquisitions will be successful.
COMPETITION
The oil and gas industry is highly competitive. HVI competes in the areas
of property acquisitions and the exploitation, production and marketing of oil
and gas with major oil companies, other independent oil and gas concerns and
13
<PAGE>
individual producers and operators. Many of these competitors have substantially
greater financial and other resources than HVI. However, despite being a
relatively small company, HVI believes it has an advantage over its competition
due to the level of its field expertise in applying the patented Amoco Short
Radius Horizontal Drilling technology and its ability to provide this technology
at a fraction of the cost of the competition. Although Amoco has provided
licenses to others, HVI feels that its experience and its two prong approach is
sheltered from other licensees who are concentrating on services within their
respective geographical area. See page 61 "BUSINESS OF HVI - Competition."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL RISKS
HVI's business is subject to various federal, state and local laws and
governmental regulations which may be changed from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, unitization and pooling of properties,
taxation and environmental protection. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas.
HVI's operations could result in liability for personal injuries, property
damage, oil spills, discharge of hazardous materials, remediation and clean-up
costs and other environmental damages. HVI could be liable for environmental
damages caused by previous property owners. As a result, substantial liabilities
to third parties or governmental entities may be incurred, the payment of which
could have a material adverse effect on HVI's financial condition and results of
operations. HVI maintains general liability insurance coverage for its
operations, but has not obtained insurance coverage for certain environmental
hazards. Accordingly, HVI may be subject to liability or may lose substantial
portions of its properties in the event of certain environmental damages. HVI
could incur substantial costs to comply with environmental laws and regulations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws of
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on HVI.
The recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. For instance, legislation has been introduced
in Congress that would reclassify certain exploration and production wastes as
"hazardous wastes" which would make the reclassified wastes subject to much more
stringent handling, disposal and clean-up requirements. If such legislation were
enacted, it could have a significant impact on the operating costs of HVI, as
well as the oil and gas industry in general. Initiatives to further regulate the
disposal of oil and gas wastes are also pending in certain states, and these
various initiatives could have a similar impact on HVI. See page 61 "BUSINESS OF
HVI - Regulation" and page 63 "Environmental Regulation."
NO DIVIDENDS ON HVI COMMON STOCK
HVI has never paid any cash or other dividends on HVI Common Stock and does
not anticipate payment of any dividends for the foreseeable future. HVI
anticipates that any future earnings will be retained to finance HVI's
operations and future growth and expansion.
POSSIBLE VOLATILITY OF MARKET VALUE OF HVI COMMON STOCK
The market value of HVI Common Stock could be subject to wide fluctuations
in response to quarterly variations in actual or anticipated results of
operations of HVI, changes in securities analysts' earnings estimates,
announcements of technological innovations by HVI or its competitors, general
conditions in the oil and gas industry or other factors. In addition, the
securities markets frequently experience extreme price and volume fluctuation
which affect market prices for securities generally. Such fluctuations are often
unrelated to the operating performance of the affected companies. These broad
market fluctuations may adversely affect the market price of HVI Common Stock.
See page 52 "Market Price of HVI and Saba Common Stock and Dividends."
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FUTURE ISSUANCES OF STOCK BY HVI WITHOUT SHAREHOLDER APPROVAL
Under the Nasdaq SmallCap Market listing requirements, HVI may issue
without shareholder approval securities representing the present or potential
issuance of up to 20% of the number of shares of common stock outstanding prior
to the issuance of such securities. Any such issuances could be used as a method
of discouraging, delaying or preventing a change in control of HVI or could
significantly dilute the public ownership of HVI, which could adversely affect
the market value of HVI Common Stock. There can be no assurance that HVI will
not undertake to issue such shares if it deems it appropriate to do so. The
holders of options, warrants and other securities convertible into shares of HVI
Common Stock have the opportunity to profit from a rise in the market price of
the HVI Common Stock, if any, without assuming the risk of ownership, with a
resulting dilution in the interest of other shareholders of HVI. The existence
of options and warrants granted by HVI may prove to be a hindrance to future
equity financing by HVI. Further, the holders of such warrants and options may
exercise them at a time when HVI would otherwise be able to obtain additional
equity capital on terms more favorable to HVI.
Effect of Price Declines on Saba
Most of the oil produced by Saba 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 Saba, tend to become
marginally economic in periods of declining oil prices, such as those presently
existing. This is true of Saba's California heavy oil properties most of which,
at present prices, remain economic to produce; should prices continue to
decline, much of Saba's California production will become marginally economic
and certain of its properties may be temporarily removed from production.
During 1997, Saba 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 Saba
presently produces from such properties. The recent decline in prices and the
results of the 1997 drilling program render it doubtful that Saba will realize
the value of these installations within the foreseeable future.
Bank Credit Facility
Saba 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
Saba's remaining reserves and the projected cash flows from those reserves. In
the event that the Bank's estimate of the loan value of Saba's reserves
("borrowing base") is less than the outstanding loan balance, the Bank may
require Saba 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, Saba'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" Saba 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 Saba'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.
Saba'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.
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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 Saba'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 for Saba
In that the current maturities of Saba's bank debt are in excess of Saba's
apparent ability to meet such obligations as they come due, Saba's auditors have
included an explanatory paragraph in their opinion on Saba's 1997 financial
statements to state that there is substantial doubt as to Saba's ability to
continue as a going concern. See "Saba - Recent Developments - Going Concern
Status". In the past, Saba 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, Saba
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,
California and Columbia. The proceeds of such sales, if any, will be applied to
reduction of its bank debt. There can be no assurance that Saba 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 Saba'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 of Saba
Saba is in a capital intensive industry. Its immediate needs for capital
will intensify should Saba be successful in one or more of the exploratory
projects it is undertaking, in that it is likely that Saba 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 Saba's exploratory and development programs will require
more cash than Saba's properties will generate from operations at present price
levels. Saba 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
Saba during 1998, a major portion of which may be applied to Saba's bank
indebtedness. However, the timing of any sale and the amounts realized therefrom
nevertheless may not be sufficient or early enough to permit Saba to make its
bank payments and fund its committed exploration activities, in which cases Saba
would be required to seek other financing or attempt to reduce its exploratory
commitments. There is no assurance that Saba will be able to do either or that
the terms of any new financing or reduction in commitments will be favorable to
Saba.
Saba's Series A Preferred Stock contains provisions which under certain
circumstances of default currently existing require Saba to redeem that series
at a price equal to 115% of its stated value. See "Description of Capital
Stock-Preferred Stock. Saba does not presently have the funds with which to
redeem the Series A Preferred Stock, although $1.5 million has been invested by
HVI. See "Recent Developments" for a discussion of Saba'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 Saba
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 has agreed with Saba 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 BY SABA
Saba 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 Saba's future earnings and
financial condition. Pursuant to the terms of Saba's credit facility and the
terms of its Series A Preferred Stock and its Debentures, Saba 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.
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SABA DEPENDENCE ON KEY PERSONNEL
Saba depends upon the efforts and skills of its key executives. Saba has
employment agreements with certain key employees. See "Management - Benefit
Plans and Employment Agreements - Employment Agreements." The success of Saba
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 Saba
will be able to hire or retain such personnel. In addition, the loss of key
personnel could have a material adverse effect on Saba.
VOLATILITY OF SABA 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 Saba 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 Saba.
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 Saba'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, Saba 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
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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 Saba 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 Series A Preferred Stock contains terms that impose restrictions on
Saba, with which the Company may not be in compliance, and may hinder Saba'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
Saba'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 Saba. Saba 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, Saba 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, Saba 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, Saba 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, Saba 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 Saba 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 Saba 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 Saba would otherwise be able to obtain additional equity capital on
terms more favorable to Saba. See "Description of Capital Stock Common Stock"
and "Principal Stockholders."
SABA DEPENDENCE ON KEY CUSTOMERS
Empresa Colombiana de Petroles ("Ecopetrol"), which also owns a 50% working
interest in Saba's Colombian Nare Association properties accounted for 31.4% and
33.4% of Saba'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 Saba's Colombian properties are determined by
formulas set by Ecopetrol. The formula for determining the price paid for crude
oil produced at Saba'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
Saba's oil in the future. A material decrease in the price paid by Ecopetrol
would have a material adverse effect on Saba's financial condition and future
operations. Also, the loss of Ecopetrol as a purchaser could have a material
adverse effect on Saba. See "Business-Marketing of Production."
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Much of Saba'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 Saba's production from the
Central Coast Fields can vary significantly. Substantially all of Saba's
production from the Central Coast Fields is sold to Crown Energy, which in turn,
has such oil processed at Saba's asphalt refinery in Santa Maria, California
(the "Santa Maria Refinery"). The operation and ownership of the Santa Maria
Refinery is important to Saba because it creates additional demand for Saba's
heavy gravity crudes.
SABA DEPENDENCE ON OPERATOR
For the nine months ended September 30, 1998, approximately 13.2% of Saba's
United States oil and gas production was derived from properties operated by
Omimex. All of Saba'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 Saba'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, Saba 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 Saba. See "Factors
Relating to the Oil and Gas Industry and the Environment - Colombian
Operations."
RISKS RELATING TO CERTAIN SABA CORPORATE MATTERS
Under previous management and prior to its reincorporation as a Delaware
corporation in 1997, Saba 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, Saba 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
Saba's 1997 Annual Meeting of Stockholders, Saba 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, Saba 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 Saba and controlled by Ilyas
Chaudhary, Saba'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 Saba, Saba 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 Saba - Risks Relating to Certain Corporate
Matters" in Saba'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 Saba'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.
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WELLS OPERATED UNDER JOINT OPERATING AGREEMENTS
Many of Saba's business activities are conducted through joint operating
agreements in which Saba owns a partial interest in oil and gas wells and the
wells are operated by Saba or another joint owner. If Saba is the operator, it
has the risk that one of the joint owners may not pay the owner's share of
costs. If Saba is not the operator, it has risks because it must reimburse the
operator for Saba's share of costs incurred by the operator, and Saba does not
have control over operating procedures and expenditures of the operator.
CORPORATE AND REPORTING COMPLIANCE
Saba 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. Saba'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 Saba's DBA or the
implementation in California of the DBA.
Effective in January 1998, Saba acquired the remaining partnership interest
in MV Ventures, GP, a partnership in which Saba 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, Saba,
may continue the business of the partnership.
Franchise taxes, local and/or tax returns are or may be outstanding for the
Company and its subsidiaries. As a result some of Saba's subsidiaries are not in
good standing in jurisdictions in which Saba does business. The Company is in
receipt of a notice of default from Columbian tax authorities for the
outstanding payment of income taxes for the year 1997 attributable to Sabacol,
Inc., in the principal amount of $2.64 billion Columbian pesos, a wholly-owned
subsidiary of the company. The outstanding principal amount may accrue interest
at the rate of approximately 33% until paid. The Columbian 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 note yet been completed to Saba's
knowledge. Saba's appointment of officers has not yet been recorded in the
minute book.
GOVERNMENTAL PROGRAMS
Saba 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,
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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 Saba's Common Stock and Saba's ability to
obtain capital or partners for its projects. See " Factors Relating to Saba
- -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 Saba'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
Saba'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, Saba'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, Saba may begin a drilling
program designed to enhance the value of the prospect. Saba's drilling
operations may be curtailed, delayed or canceled 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 Saba'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 Saba's Indonesian Concession) impose
substantial work obligations upon the concession holder. See "Business -
Exploration and Development Drilling Activities."
WRITEDOWNS OF CARRYING VALUES
Saba 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 Saba 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.
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As of December 31, 1997, Saba 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, Saba 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 Saba'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 Saba's current and
potential competitors have significantly greater financial resources and a
greater number of experienced and trained managerial and technical personnel
than Saba. There can be no assurance that Saba 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, Saba 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. Saba does not conduct a detailed investigation and,
accordingly, Saba 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
Saba'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 Saba 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, Saba has violated various
administrative environmental rules. Saba rectifies the violations after they
become known to Saba. In many cases, Saba 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, Saba 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 Saba must file reports concerning
drilling and operations and must obtain permits and bonds for drilling,
reworking and recompletion operations. Most areas in which Saba 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 Saba's properties. Some
jurisdictions have also enacted statutes prescribing maximum prices for natural
gas sold from such jurisdictions.
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Various federal, state and local laws and regulations relating to the
protection of the environment affect Saba's operations and costs. In particular,
Saba'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 Saba 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.
Saba 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. Saba 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 Saba 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. Saba 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 Saba
agreed to remediate portions of the refinery property in a five-year period
ending June 1999. Prior to the acquisition of the refinery, Saba 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 Saba will attempt to negotiate with the seller for
additional time to complete the remediation.
In addition, Saba 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, Saba 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. Saba believes that the contamination is attributable to the
previous refinery owner's operations, since 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 Saba 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.
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Ultimate responsibility for remediation of the foregoing condition depends
upon an interpretation of the contract of purchase and factual matters. Saba 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 Saba, had advised Saba
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 Saba or the predecessor owner in interest.
Saba 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 Saba. While the seller of the adjoining property
retains a mortgaged interest in the adjoining property, Saba'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 Saba believes 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 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 mehtods to treat the water. There can be no assurance as to the amount
of future exepnditures of the Company associated with the environmental
requirements for the Cocorna Concession. The property in Colombia 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 Company is researching the validity and
extent of this report.
In 1993, Saba acquired a producing mineral interest in California from a
major oil company. At the time of acquisition, Saba'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
Saba assumed operation of the property, Saba became aware of the fact that
diluent was seeping into a drainage area which traverses the property. Saba 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. Saba 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. Saba 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 Saba be
required to remediate the area itself, the cost to Saba could be significant.
Saba 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, Saba is unable to accurately
estimate the cost to be borne by Saba.
In 1995, Saba 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 Saba assume the obligation to abandon any
wells that Saba did not return to production, irrespective of whether certain
consents of third parties necessary to transfer the property to Saba were
obtained. Saba 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 Saba 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. Saba has been unable
to determine its exposure to third parties if Saba 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 Saba. In addition, Saba 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 Saba's other oil and gas properties would not have a material adverse
effect on Saba.
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Saba 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 Saba's permit had
expired while Saba continued operations. Saba 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 reseraching the
validity and extent of this report.
In December 1998, Saba also incurred fines of approximately $23,500 payable
to the Air Pollution Control District for the County of Santa Barbara resulting
from violations of Saba that flexible sump covers located on certain oil and gas
properties of Saba in California were 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 Saba. Saba 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 Saba 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. Saba 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 Saba's insurance policies or because of other factors.
Any uninsured loss could have a material and adverse effect on Saba. Saba
maintains insurance which covers, among other things, environmental risks;
however, there can be no assurance that the insurance Saba 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 Saba. See "Governmental
Regulations and Environmental Risks."
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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
Saba 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, Saba 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. Saba 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 Saba's
Colombian properties and operations or by affecting Colombian governmental
policy, have an adverse impact on Saba'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
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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 Saba's long-term financial
results.
Colombian Labor Disturbances
All of the workers employed at Saba'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 Saba. At December 17,
1998, the impact of the renegotiation is unknown. While Saba 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 Saba 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
Columbia 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.
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THE MERGER
The discussion of the merger and the principal terms of the Merger
Agreement contained in this Joint Proxy Statement/Prospectus describes the
material terms of the Merger Agreement is qualified in its entirety by reference
to the Merger Agreement, a copy of which is annexed hereto as Annex I and
incorporated herein by this reference.
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the holders of
common stock, no par value per share ("HVI Common Stock"), of Horizontal
Ventures, Inc., a Colorado corporation ("HVI"), in connection with the
solicitation of proxies by the Board of Directors of HVI for use at a Special
Meeting of Shareholders of HVI to be held on February 5, 1999 at the principal
executive offices of Saba at 3201 Airpark Drive, Suite 201, Santa Maria,
California, and at any reconvened meeting after any adjournments or
postponements thereof (the "HVI Special Meeting"). The HVI Special Meeting has
been called to consider and vote upon a proposal to approve the issuance by HVI
of up to an aggregate of 1,300,000 shares of HVI Common Stock (the "HVI Share
Issuance"), pursuant to the Agreement and Plan of Merger dated December 18, 1998
(the "Merger Agreement"), among HVI, HVI Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of HVI, and Saba Petroleum Company, a
Delaware corporation ("Saba"). HVI currently owns 34.7% of the issued and
outstanding shares of Saba common stock, $.001 par value per share ("Saba Common
Stock"). Pursuant to the Merger Agreement, all shares of Saba Common Stock other
than shares owned by HVI which remain issued and outstanding immediately before
the closing of the Merger Agreement will be exchanged for shares of HVI Common
Stock to be issued based on an exchange ratio of one share of HVI Common Stock
for each six shares of Saba Common Stock, Saba will merge with and into HVI
Acquisition Corporation with Saba thereby becoming a wholly owned subsidiary of
HVI. A copy of the Merger Agreement is attached to this Joint Proxy
Statement/Prospectus as Annex I. At the HVI Special Meeting HVI shareholders
will also be asked to approve a change in the name of HVI to GREKA Energy
Cororation and the authorization of the issuance of up to an additional
2,000,000 shares of common stock for possible future acquisitions.
This Joint Proxy Statement/Prospectus is also being furnished to the
holders of Saba Common Stock in connection with the solicitation of proxies by
the Board of Directors of Saba for use at a Special Meeting of Shareholders of
Saba to be held on February 5, 1999 at the principal executive offices of Saba
at 3201 Airpark Drive, Suite 201, Santa Maria, California and at any reconvened
meeting after any adjournments or postponements thereof (the "Saba Special
Meeting"). The Saba Special Meeting has been called to consider and vote upon a
proposal to approve the Merger Agreement.
The consummation of the Merger Agreement is subject to, among other things,
(i) the approval of the HVI Share Issuance by the affirmative vote of a majority
of the total votes cast at the HVI Special Meeting, and (ii) the approval of the
Merger Agreement by the affirmative vote of a majority of the outstanding shares
of Saba Common Stock entitled to vote thereon. HVI owns 34.7% of the issued and
outstanding shares of Saba Common Stock as of the record date for the Saba
Special Meeting and HVI will vote its shares of Saba Common Stock in favor of
the Merger Agreement.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
HVI filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") with the SEC under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the shares of HVI Common Stock to be issued
pursuant to the Merger Agreement, which Prospectus is being furnished to the
holders of Saba Common Stock. It is anticipated that approximately 1,240,000
shares of HVI Common Stock will be issued pursuant to the Merger Agreement,
representing approximately 30 percent of the shares of HVI Common Stock expected
to be issued and outstanding after giving effect to the consummation of the
Merger Agreement.
BACKGROUND OF THE MERGER
In September 1997, HVI acquired a 200-acre lease in the Cat Canyon Field in
California with ten producing wells and ten additional abandoned wellbores. HVI
drilled three horizontal re-entries into abandoned wellbores. The final well,
which was up-dip and near the border of a much larger acreage position owned by
Saba, was the most successful and produced 65 barrels of oil per day at a cost
of $100,000. Although Saba's drilling has been successful in producing high
initial production rates, its development costs are much higher than those of
HVI=s test wells and the decline curves experienced were steeper because Saba's
longer laterals experience more sand intrusion.
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In April 1998, Randeep S. Grewal, Chairman and CEO of HVI, contacted Ilyas
Chaudhary, then the Chairman and CEO of Saba, regarding any possible business
opportunities that could be shared by HVI and Saba. Almost immediately the
discussions turned to the possibility of engaging in a joint venture whereby HVI
would re-enter Saba's existing wells in exchange for a retained interest in
production or some other similar arrangement. During these initial discussions
Saba's REDU field located in Orange County, California also was discussed. After
examining the REDU field, HVI entered into a confidentiality agreement with Saba
and HVI commenced a due diligence investigation that was intended to lead to the
possible acquisition of the REDU field. Through its due diligence efforts, HVI's
management learned of a transaction that had resulted in Omimex, a privately
held oil and gas company which operates a substantial portion of Saba's
producing properties, entering into a merger agreement with Saba whereby Omimex
would acquire approximately 65% of the issued and outstanding shares of Saba
common stock in a merger. However, Omimex was not interested in the California
assets of Saba. As part of that merger agreement, Omimex loaned Saba
approximately $4,150,000 to redeem certain of the outstanding shares of Saba's
Series A Preferred Stock and to pay down Saba's line of credit with Bank One. In
furtherance of the REDU purchase proposal HVI management completed its due
diligence, conducted environmental studies, title searches, and had discussions
with Saba's management concerning the possible acquisition of other non-core
assets of Saba which could utilize HVI's special technology to enhance
production. As a result HVI discovered that several of Saba's properties were
candidates for HVI's Amoco technology including several reservoirs in
California. After examining Saba's data on the Cat Canyon field, HVI identified
a significant number of sites where HVI's short radius horizontal drilling
technology could be used and was of the opinion that Saba's Cat Canyon Field was
ideal for HVI's technology. Since HVI's technical staff was already familiar
with the structure of Saba's reservoirs, HVI believed that an overall
combination of Saba's assets with HVI's technology and expertise could enhance
the exploitation potential for both companies.
This realization led to the commencement of meetings on July 7 and 8, 1998
regarding the acquisition of a controlling interest in Saba by HVI. A revised
confidentiality agreement was signed at those meetings regarding an overall
transaction which was structured so as to coordinate the Omimex transaction with
a complementary plan with the Omimex transaction, which left out California
properties. HVI management met with Saba management at Saba's offices in Santa
Maria, California twice during July 1998, and once in Chicago, once in
Philadelphia, once in Houston, and finally in the Netherlands during August
1998, where Ilyas Chaudhary was introduced by Randeep Grewal to International
Publishing Holding s.a. ("IPH"), then HVI's largest shareholder. While in the
Netherlands, terms of a proposed transaction that would allow HVI to gain a
controlling interest in Saba were discussed. During August 1998, HVI management
met with the principals of RGC International Investors LDC ("RGC"), which owned
100% of the issued and outstanding shares of Saba Series A Preferred Stock, and
presented them with the idea of purchasing their preferred stock position if and
when the Omimex transaction expired. These negotiations resulted in a consent
letter being signed by RGC, HVI and Saba providing that in the event Omimex did
not close its transaction, the parties to the consent letter would attempt to
structure an overall deal. The Omimex merger agreement was not consummated and
expired on September 28, 1998.
During September and early October 1998, Mr. Grewal was in constant
discussions with Mr. Chaudhary, as well as with Capco Resources Ltd., a Canadian
corporation which owned Capco Aquisub, a California corporation and then the
largest single shareholder of Saba. Capco Resources Ltd. is controlled by Mr.
Chaudhary. These discussions were intended to result in HVI acquiring Capco=s
interest in Saba but they stalled.
As part of HVI's planning process, it contacted several investment banking
firms during September 1998 in an attempt to negotiate terms of a letter of
intent for a contemplated private placement of HVI securities to finance the
possible acquisition of Saba. On or about September ___, 1998, HVI negotiated a
handshake agreement with Jefferies & Company, Inc., a New York-based investment
banking firm specializing in the oil and gas industry, pursuant to which the
parties agreed to work towards a letter of intent providing for the framework of
a possible private placement by HVI, with the assistance of Jefferies & Company,
to raise funds for such purpose.
On October 6, 1998, HVI entered into a Preferred Stock Transfer Agreement
(the "Preferred Stock Transfer Agreement") with RGC, pursuant to which HVI
acquired on October 6, 1998 690 shares of the 8,000 shares of issued and
outstanding Saba Series A Preferred Stock held by RGC in exchange for cash in
the amount of $750,000, of which $500,000 was borrowed from IPH. HVI executed a
Promissory Note to repay the $500,000 to IPH without interest on or before
December 31, 1998 which matruity date subsequently was extended to January 31,
1999 in the form of cash or shares of Saba Series A Preferred Stock held by HVI.
The Promissory Note is secured by a pledge of two-thirds of the Saba Series A
Preferred Stock held by HVI.
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Under the Preferred Stock Transfer Agreement, HVI was granted the exclusive
right until November 6, 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 $6,859,000, and such exclusive right could be extended
until December 6, 1998 by HVI's payment of $500,000, which is nonrefundable but
if the option is exercised within the extended period is applied to the
acquisition price. In addition, HVI was granted the exclusive right to acquire
any remaining shares of Series A Preferred Stock held by RGC after it converts a
sufficient number of shares of Series A Preferred Stock to cover RGC's short
position with respect to 653,000 shares of Saba common stock. On December 7,
1998 the board of directors of Saba agreed to permit HVI to convert the Series A
Preferred Stock and accrued dividends to common stock at the ratio of $1.50 per
common share. The 690 shares of Series A Preferred Stock acquired by HVI and the
minimum of 6,310 shares of Series A Preferred Stock which HVI has the exclusive
right to acquire from RGC, along with the accrued but unpaid dividends thereon,
would be convertible into an estimated aggregate of 5,066,667 shares of Saba
common stock. All agreemnts on conversion prices expired on December 8, 1998.
The parties are negotiating to extend the terms.
During this same relative time period, HVI conducted negotiations with Saba
for an equity investment directly into Saba totaling $7,500,000. As result, on
October 8, 1998 HVI and Saba entered into a Common Stock Purchase Agreement (the
"Common Stock Purchase Agreement") pursuant to which Saba's Board of Directors
agreed to issue to HVI an aggregate of 2,500,000 shares of Saba common stock as
follows:
* 333,333 shares of Saba common stock in exchange for $1,000,000 in cash
by November 6, 1998; and
* 2,166,667 shares of Saba common stock in exchange for $6,500,000 in
cash by December 4, 1998.
Upon the execution of the Common Stock Purchase Agreement, Randeep S.
Grewal was appointed to the Saba Board of Directors. The Common Stock Purchase
Agreement also provided that upon the December 4, 1998 closing a second director
designated by HVI was be appointed to the Saba Board of Directors. In addition,
the letter agreement dated October 8, 1998 between Saba and HVI provided that
upon the closing thereof a third director designated by HVI would be appointed
to the Saba Board of Directors.
Also during the same relative time period, IPH in conjunction with HVI made
open market purchases of just around 5% of the issued and outstanding shares of
Saba common stock. Pursuant to an Option Agreement dated July 22, 1998 between
HVI and IPH, HVI holds a call option to acquire the approximately 568,000 shares
of Saba common stock purchased by IPH at an exercise price equal to the cost to
IPH of acquiring such shares plus twenty percent, which is estimated to be
approximately $1,020,000. HVI has the option of paying such exercise price to
IPH in the form of cash or shares of HVI common stock.
On October 14, 1998, HVI and IPH as a group filed a Schedule 13D with the
SEC that disclosed the foregoing purchases and contractual arrangements to
acquire Saba securities and that HVI was acquiring the securities of Saba for
the purpose of gaining control of Saba. Subsequently, HVI during October and
early November 1998 directly acquired 80,000 shares of Saba common stock in open
market purchases at an aggregate cost of approximately $70,130.
On October 16, 1998, HVI executed a letter of intent with Jefferies &
Company, Inc. which contemplated Jefferies & Company acting as HVI's placement
agent in an $18 million private placement of HVI's convertible preferred stock
to finance the pending closings of the Preferred Stock Transfer Agreement and
the Common Stock Purchase Agreement.
On October 23 and 26, 1998, the Saba Board of Directors met to discuss the
transactions and a proposed tender offer by HVI for the balance of the
outstanding shares of Saba common stock. At the October 23 meeting of the Saba
Board of Directors, an executive committee made up of Randeep S. Grewal, William
M. Hagler and Imran Jattala was appointed to supervise day-to-day activities of
Saba pending the conclusion of the transactions contemplated and Ilyas Chaudhary
resigned from all positions with Saba. On October 26, the Saba Board of
Directors met specifically to vote whether to support HVI's proposed tender
offer. Mr. Grewal and Mr. Chaudhary recused themselves from the vote and the
balance of the four directors split. As a result of the deadlock, the motion was
tabled.
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On November 6, 1998, HVI paid Saba $1,000,000 for 333,333 shares of Saba
common stock pursuant to the Common Stock Purchase Agreement and $500,000 to RGC
to extend the term until December 6, 1998 of HVI's exclusive right to acquire
the Saba Series A Preferred Stock from RGC pursuant to the Preferred Stock
Transfer Agreement. These payments were financed by HVI's issuance to IPH on
November 4, 1998 of a Promissory Note payable in the amount of $1,500,000, with
6% interest, by December 31, 1998. This note has now been extended to January
31, 1999.The Promissory Note is secured by HVI's pledge of all of the issued and
outstanding shares of HVI Cat Canyon, Inc., a wholly owned subsidiary of HVI.
After a Saba Board of Directors meeting on November 13, 1998, Saba
announced that Ilyas Chaudhary had resigned from all positions with Saba.
From early October through December, the price of oil on the commodities
markets and spot prices declined roughly 30% creating market turmoil in that
sector. Neither the company nor its placement agent, Jefferies and Company, Inc.
were able to conclude their proposed private offering to raise the funds
necessary to timely complete the Preferred Stock Transfer Agreement and incurred
delays due to pending due diligence items. As a result, on December ____, 1998
the board of directors of Saba met and agreed to extend the Common Stock
Purchase Agreement to January 31, 1999. Additionally, negotiations commenced
immediately with RGC to extend the Preferred Stock Transfer Agreement, which
negotiations are ongoing.
On November 23, 1998, as amended at closing on December 18, 1998 HVI
entered into a Stock Exchange Agreement with Saba Acquisub, Inc. ("SAI"), which
owned 2,976,765 shares of Saba common stock. SAI was controlled by Capco
Resources Ltd. which is controlled by Ilyas Chaudhary. Under the Stock Exchange
Agreement, HVI would acquire the Saba common stock owned by SAI in exchange for
the issuance by HVI to the shareholder of SAI an aggregate of 1,340,000 shares
of HVI common stock and SAI would merge with and into HVI. The Stock Exchange
Agreement also contains the following provisions:
* By February 18, 1999, HVI shall register for resale up to 1,000,00 of
the 1,340,000 shares HVI common stock issued to Capco Resources Ltd.;
* HVI shall indemnify the former shareholders of SAI to the fullest
extent permissible by law and the corporate by-laws against any claim
arising from the Stock Exchange Agreement;
* Until December 31, 1999 Capco Resources Ltd. or any approved assignee
shall give Mr. Grewal its proxy to vote the shares of HVI common stock
acquired by it under the Stock Exchange Agreement; and
* Until December 31, 2001 HVI shall have a right of first refusal with
respect to any proposed disposition by Capco Resources, Ltd. of the
HVI common stock acquired by it under the Stock Exchange Agreement.
On December 7, 1998, HVI announced that the Saba Board of Directors had
approved the acquisition of all the remaining outstanding shares of Saba common
stock through a proposed merger with HVI based on an exchange ratio of one share
of HVI common stock for each six shares of Saba common stock. The exchange ratio
is based on the following:
* a 55% premium for Saba common stock ($2.02 per share) above the
average closing price of Saba common stock over the preceding 31
calendar days ($1.___ per share) as compared to the average closing
quotation for HVI common stock over the same period with no premium
($12.14 per share); and
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* 11,385,726 shares of Saba common stock issued and outstanding,
including the 333,333 shares issued to HVI on November 6, 1998.
The Boards of both entities relied entirely on arms length negotiations in
determining the exchange ratios. No third party opinion or valuations were
sought or received. Initially HVI offered only a 20% premium but agreed to raise
that to 55% when Saba's Board rejected that proposal. HVI's offer and the
ability to close the merger is dependent on Bank One's support due to the fact
that Saba's loan with the bank is in default. At this time Bank One is
supportive of HVI's efforts. HVI's offer was based not only on market variations
but also on the realization that Saba would be required to sell substantial
pieces of its non core assets in order to pay down its substantial and pressing
current obligations.
HVI also announced that Saba had agreed to extend from December 4, 1998 until
January 31, 1999 the final closing deadline of the Common Stock Purchase
Agreement and that the merged company intends to divest certain non-core assets
to satisfy outstanding liabilities.
In connection with intended divestiture of certain non-core assets, Saba
has commenced negotiations with respect to the following possible disposition
transactions:
* The sale of Saba's wholly owned subsidiary SabaCol, Inc., which holds
oil and gas interests in Columbia; and
* The sale of the assets of Saba's wholly owned subsidiary Saba Energy
of Texas, Inc. ("SETI").
These possible dispositions would be subject to the consent of Bank One, which
in connection with Saba's line of credit holds security interests covering the
property which may be sold. Saba expects to use the proceeds from such
dispositions, if they are consummated, primarily to reduce its outstanding
indebtedness to Bank One, possibly to redeem the outstanding Series A Preferred
Stock held by RGC and pay other creditors.
Pending the conclusion of these transactions, on December 11, 1998 SabaCol
was forced to file a petition pursuant to Chapter 11 of the U.S. Bankruptcy Code
to protect against the loss of one of its key assets its inability to pay
current liabilities. This loan is secured by SabaCol's interest in an oil
pipeline in Columbia. Additionally, on December 11, 1998 Saba announced that it
would be unable to timely pay an interest payment on its outstanding convertible
debentures due on December 14. Notwithstanding these troublesome issues, HVI as
of December 15, 1998 has determined to continue with the proposed acquisition of
Saba.
On December 10, 1998 HVI closed the Stock Exchange Agreement with SAI dated
November 23, 1998, thereby raising HVI's ownership stake in Saba to
approximately 35%.
HVI'S REASONS FOR THE MERGER; RECOMMENDATION OF THE HVI BOARD
The HVI Board has unanimously determined that the merger agreement and
the transactions contemplated thereby, including the HVI share issuance, are in
the best interests of HVI and its shareholders and has approved the HVI share
issuance. The HVI Board unanimously recommends that the shareholders of HVI vote
"FOR" approval of the HVI share issuance at the HVI Special Meeting.
The HVI Board believes that the HVI Share Issuance represents a unique
opportunity to acquire a company with oil and gas properties particularly suited
to exploitation by HVI's horizontal drilling technology. HVI believes that
Saba's Cat Canyon Field is an ideal field to apply short radius horizontal
drilling technology for the following reasons:
* Mature Fields/Extensive Data. Cat Canyon is a mature field, discovered
in 1908, that provides numerous abandoned or semi-abandoned wells to
re-enter, and extensive geological information from which to develop
an exploitation plan without much additional cost;
* Hedge Against Oil Prices. Saba's Asphalt Refinery is fed by Saba's and
HVI's Cat Canyon properties thus greatly reducing oil price risk from
HVI's Cat Canyon development strategy. Since 1996, asphalt sales
prices from the Asphalt Refinery have varied between $16.09 and $18.41
per ton, -- while prices have varied between $7.17 and $17.38 during
the same period. Notwithstanding, the primary objective will be to
apply technology relevant production rates per ton of $6 - hedge of
$5;
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* Heavy Oil. Heavy oil, which is common to California fields, is
typically more difficult to recover because much higher pressure
differentials are necessary to force the oil up the well. Horizontal
drilling allows more of the reservoir to be exposed and more oil to be
recovered. Furthermore, short radius horizontals allow the pump
mechanism to be placed much closer to the reservoir resulting in
substantial productivity;
* Abundance of Remaining Reserves. Because of the difficulty in
recovering heavy oil from reservoirs, only about 10% of the original
oil has been recovered. However, just a 1% increase in the oil
recovered from the field would yield large returns for HVI; and
* California Land Use Laws. Amoco's technology does not require the use
of a full-size drilling rig and the building of a drilling site, which
can be made prohibitively expensive by California land use laws.
Amoco's technology can be applied on a truck mounted workover rig with
no new drilling site, eliminating the requirement for a drilling
permit. The drilling permit process in California can take over six
months to complete while HVI's rework permits typically take four
days.
The Asphalt Refinery
Saba owns an asphalt refinery in Santa Barbara County, California that is fed by
production from the Cat Canyon region. Generally, the crude oil produced in
these areas is of low gravity and is ideally suited as feedstock for asphalt.
Furthermore, asphalt prices have historically been less volatile than feedstock
prices, providing Saba with a hedge against oil price movements. This refinery
was acquired from Conoco Inc. in 1994 and Conoco retained all environmental
liabilities.
Throughput at the Asphalt Refinery has ranged between 2,000 to 4,500 Bopd, while
production capacity is approximately 8,000 Bopd. Only approximately 1,750 Bopd
of the throughput has come from Saba's production. Currently, there is not
sufficient oil production in Santa Barbara County to provide full utilization of
the Asphalt Refinery HVI believes that the Asphalt Refinery's margins will
improve significantly as it increases production from the Cat Canyon field,
providing additional feedstock and spreading the fixed cost of the refinery over
more units produced. Furthermore, HVI intends to increase the capacity to 10,000
Bopd by 2000. HVI estimates that a 1,000 Bopd increase in throughput would yield
approximately $2.0 million in additional EBITDA.
The Asphalt Refinery is currently operated through a processing agreement with
Crown Energy whereby Crown Energy markets the refined product and maintains the
inventory. The majority of the day-to-day operations of the Asphalt Refinery are
managed by Saba employees. Saba and Crown Energy each receive approximately 50%
of the net income from the Asphalt Refinery. This processing agreement expires
on December 31, 1998 and Saba intends to renew the contract short-term with
probable modification.
HVI's Strategy for Saba after the Merger:
* Exploit and Produce Reserves in California. HVI intends to apply
Amoco's patented short radius horizontal drilling technology to
exploit and produce reserves to maximize cash flow with minimal
capital expenditures. HVI intends to first apply the technology on the
Cat Canyon field in California;
* Capitalize on the Asphalt Refinery to Increase Margins. HVI intends to
increase throughput at the Asphalt Refinery to take advantage of the
oil price hedge provided by the Asphalt Refinery and the significant
additional cash flow generated by utilizing its excess capacity. HVI
intends to secure extensions of the Conoco agreements with respect to
Conoco's obligation to remediate environmental contamination of the
Asphalt Refinery;
* Divest Properties Not Consistent with Focus. Saba owns substantial
acreage and exploration concessions in Columbia, Indonesia, Great
Britain, Louisiana and New Mexico. HVI intends to sell or farm-out
exploration concessions and properties where short radius drilling
would not add significant value; and
* Penetrate New Niche Markets. HVI intends to penetrate new niche
markets in gas storage and coal bed methane where there is significant
added value for its short radius drilling technology and is currently
in discussions with companies.
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The HVI Board also believes that the acquisition of Saba through the HVI
Share Issuance will bring opportunities for cost savings, economies of scale and
other synergies, resulting in improved cash flow potential for the long-term
growth of HVI and of shareholder value. Further, the acquisition of Saba will
give HVI a stronger consolidated asset base upon which it can rely in securing
future financings, both equity and debt. There can, however, be no assurance
that any specific level of cost savings or other synergies will be achieved or
that such cost savings or other synergies will be achieved within the time
periods contemplated, or that HVI will be able to secure future financings. For
the foregoing reasons, the HVI Board believes that the HVI Share Issuance is in
the best interest of HVI and its shareholders.
The following are the material factors considered by the HVI Board in
reaching its conclusions, certain of which factors contained both positive and
negative elements:
* the judgment, advice and analyses of the HVI Board with respect to the
strategic, financial and operational benefits of the Merger, based in
part on the business, financial, accounting and legal due diligence
investigations performed with respect to Saba;
* information concerning the financial condition, results of operations,
prospects, business and past performance of Saba;
* current industry, economic and market conditions which make the
combination of the two companies much more viable;
* the synergies, cost reductions and operating efficiencies that may
become available to the combined company as a result of the
transactions, as well as the management challenges associated with
successfully integrating the businesses, cultures and managements of
two corporations;
* the opportunities for constructive sharing of resources between HVI
and Saba including properties, expertise and personnel; and
* the express terms and conditions of the Merger Agreement, which are
viewed as providing an equitable basis for the transactions from the
standpoint of HVI.
The foregoing discussion of the information and factors considered and
given weight by the HVI Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the
transactions, the HVI Board did not find it practicable to and did not quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the HVI Board may
have given different weights to different factors.
SABA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE SABA BOARD
The Saba board has determined that the merger agreement is in the best
interests of Saba and its shareholders and has approved the merger agreement.
The Saba Board recommends that the shareholders of Saba vote "FOR" approval of
the merger agreement at the Saba Special Meeting.
The Saba Board believes that the Merger Agreement represents a unique
opportunity to create a stronger combined company with a broader base of
resources and properties. The Saba Board also believes that the Merger Agreement
will bring opportunities for cost savings, economies of scale and other
synergies, resulting in improved cash flow potential for the long-term growth of
the combined company and of shareholder value. There can, however, be no
assurance that any specific level of cost savings or other synergies will be
achieved or that such cost savings or other synergies will be achieved within
the time periods contemplated or that the combined company will be able to
secure future financings. For the foregoing reasons, the Saba Board believes
that the terms and conditions of the Merger Agreement are in the best interest
of Saba and its shareholders.
The following are the material factors considered by the Saba Board in
reaching its conclusions, certain of which factors contained both positive and
negative elements:
* the opportunities for constructive sharing of resources between Saba
and HVI including properties, technology, expertise and personnel;
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* the preceived ability of HVI to raise debt and equity capital and
engage in "work out" arrangements with Saba's creditors.
* the judgment, advice and analyses of its management with respect to
the strategic, financial and operational benefits of the Merger
Agreement, based in part on the business, financial, accounting and
legal due diligence investigations performed with respect to HVI;
* information concerning the financial condition, results of operations,
prospects, business and past performance of HVI;
* current industry, economic and market conditions;
* the synergies, cost reductions and operating efficiencies that may
become available to the combined company as a result of the Merger
Agreement, as well as the management challenges associated with
successfully integrating the businesses, cultures and managements of
two corporations; and
* the express terms and conditions of the Merger Agreement, which are
viewed as providing an equitable basis for the Merger from the
standpoint of Saba.
The foregoing discussion of the information and factors considered and
given weight by the Saba Board is not intended to be exhaustive. In view of the
wide variety of factors considered in connection with its evaluation of the
transactions, the Saba Board did not find it practicable to and did not quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the Saba Board
may have given different weights to different factors.
FORM OF MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time Saba will merge with and into HVI Acquisition Corporation. The
separate corporate existence of Saba will then cease and HVI Acquisition
Corporation will continue as the surviving corporation under the name "Saba
Petroleum Company."
MERGER CONSIDERATION
At the Effective Time the shares of Saba common stock issued and
outstanding immediately before the closing of the Merger Agreement, other than
shares owned by HVI, will be converted into the right to receive shares of HVI
common stock to be issued based on an exchange ratio of one share of HVI common
stock for six shares of Saba common stock (except that cash will be paid in lieu
of any resulting fractional shares as described under "--Conversion of Shares;
Procedures for Exchange of Certificates; Fractional Shares).
Shares of Saba common stock owned by HVI or Saba immediately prior to the
Effective Time shall be canceled and retired, and no HVI common stock will be
delivered in exchange for those shares.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; TWO HVI SHARES OR
LESS; FRACTIONAL SHARES
The conversion of Saba common stock into the right to receive HVI common
stock will occur automatically at the Effective Time. Prior to the Effective
Time, HVI will appoint a commercial bank or trust company to act as the Exchange
Agent for the purpose of exchanging stock certificates for the Merger
Consideration. As soon as practicable after the Effective Time, the Exchange
Agent will send a transmittal letter to each holder of Saba common stock. The
transmittal letter will contain instructions with respect to obtaining shares of
HVI common stock in exchange for share of Saba common stock. HVI has determined
to offer any Saba shareholder who would receive two shares or less HVI cash at
the closing market price on the date the merger receives shareholder approvel.
Saba shareholders should NOT return stock certificates with the enclosed
proxy card.
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Upon surrender of a Saba common stock certificate to the Exchange Agent
together with the letter of transmittal, properly completed and executed in
accordance with its instructions, and such other documents that may be required
by the Exchange Agent, the holder of such certificate will be entitled to
receive therefor:
* three or more shares of HVI Common Stock representing, in the
aggregate, the whole number of shares that such holder has the right
to receive pursuant to the Merger Agreement; and
* a check in the amount equal to the cash that such holder has the right
to receive pursuant to the Merger Agreement with respect to cash in
lieu of two shares or less and fractional shares of HVI common stock.
No interest will be paid or will accrue on any cash payable pursuant to the
Merger Agreement. In the event of a transfer of ownership of Saba common stock
that is not registered in the transfer records of Saba, one or more shares of
HVI common stock representing, in the aggregate, the proper number of shares of
HVI Common Stock to which such holder is entitled pursuant to the Merger
Agreement, and a check in the proper amount of cash in lieu of any fractional
shares of HVI common stock may be issued with respect to such Saba common stock
to such a transferee if the Saba certificate representing such shares of Saba
common stock is presented to the Exchange Agent, accompanied by all of the
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
No fractional shares of HVI common stock will be issued upon the surrender
for exchange of Saba common stock certificates and such fractional share
interests will not entitle the owner thereof to vote or have any other rights of
a shareholder of HVI. For each fractional share of HVI common stock that would
otherwise be issued, the Exchange Agent will remit an amount in cash (without
interest) equal to the product of (a)such fractional part of a share of HVI
common stock multiplied by (b) the last sales price per share of HVI common
stock reported on the Nasdaq SmallCap Market in The Wall Street Journal, Eastern
edition, as of the Closing Date.
EFFECTIVE TIME
The Effective Time will be the time of filing of the Certificate of Merger
with the Delaware Secretary of State. Pursuant to the Merger Agreement, the
filing of the Certificate of Merger will be made as soon as practicable after
the closing of the Merger, which is to occur on the second business day after
the satisfaction or waiver of the conditions to the Merger as set forth in the
Merger.
NASDAQ SMALLCAP MARKET AND AMERICAN STOCK EXCHANGE LISTINGS
Application for listing of the HVI common stock to be issued pursuant to
the Merger Agreement in exchange for Saba common stock will be made with the
Nasdaq SmallCap Market. Following the Merger, Saba shareholders will no longer
be able to trade Saba common stock on any exchange because Saba common stock
will no longer be listed on any exchange.
DELISTING AND DEREGISTRATION OF SABA COMMON STOCK
The Merger is consummated, the shares of Saba common stock will be delisted
from the American Stock Exchange and will be deregistered under the Securities
Exchange Act of 1934. Consequently, Saba shareholders will no longer be able to
trade Saba common stock on any exchange.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain expected federal income
tax consequences of the Merger to HVI, HVI Acquisition Corporation, Saba, and to
United States persons who hold shares of Saba common stock as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). The discussion does not address all tax consequences that
might be relevant to Saba shareholders in light of their particular
circumstances, including but not limited to Saba shareholders entitled to
special treatment under federal income tax law (including dealers in securities
or foreign currency, tax-exempt entities, banks, trusts, insurance companies,
persons that hold Saba common stock as part of a straddle, a hedge against
currency risk or a constructive sale or conversion transaction, persons that
have a functional currency other than the U.S. dollar, investors in pass-through
entities and foreign persons, including foreign individuals, partnerships and
corporations). This discussion also does not describe any tax consequences
arising out of the tax laws of any state, local or foreign jurisdiction.
The parties have structured the Merger Agreement with the intent and
expectation that the Merger will constitute a tax-free "reorganization" within
the meaning of Section 368(a) of the Code. However, the parties have not
requested and the Merger is not conditioned upon an opinion of counsel or a
ruling from the IRS with respect to any of the federal income tax consequences
of the Merger, and as a result there can be no assurance with respect to any of
the expected consequences summarized in this discussion.
If the Merger qualifies as a tax-free reorganization, the resulting federal
income tax consequences with respect to HVI, HVI Acquisition Corporation, Saba
and holders of Saba common stock will include the following:
* No gain or loss will be recognized by HVI, HVI Acquisition Corporation
or Saba as a result of the Merger;
* No gain or loss will be recognized by a holder of Saba common stock
upon the exchange of shares solely for shares of HVI common stock
pursuant to the Merger Agreement, except with respect to cash, if any,
received by a holder of Saba common stock in lieu of a fractional
share of HVI common stock;
* The aggregate tax basis of the shares of HVI common stock received by
a holder of Saba common stock solely in exchange for shares of Saba
common stock pursuant to the Merger Agreement (including a fractional
share of HVI common stock for which cash is received) will be the same
as the aggregate tax basis of the shares of Saba common stock
surrendered in exchange therefor; and
* Cash received by a holder of Saba common stock in lieu of a fractional
share of HVI common stock will be treated as received in exchange for
such fractional share and capital gain or loss will be recognized in
an amount equal to the difference between the amount of cash received
and the portion of the tax basis of the share of Saba common stock
allocable to such fractional interest.
If the IRS successfully challenges the Merger as a tax-free reorganization,
there would be significant federal income tax consequences. A holder of Saba
common stock would recognize taxable gain or loss with respect to each share of
Saba common stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time, of the
HVI common stock received in exchange therefor. In such event, a stockholder's
aggregate basis in the HVI common stock so received would equal its fair market
value.
Each holder of Saba common stock is urged to consult his or her personal
tax advisor with respect to the particular tax consequences of the Merger to
such holder.
REGULATORY MATTERS
The Merger is not subject to the notification and waiting period
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, since neither HVI nor Saba has total annual sales or total assets of
$100 million or more.
ANTICIPATED ACCOUNTING TREATMENT
It is anticipated that the acquisition of Saba by HVI pursuant to the
Merger Agreement will be accounted for using the purchase method of accounting.
Under the purchase method of accounting, the purchase price is allocated to the
assets and liabilities acquired based upon the estimated fair values of such
assets and liabilities.
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OTHER TERMS OF THE MERGER AGREEMENT
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary mutual representations and
warranties by each of HVI and Saba relating to, among other things, the
following:
* Corporate existence, good standing, corporate power and similar
corporate matters;
* Capitalization and authorization, execution, delivery and
performance and the enforceability of the Merger Agreement and
related matters;
* The absence of conflicts, violations and defaults under their
certificate or articles of incorporation and by-laws and certain
other agreements and documents;
* The absence of required consents, approvals, orders or
authorizations of, or registration, declaration or registration
with certain governmental entities;
* the documents and reports filed with the SEC and the accuracy and
completeness of the information contained therein;
* the Registration Statement and this Joint Proxy
Statement/Prospectus and the accuracy and completeness of the
information contained therein and herein;
* the absence of certain material changes or events with respect to
HVI and Saba since September 30, 1998; and
* brokers or finders fees and expenses.
All representations and warranties of HVI and Saba expire one year from the
date of the Closing of the Merger Agreement.
CONDUCT OF BUSINESS BY SABA PENDING THE MERGER
Saba has agreed that, during the period from the date of the Merger
Agreement and continuing until the Closing Date, except as permitted by the
prior consent HVI, it will not:
* incur any obligations or liabilities except in the ordinary course of
business;
* issue any equity securities except as required by the Common Stock
Purchase Agreement dated October 8, 1998 between Saba and HVI;
* discharge any liens or encumbrances or pay any obligation or liability
other than current liabilities as of September 30, 1998 and current
liabilities incurred after September 30, 1998 in the ordinary course
of business;
* declare or pay any distributions in respect of any of its capital
stock, or redeem any shares of common stock;
* encumber any of its assets;
* sell any material assets or cancel any material debt or claim;
* waive any substantially valuable rights; and
* enter into any other material transaction other than in the ordinary
course of business.
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CONDITIONS PRECEDENT TO THE MERGER
The respective obligations of HVI, HVI Acquisition Corporation and Saba to
effect the Merger are subject to, among other things, to the satisfaction or
waiver on or prior to the Closing Date of the following conditions:
* Approval by the Saba shareholders of the Merger Agreement and approval
by the HVI shareholders of the HVI Share Issuance;
* No legal restraints to the Merger;
* The Registration Statement has been declared effective by the SEC;
* Listing with the Nasdaq SmallCap Market of shares of HVI common stock
to be issued in the Merger;
* No conversion of Saba Series A Preferred Stock into Saba Common Stock
without the consent of HVI; and
* No notice of redemption of Saba Series A Preferred Stock unless
redeemed or redeemable out of Saba's available cash.
In addition, the obligation of each of HVI and Saba to effect the Merger is
subject to the satisfaction or waiver of the following conditions:
* All of the other party's representations and warranties under the
Merger Agreement shall be true in all material respects as of the
Closing Date; and
* The other party shall have performed in all material respects its
obligations under the Merger Agreement and required to be performed by
it at or prior to the Effective Time;
It is anticipated that such conditions will be satisfied by the dates of
the Special Meetings and the Merger will be consummated promptly following such
meetings.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time by action taken or authorized by the Board of Directors of the terminating
party or parties:
* By the mutual written consent of HVI and Saba, by action of their
respective Boards of Directors;
* By either HVI or Saba if the Effective Time does not occur within
three months of the date of the Merger Agreement, subject to the
condition that the right to terminate for this reason will not be
available to a party whose failure to fulfill any obligation under the
Merger Agreement resulted in the delay of the Effective Time; or
* By either HVI or Saba if the shareholders of Saba do not approve the
Merger Agreement or the shareholders of HVI do not approve the HVI
Share Issuance.
If HVI terminates the Merger Agreement as a result of a delay in the
Effective Time beyond three months after the date of the Merger Agreement due to
Saba's failure to fulfill any of its obligations under the Merger Agreement,
Saba must pay a termination fee to HVI equal to the sum of $1,000,000 pus all
amounts invested into Saba by HVI plus all amounts advanced to Saba by HVI.
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FEES AND EXPENSES
Whether or not the Merger Agreement is consummated, all expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses.
AMENDMENT
The Merger Agreement may be amended by HVI and Saba at any time before or
after approval of the matters presented in connection with the Merger by the
shareholders of Saba and the shareholders of HVI. After any such shareholder
approval, no amendment can be made without further shareholder approval if
required by law or the rules of Nasdaq or the American Stock Exchange. The
Merger Agreement may only be amended by an instrument in writing, signed on
behalf of each of HVI and Saba.
WAIVER
The Merger Agreement permits HVI and Saba at any time prior to the
Effective Time to:
* Extend the time for the performance of any of the obligations of the
other parties;
* waive any inaccuracies in the representations and warranties contained
in the Merger Agreement or in any document delivered pursuant thereto;
and
* waive compliance with any of the agreements or conditions contained in
the Merger Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the HVI board of Directors with
respect to the HVI Share Issuance pursuant to the Merger Agreement, the HVI
shareholders should be aware that the HVI Board of Directors has authorized the
issuance of 30,000 shares of HVI Common Stock to Randeep S. Grewal, a member of
the HVI Board of Directors, upon the Effective Date of the Merger.
Additionally Saba's former Chairman, Ilyas Chaudhary through companies
owned by him owned approximately 29% of Saba prior to HVI's introduction to
Saba. This block of voting interest is considered a control block by HVI and HVI
deemed it imperative to acquire that control block prior to the commencement of
the shareholder voting process. As a result, HVI agreed to pay a greater number
of shares to Mr. Chaudhary through his corporate entities than it has agreed to
pay to the sharesholders of Saba in general. This is a very common practice in
merger transactions. Such interests, together with other relevant factors, were
considered by the Saba Board of Directors in approving the Merger Agreement.
PERCENTAGE OWNERSHIP INTEREST OF SABA SHAREHOLDERS FOLLOWING THE MERGER
The number of shares of HVI Common Stock to be issued in the Merger is
expected to be approximately 1,240,000 shares, based upon 7,440,000 shares of
Saba Common Stock being outstanding and not owned by HVI immediately prior to
the Effective Time. If the 1,240,000 shares of HVI Common Stock are issued to
holders of Saba Common Stock, the shares of HVI Common Stock owned by Saba
shareholders other than HVI immediately after the Effective Time will represent
approximately 30% of the total shares of HVI Common Stock then outstanding.
NASDAQ LISTING
It is a condition to the consummation of the Merger that the shares of HVI
Common Stock to be issued thereunder shall be registered under the Securities
Act and be authorized for listing on The Nasdaq SmallCap Market, subject only to
official notice of issuance. HVI intends to apply for listing of post-Merger HVI
on the Nasdaq National Market system if the criteria for such listing are met.
However, there can be no assurance that a listing on the Nasdaq National Market
system will be obtained.
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RESALES OF HVI COMMON STOCK
The shares of HVI Common Stock to be issued to shareholders of Saba
pursuant to the Merger Agreement have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), thereby allowing such shares to be
freely traded without restriction by persons who will not be "affiliates" (as
used in paragraphs (c) and (d) of Rule 145 under the Securities Act, including,
without limitation, directors and certain executive officers) of HVI after the
Merger or who were not "affiliates" of Saba on the date of the Saba Special
Meeting. All directors and certain officers and shareholders of Saba may be
deemed to have been "affiliates" of Saba within the meaning of such rules. Any
such person may resell the HVI Common Stock received by him or her in the Merger
only if such shares are registered for such resell under the Securities Act or
an exemption from such registration under the Securities Act is available. Such
persons may be permitted to effect resales under the safe harbor provisions of
Rule 145 under the Securities Act (or Rule 144 in the case of such persons who
become "affiliates" of HVI) or as otherwise permitted under the Securities Act.
Persons who may be deemed affiliates of Saba or HVI generally include
individuals or entities that control, are controlled by, or are under common
control with, such party, and may include certain officers and directors of such
party as well as principal shareholders of such party, as well as principal
shareholders of such party. It is recommended that any such person obtain advice
of securities counsel prior to effecting any resales.
Saba has agreed to prepare and deliver to HVI a list identifying each
person who, at the time of the Saba Special Meeting, may be deemed to be an
"affiliate" of Saba for purposes of Rule 145 under the Securities Act and that,
on or prior to the Effective Time, Saba will deliver on behalf of each of Saba's
"affiliates" a written agreement to the effect that such person will not offer,
sell, pledge, transfer or otherwise dispose of any shares of HVI Common Stock
issued to such person in connection with the Merger in violation of the
Securities Act or the rules and regulations thereunder. HVI has agreed to
prepare and deliver to Saba a list identifying each person who, at the time of
the HVI Special Meeting, may be deemed to be an "affiliate" of HVI for purposes
of Rule 145 under the Securities Act and that, on or prior to the Effective
Time, HVI will deliver on behalf of each of HVI's "affiliates" a written
agreement to the effect that such person will not offer, sell, pledge, transfer
or otherwise dispose of any of their shares of HVI Common Stock in violation of
the Securities Act or the rules and regulations thereunder.
This Joint Proxy Statement/Prospectus does not cover resales of HVI Common
Stock received by any person who may be deemed to be an affiliate of HVI or
Saba.
HVI's REASONS FOR THE NAME CHANGE AND THE FUTURE SHARE ISSUANCE; RECOMMENDATION
OF HVI BOARD
The HVI Board has unanimously determined that the name change to GREKA
Energy Corporation and the authorization of the issuance of up to an additional
2,000,000 shares of common stock for possible future acquisitions are in the
best interests of HVI and its shareholders and has apaproved these proposals.
The HVI Board unanimously recommends that the shareholders of HVI vote "FOR"
approval of those proposals of the HVI Special Meeting.
Management of HVI has been advised that its current name, Horizontal
Ventures, Inc., really does not link it to the energy industry and several
investment banking firms which follow HVI's stock have suggested a name change.
The additional stock issuance request is required by the Nasdaq Stock Market
rules. By having these shares preapproved by the shareholders, management of HVI
believes that it will be able to enter into and close acquisitions of oil and
gas producing properties rapidly in one of the best buyers markets on record.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This document contains or incorporates by reference forward-looking
statements with the meaning of Section 27A of the Securities Act and Section 21E
of the Exchange Act that include, among others, (i) statements by HVI or Saba,
as the case may be, concerning (a) the benefits expected to result from the
Merger Agreement, including, without limitation, synergies in the form of
increased revenues, decreased expenses and avoided expenses and expenditures
that are expected to be realized by HVI and Saba after the closing of the Merger
Agreement, and (b) the complementary nature of HVI's horizontal drilling
technology and certain Saba oil reserves, and (ii) other statements by HVI or
Saba, as the case may be, of expectations, anticipations, beliefs, estimations,
projections, and other similar matters that are not historical facts, including
such matters as future capital, development and exploration expenditures
(including the amount and nature thereof), drilling of wells, reserve estimates
(including estimates of future net revenues associated with such reserves and
the present value of such future net revenues), future production of oil and
gas, repayment of debt, business strategies, and expansion and growth of
business operations. These statements are based on certain assumptions and
analyses made by HVI or Saba, as the case may be, in light of past experience
and perception of historical trends, current conditions, expected future
developments and other factors that HVI or Saba, as the case may be, believes
are appropriate in the circumstances.
The managements of HVI and Saba, respectively, caution the reader that
these forward-looking statements are subject to risks and uncertainties,
including financial, regulatory environment, and trend projections, that could
cause actual events or results to differ materially from those expressed or
implied by the statements. Such risks and uncertainties include those risks,
uncertainties and risk factors identified among other places, under "RISK
FACTORS," "MERGER AGREEMENT - Recommendation of the HVI Board; HVI's Reasons for
the Merger," "MERGER AGREEMENT - Recommendation of the Saba Board; Saba's
Reasons for the Merger," "HVI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "SABA MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Significant factors
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that could prevent HVI or Saba, as the case may be, from achieving its stated
goals include, but are not limited to, (a) failure by HVI and Saba to consummate
the Merger Agreement on a timely basis or at all, (b) if the Merger Agreement is
consummated, failure by HVI to integrate the respective operations of HVI and
Saba or to achieve the synergies expected from the Merger, (c) declines in the
market prices for oil and gas, and (d) adverse changes in the regulatory
environment affecting HVI and/or Saba.
The cautionary statements contained or referred to in this section should
be considered in connection with any subsequent written or oral forward-looking
statements that may be issued by HVI or Saba or persons acting on its or their
behalf. Neither HVI nor Saba undertakes any obligation to release publicly any
revisions to any forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
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HVI SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The HVI Special Meeting will be held on Friday, February 5, 1999, at 10:00
a.m. local time, at the principal executive offices of Saba at 3201 Airpark
Drive, Suite 201, Santa Maria, California, to consider and vote upon proposals
to approve the HVI Share Issuance, the change in the name of HVI to GREKA Energy
Corporation and the authorization of the issuance of up to an additional
2,000,000 shares of common stock for possible future acquisitions.
THE HVI BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT IS IN THE BEST INTERESTS OF HVI AND ITS SHAREHOLDERS, AND HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE HVI SHARE ISSUANCE. THE HVI
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF HVI VOTE
"FOR" APPROVAL OF THE HVI SHARE ISSUANCE, THE NAME CHANGE TO GREKA ENERGY
CORPORATION AND THE AUTHORIZATION OF THE ISSUANCE OF UP TO AN ADDITIONAL
2,000,000 SHARES. SEE "THE MERGER - BACKGROUND OF THE MERGER "AND" -
RECOMMENDATION OF THE HVI BOARD; HVI'S REASONS FOR THE MERGER."
The approval of the HVI Share Issuance by the HVI shareholders is required
by the rules of the Nasdaq SmallCap Market because the number of shares of HVI
Common Stock to be issued pursuant to the Merger Agreement exceeds twenty
percent of the number of shares of HVI Common Stock that would be outstanding
immediately before the closing of the Merger Agreement. The approval of the HVI
Share Issuance is a condition to the obligation of HVI and HVI Acquisition
Corporation to close the Merger Agreement.
HVI shareholders are not required by the Colorado Business Corporation Act,
Nasdaq SmallCap Market rules or otherwise to approve the Merger Agreement, and
HVI shareholders will not be asked to consider or vote upon any proposal for
such purpose.
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of HVI Common Stock at the close of business on
December 21, 1998 (the "HVI Record Date") are entitled to receive notice of and
to vote at the HVI Special Meeting. At the close of business on the HVI Record
Date, there were 2,910,981 shares of HVI Common Stock outstanding and entitled
to vote. Each such share owned at the Record Date entitles the registered holder
thereof to one vote.
QUORUM; VOTE REQUIRED
The presence in person or by proxy of holders of one-third of the shares of
HVI Common Stock entitled to vote is necessary to constitute at a quorum for the
transaction of business at the HVI Special Meeting. Once a quorum has been
established, an affirmative vote of a majority votes cast at the HVI Special
Meeting will be required for approval of the HVI Share Issuance, the name change
and the authorization of the additional share issuance.
Shares of HVI Common Stock represented by proxies that are marked "abstain"
will be counted as shares present for purposes of determining the presence of a
quorum. An abstention with respect to any proposal will have the effect of a
vote cast against that proposal. Brokers who hold shares of HVI Common Stock as
nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners thereof. Any votes that are
not cast because the nominee-broker lacks such discretionary authority will not
be counted as votes cast on such proposal and will have no effect on the vote.
In the event that a quorum is not present at the HVI Special Meeting, it is
expected that the meeting will be adjourned or postponed to solicit additional
proxies.
SHARE OWNERSHIP OF HVI AFFILIATES
As of the date hereof, the executive officers and directors of HVI have
voting power with respect to approximately 51% of the total issued and
outstanding shares of HVI Common Stock. The executive officer and directors of
HVI have indicated that they will vote in favor of the HVI Share Issuance, the
name change and the authorization of the additional share issuance.
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PROXIES
All shares of HVI Common Stock which are represented by properly executed
proxies received in time for the HVI Special Meeting and have not been revoked
will be voted in accordance with the instructions indicated in such proxies. If
no instructions are indicated, such shares will be voted "FOR" approval of the
HVI Share Issuance, the name change and authorization of the additional share
issuance and in the discretion of the proxy with respect to such other business
as may properly come before the HVI Special Meeting or any adjournment or
postponement thereof.
Any proxy may be revoked by the shareholder executing it at any time prior
to its exercise by the shareholder giving written notice thereof to the Chairman
and Chief Executive Officer of HVI, by signing and returning a later-dated proxy
or by voting in person at the HVI Special Meeting. Attendance at the HVI Special
Meeting will not in and of itself constitute the revocation of a proxy.
The HVI Board of Directors is not currently aware of any business to be
brought before the HVI Special Meeting other than described herein. If, however,
other matters are properly brought before the HVI Special Meeting or any
adjournment or postponement thereof, the person appointed as proxy will have
discretionary authority to vote the shares represented by duly executed proxies
in accordance with his discretion and judgment.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the HVI Board of Directors.
The entire cost of proxy solicitation for the HVI Special Meeting, including the
reasonable expenses of brokers, fiduciaries and other nominees in forwarding
solicitation material to beneficial owners, will be borne by HVI. In addition to
solicitation by mail, officers and regular employees of HVI may solicit proxies
personally or by telephone, facsimile transmission or otherwise. Such officers
and regular employees will not be additionally compensated for such
solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. If undertaken, the expense of such solicitation would be
nominal.
HOLDERS OF HVI COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING HVI PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
DISSENTERS' RIGHTS
Under the Colorado Business Corporation Act, HVI shareholders are not
entitled to assert dissenters' rights in connection with the merger Agreement or
the transactions contemplated thereby.
SABA SPECIAL MEETING
DATE, TIME AND PLACE
The Saba Special Meeting will be held on Friday, February 5, 1999, at 2:00
p.m. local time, at the principal executive offices of Saba located at 3201
Airpark Drive, Suite 201, Santa Maria, California to consider and vote upon a
proposal to approve the Merger Agreement.
THE SABA BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT IS IN
THE BEST INTEREST OF SABA AND ITS SHAREHOLDERS AND HAS APPROVED THE MERGER
AGREEMENT. THE SABA BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF SABA
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AT THE SABA SPECIAL MEETING.
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RECORD DATE; VOTE REQUIRED
Only holders of record of Saba Common Stock at the close of business on
December 21, 1998 (the "Saba Record Date") are entitled to receive notice of and
to vote at the Saba Special Meeting. At the close of business on the Saba Record
Date, there were 11,385,726 shares of Saba Common Stock outstanding and entitled
to vote. Each such share owned at the Record Date entitles the registered holder
thereof to one vote.
QUORUM
The holders of a majority of the shares of Saba Common Stock outstanding
and entitled to vote must be present at the Saba Special Meeting in person or
represented by Proxy in order for a quorum to be present. Once a quorum has been
established, an affirmative vote of a majority of the outstanding shares of Saba
Common Stock will be required for approval of the Merger Agreement. Abstentions
will have the effect of a vote cast against the Merger Agreement. Brokers who
hold shares of Saba Common Stock as nominees will not have discretionary
authority to vote such shares in the absence of instructions from the beneficial
owners thereof. Any votes that are not cast because the nominee-broker lacks
such discretionary authority will not be counted as votes cast on such proposal
and will have no effect on the vote.
SHARE OWNERSHIP OF SABA AFFILIATES
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of shares of issued and outstanding Saba common stock. As
of the date hereof, Saba's executive officers and directors, and HVI, the
principal shareholder of Saba, own approximately 35% of the total issued and
outstanding shares of Saba common stock. Saba's executive officers and directors
and HVI have indicated that they will vote in favor of the Merger Agreement.
PROXIES
All shares of Saba Common Stock which are represented by properly executed
proxies received in time for the Saba Special Meeting and have not been revoked
will be voted in accordance with the instructions indicated in such proxies. If
no instructions are indicated, such shares will be voted "FOR" approval of the
Merger Agreement, and in the discretion of the proxy with respect to such other
business as may properly come before the Saba Special Meeting or any reconvened
meeting after any adjournment or postponement thereof.
Any proxy may be revoked by the shareholder executing it at any time prior
to its exercise by the shareholder giving written notice thereof to the
Secretary of Saba, by signing and returning a later-dated proxy or by voting in
person at the Saba Special Meeting. Attendance at the Saba Special Meeting will
not in and of itself constitute the revocation of a proxy.
The Saba Board of Directors is not currently aware of any business to be
brought before the Saba Special Meeting other than described herein. If,
however, other matters are properly brought before the Saba Special Meeting or
any reconvened meeting after any adjournment or postponement thereof, the person
appointed as proxy will have discretionary authority to vote the shares
represented by duly executed proxies in accordance with his discretion and
judgment.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Saba Board of
Directors. The entire cost of proxy solicitation for the Saba Special Meeting,
including the reasonable expenses of brokers, fiduciaries and other nominees in
forwarding solicitation material to beneficial owners, will be borne by Saba. In
addition to solicitation by mail, officers and regular employees of Saba may
solicit proxies personally or by telephone, facsimile transmission or otherwise.
Such officers and regular employees will not be additionally compensated for
such solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. If undertaken, the expense of such solicitation would be
nominal.
HOLDERS OF SABA COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING SABA PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
APPRAISAL RIGHTS
Holders of shares of Saba Common Stock are not entitled to assert appraisal
rights under Section 262 of the Delaware General Corporation Law since shares of
Saba Common Stock are held of record by more than 2,000 holders and the
consideration such holders will receive upon consummation of the Merger
Agreement will be shares of HVI Common Stock, which will have more than 2,000
record holders, and cash in lieu of fractional shares.
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DESCRIPTION OF HVI SECURITIES
HVI is authorized to issue 50 million shares of common stock, no par value
("HVI Common Stock"), and 50 million shares of preferred stock, no par value
("HVI Preferred Stock") of which 2,910,981 shares of HVI Common Stock and no
shares of HVI Preferred Stock are issued and outstanding as of the date hereof.
All shares of HVI Common Stock have equal rights and privileges with respect to
voting, liquidation and dividend rights. Each share of Common Stock entitles the
holder thereof to (i) one non-cumulative vote for each share held of record on
all matters submitted to a vote of the shareholders; (ii) to participate equally
and to receive any and all such dividends as may be declared by the HVI Board
out of funds legally available therefor; and (iii) to participate pro rata in
any distribution of assets available for distribution upon liquidation of HVI.
Shareholders of HVI have no preemptive rights to acquire additional shares of
Common Stock or any other securities. The Common Stock is not subject to
redemption and carries no subscription or conversion rights. All outstanding
shares of Common Stock are fully paid and non-assessable. Additional shares of
HVI Common Stock may be issued without shareholder approval, except as that
right is limited by the Nasdaq SmallCap Market rules.
SHARES ELIGIBLE FOR FUTURE SALES
The up to 1,300,000 shares of HVI Common Stock issued pursuant to the
Merger will be freely tradeable without restriction or further registration
under the Act, except for any HVI Common Stock held by an "affiliate" (as
defined under the Act) of HVI. As of the date hereof, _________ shares of HVI
Common Stock held by HVI's current shareholders constitute "restricted
securities" within the meaning of Rule 144 under the Act and may be sold only
pursuant to an effective registration statement under the Act or an applicable
exemption, including an exemption under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated in accordance with Rule 144) who has beneficially
owned "restricted securities" (defined generally as shares acquired from the
issuer or an affiliate in a non-public transaction) for at least one year, as
well as any person who purchases unrestricted shares in the open market who may
be deemed an "affiliate" of the issuer, is entitled to sell, within any
three-month period, a number of shares of HVI Common Stock that does not exceed
the greater of (i) 1% of the then outstanding shares, or (ii) the average weekly
trading volume in the shares during the four calendar weeks preceding each such
sale. A person who is not deemed to be an "affiliate" of HVI and has not been an
affiliate for at least three months, and who has held restricted shares for at
least two years would be entitled to sell such shares without regard to the
volume limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly, through the use of one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer. Sales of substantial amounts of restricted shares, or the
perception that such sales may occur, could adversely affect prevailing market
prices for HVI Common Stock.
Beginning 90 days from the date of this Prospectus, in addition to the up
to 1,300,000 shares issued pursuant to the Merger and ________ tradeable shares
of Common Stock outstanding prior to the Merger, approximately _________ shares
of HVI Common Stock deemed restricted securities are eligible to be sold under
Rule 144 of the Act, subject to the volume and other restrictions of Rule 144.
An additional ________ shares are deemed restricted securities and will not be
eligible for sale under Rule 144 for approximately ten months.
There can be no predictions of the effect, if any, that sales of HVI Common
Stock under Rule 144 will have on the market price prevailing from time to time.
Sales of substantial amounts of HVI Common Stock pursuant to Rule 144 could
subsequently adversely affect the market price of HVI Common Stock.
The transfer agent and registrar for HVI Common Stock is American
Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite 444, Denver,
Colorado 80202.
COMPARISON OF THE RIGHTS OF HOLDERS OF HVI COMMON STOCK
AND SABA COMMON STOCK
HVI is a Colorado corporation and the rights of its shareholders are
governed by the Colorado Business Corporation Act and the Articles of
Incorporation and Bylaws of HVI. Saba is a Delaware corporation and the rights
of it shareholders are governed by the Delaware General Corporation Law and the
Certificate of Incorporation and Bylaws of Saba.
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Significant Differences Between the Corporation Laws of Colorado and Delaware
The corporation laws of Colorado and Delaware differ in many respects.
Although all the differences are not set forth in this Joint Proxy
Statement-Prospectus, certain provisions which could materially affect the
rights of shareholders are discussed below.
Removal of Directors
The corporation may remove directors, with or without cause, with the
approval of a majority of the outstanding shares entitled to vote. However, no
director may be removed if the number of votes cast against such removal would
be sufficient to elect the director. Under Colorado law, a director of a
corporation that does not have a staggered board of directors or cumulative
voting may be removed with or without cause with the approval of a majority of
the outstanding shares entitled to vote at an election of directors. In the case
of a Colorado corporation having cumulative voting, if less than the entire
board is to be removed, a director may not be removed without cause if the
number of shares voted against such removal would be sufficient to elect the
director under cumulative voting. HVI has a staggered board. Under Delaware law,
a director of a corporation that does not have a classified board of directors
or cumulative voting may be removed with or without cause with the approval of a
majority of the outstanding shares entitled to vote at an election of directors.
In the case of a Delaware corporation having cumulative voting, if less than the
entire board is to be removed, a director may not be removed without cause if
the number of shares voted against such removal would be sufficient to elect the
director under cumulative voting. A director of a corporation with a classified
board of directors may be removed only for cause, unless the certificate of
incorporation otherwise provides. The Certificate of Incorporation of Saba does
not provide for a classified board of directors or for cumulative voting.
Classified Board of Directors
A classified or staggered (term in Colorado) board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus a potential change in control of
a corporation a lengthier and more difficult process. The HVI Articles of
Incorporation and Bylaws provide for a staggered board. Colorado law permits,
but does not require, a staggered board of directors, pursuant to which the
directors can be divided into as many as three classes with staggered terms of
office, with only one class of directors standing for election each year.
Delaware law permits, but does not require, a classified board of
directors, pursuant to which the directors can be divided into as many as three
classes with staggered terms of office, with only one class of directors
standing for election each year. The Saba Certificate of Incorporation and
Bylaws do not provide for a classified board and Delaware presently does not
intend to propose establishment of a classified board.
Indemnification and Limitation of Liability
Delaware and Colorado have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
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The Articles of Incorporation of HVI eliminate the liability of directors
to the corporation to the fullest extent permissible under Colorado law.
Colorado law does not permit the elimination of monetary liability where such
liability is based on: (a) intentional misconduct or knowing and culpable
violation of law; (b) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders, or that involve
the absence of good faith on the part of the director; (c) receipt of an
improper personal benefit; (d) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (e)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) interested transactions between the corporation and a director
in which a director has a material financial interest; and (g) liability for
improper distributions, loans or guarantees.
The Certificate of Incorporation of Saba also eliminates the liability of
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director to the fullest extent permissible under Delaware
law, as such law exists currently or as it may be amended in the future. Under
Delaware law, such provision may not eliminate or limit director monetary
liability for: (a) breaches of the director's duty of loyalty to the corporation
or its stockholders; (b) acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law; (c) the payment of unlawful
dividends or unlawful stock repurchases or redemptions; or (d) transactions in
which the director received an improper personal benefit. Such limitation of
liability provisions also may not limit a director's liability for violation of
or otherwise relieve Delaware of its directors from the necessity of complying
with federal or state securities laws, or affect the availability of
non-monetary remedies such as injunctive relief or rescission.
Colorado law generally permits indemnification of director expenses,
including attorney's fees, actually and reasonably incurred in the defense or
settlement of a derivative or third-party action, provided there is a
determination by a majority vote of a disinterested quorum of the directors, by
independent legal counsel or by a majority vote of a quorum of the stockholders
that the person seeking indemnification acted in good faith and in a manner
reasonably believed to be in the best interests of the corporation. Without
court approval, however, no indemnification may be made in respect of any
derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. Colorado
law requires indemnification of director expenses when the individual being
indemnified has successfully defended any action, claim, issue, or matter
therein, on the merits or otherwise.
Delaware law generally permits indemnification of expenses, including
attorney's fees, actually and reasonably incurred in the defense or settlement
of a derivative or third-party action, provided there is a determination by a
majority vote of a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation. Without court approval, however, no indemnification may be made
in respect of any derivative action in which such person is adjudged liable for
negligence or misconduct in the performance of his or her duty to the
corporation. Delaware law requires indemnification of expenses when the
individual being indemnified has successfully defended any action, claim, issue,
or matter therein, on the merits or otherwise.
Delaware law also permits a Delaware corporation to provide indemnification
in excess of that provided by statute. By contrast to Colorado law, Delaware law
does not require authorizing provisions in the certificate of incorporation and
does not contain express prohibitions on indemnification in certain
circumstances; limitations on indemnification may be imposed by a court,
however, based on principles of public policy.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
Both Colorado and Delaware law requires indemnification when the individual
has defended successfully the action on the merits or otherwise.
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Expenses incurred by an officer or director in defending an action may be
paid in advance, under Colorado law and Delaware law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.
A provision of Colorado law states that, except with regard to directors,
the indemnifications provided by statute shall not be deemed exclusive of any
other rights under any bylaw, agreement, vote of stockholders or directors or
otherwise. HVI has no additional rights of indemnification in place except as
provided by Colorado law.
Inspection of Shareholder List
Both Delaware and Colorado law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interests as
a shareholder.
Dividends and Repurchases of Shares
Colorado law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. the concepts of par
value, capital and surplus are retained under Delaware law.
Colorado law permits a corporation to declare and pay dividends unless,
after giving it effect: (a) the corporation would not be able to pay its debts
as they become due in the usual course of business; or (b) the corporation's
total assets would be less than the sum of its total liabilities plus (unless
the articles of incorporation permit otherwise) the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend in declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and such redemption or repurchase would not impair
the capital of the corporation.
To date, HVI has not paid any cash dividends.
Shareholder Voting
Both Delaware and Colorado law generally require that a majority of the
shareholders of both acquiring and target corporations approve statutory
mergers. Colorado law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if (a) the merger agreement does not amend the
existing certificate of incorporation, (b) each share of the stock of the
surviving corporations outstanding immediately before the effective date of the
merger is an identical outstanding of treasury share after the merger, and (c)
either no shares of common stock of the surviving corporation and no shares,
securities or obligations convertible into such stock are to be issued or
delivered under the plan of merger, or the authorized unissued shares or the
treasury shares of common stock of the surviving corporation to be issued or
delivered under the plan of merger plus those initially issuable upon conversion
of any other shares, securities or obligations to be issued or delivered under
such plan do not exceed twenty percent (20%) of the shares of common stock of
such constituent corporation outstanding immediately prior to the effective date
of the merger. Delaware law contains a similar exception to its voting
requirements for reorganizations where shareholders of the corporation itself,
or both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than 80 percent of the voting
power of the surviving or acquiring corporation or its parent entity.
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Both Delaware law and Colorado law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
Both Colorado and Delaware law generally do not require class voting,
except in certain transactions involving an amendment to the certificate of
incorporation that adversely affects a specific class of shares or where the
class of securities designates such a right.
Stockholder Approval of Certain Business Combinations
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant shareholder, more
difficult. Under Section 203, certain "business combinations" with "interested
stockholders" of Delaware corporations are subject to a three-year moratorium
unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, fifteen
percent (15%) or more of the corporation's outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner, individually
or with or through certain other persons or entities, of fifteen percent (15%)
or more of such voting stock at any time within the previous three years, or is
an affiliate or associate of any of the foregoing.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation of a direct
or indirect majority-owned subsidiary equal in aggregate market value of ten
percent (10%) or more of the aggregate market value of either the corporation's
consolidated assets or all of its outstanding stock; the issuance of transfer by
the corporation or a direct or indirect majority-owned subsidiary of stock of
the corporation or such subsidiary to the interested stockholder (except for
certain transfers in a conversion or exchange or a pro rata distribution or
certain other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock or of the corporation's voting stock); or receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date on which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity becoming an
interested stockholder; (ii) upon consummation of the transaction that made him
or her an interested stockholder, the interested stockholder owns at least
eighty-five percent of the corporation's voting stock outstanding at the time
the transaction commenced (excluding from the eighty-five percent calculation
shares owned by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee participants the
right to decide confidentially whether to accept a tender or exchange offer); or
(iii) on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also approved
at a stockholder meeting by sixty-six and two-thirds percent of the outstanding
voting stock not owned by the interested stockholder.
Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is (i) listed on a national securities exchange, (ii)
quoted on an interdealer quotation system of a registered national securities
association or (iii) held of record by more than 2,000 stockholders. Although a
Delaware corporation to which Section 203 applies may elect not to be governed
by Section 203, Saba does not intend to so elect.
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Section 203 will encourage any potential acquirer to negotiate with the
Company's Board of Directors. Section 203 also might have the effect of limiting
the ability of a potential acquirer to make a two-tiered bid for Saba which all
stockholders would not be treated equally. Shareholders should note, however,
that the application of Section 203 to Saba will confer upon the Board the power
to reject a proposed business combination in certain circumstances, even though
a potential acquirer may be offering a substantial premium for Saba's shares
over the then-current market price. Section 203 would also discourage certain
potential acquirers unwilling to comply with its provisions.
Interested Director Transactions
Under both Delaware and Colorado law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under Delaware and Colorado law. Under Delaware and Colorado law, (a)
either the shareholders or the board of directors must approve any such contract
or transaction after full disclosure of the material facts, and, in the case of
board approval, the contract or transaction must also be "fair" to the
corporation, or (b) the contract or transaction must have been fair as to the
corporation at the time it was approved. If board approval is sought, the
contract or transaction must be approved by a majority vote of a quorum of the
directors, without counting the vote of any interested directors (except that
interested directors may be counted for purposes of establishing a quorum).
Shareholder Derivative Suits
Under both Delaware and Colorado law, a stockholder may bring a derivative
action on behalf of the corporation only if the stockholder was a stockholder of
the corporation at the time of the transaction in question or if his or her
stock thereafter devolved upon him or her by operation of law. Colorado law
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond. Delaware does not have a similar bonding requirement.
Appraisal/Dissenters' Rights
Under both Delaware and Colorado law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights pursuant to which
such shareholder may receive cash in the amount of the fair market value of his
or her shares in lieu of the consideration he or she would otherwise receive in
the transaction. Under both Delaware and Colorado law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation. Under Colorado law, such appraisal
rights are not available to stockholders of a corporation surviving a merger if
no vote of the stockholders of the surviving corporation is required to approve
the merger or share exchange under certain provisions of Colorado law. Under
Delaware law, such appraisal rights are not available (a) with respect to the
sale, lease or exchange of all or substantially all of the assets of a
corporation, (b) with respect to a merger or consolidation by a corporation the
shares of which are either listed on a national securities exchange or are held
of record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation that are either
listed on a national securities exchange or held of record by more than 2,000
holders, plus cash in lieu of fractional shares of such corporations, or (c) to
stockholders of a corporation surviving a merger if no vote of the stockholders
of the surviving corporation is required to approve the merger under certain
provisions of Delaware law.
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Dissolution
Under Colorado law, if the dissolution is initially approved by the board
of directors, it may be approved by a simple majority of the outstanding shares
of the corporation's stock entitled to vote. In the event of such a
board-initiated dissolution, Colorado law allows a Colorado corporation to
include in its certificate of incorporation a supermajority (greater than a
simple majority) voting requirement in connection with dissolutions. Under
Colorado law, shareholders may only initiate dissolution by way of a judicial
proceeding.
Under Delaware law, unless the board of directors approves the proposal to
dissolve, the dissolution must be approved by all the stockholders entitled to
vote thereon. Only if the dissolution is initially approved by the board of
directors may it be approved by a simple majority of the outstanding shares of
the corporation's stock entitled to vote. In the event of such a board-initiated
dissolution, Delaware law allows a Delaware corporation to include in its
certificate of incorporation a supermajority (greater than a simple majority)
voting requirement in connection with dissolutions. Saba's Certificate of
Incorporation contains no such supermajority requirement, however, and a
majority of the outstanding shares entitled to vote, voting at a meeting at
which a quorum is present, would be sufficient to approve a dissolution of Saba
that had previously been approved by its Board of Directors.
MARKET PRICES OF HVI AND SABA COMMON STOCK AND DIVIDENDS
HVI Common Stock listed for trading on the Nasdaq SmallCap Market under the
symbol "HVNV". Except for a period from August to December of 1997, HVI's common
stock has been quoted on NASDAQ since February 19, 1993. As of October 31, 1998,
there were seven market makers in HVI's securities and the closing bid quotation
was $13.00 per share. The following table sets forth, for the periods indicated
the range of quarterly high and low sales prices of HVI as obtained from the
Nasdaq SmallCap Market for the past two fiscal years. These prices, which are of
the Company's post bankruptcy no par value common stock are believed to be
representative of inter-dealer quotations, without retail markup, markdown or
commissions, and may not represent actual transactions. There can be no
assurance that a public market for HVI's common stock will be sustained in the
future. Saba 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 Saba 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.
<TABLE>
<CAPTION>
HVI Saba
Quarter Ended Low High Low High
------------- --- ---- --- ----
<S> <C> <C> <C> <C>
March 31, 1996 $ .19 $ .22 $ 3.56 $ 4.75
June 30, 1996 .13 .13 3.88 8.00
September 30, 1996 .25 .31 6.19 9.94
December 31, 1996 .19 .25 9.25 27.12
March 31, 1997 .19 .25 $12.75 $25.25
June 30, 1997 .03 .09 $10.75 17.75
September 30, 1997 .03 .03 12.81 20.12
December 31, 1997 6.82* 19.00* 8.00 14.88
March 31, 1998 12.00 14.75 $3.38 $8.50
June 30, 1998 8.0625 10.00 1.44 4.12
September 30, 1998 7.25 9.25 .8125 2.125
</TABLE>
*Effective November 8, 1997, a 1 share for 220 share reverse split approved by
the U.S. Bankruptcy court was effected thus dramatically affecting the per share
price of the Company's stock.
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On September 30, 1998, there were approximately 485 registered holders of
HVI's common stock. Based on a broker count, HVI believes at least an additional
1200 persons are shareholders with street name positions. On December 4, 1998,
the last trading day immediately preceding the public announcement of the
exchange ratio terms of the Merger Agreement, the shares of HVI Common Stock
closed at $11.00. On January ____, 1999 (the last practicable date prior to the
mailing of this Joint Proxy Statement/Prospectus), the high and low bid
quotations for HVI Common Stock were $_____ and $______ per share.
Holders of common stock are entitled to receive such dividends as may be
declared by HVI's Board of Directors. HVI has not yet paid any dividends, and
the Board of Directors of HVI presently intends to pursue a policy of retaining
earnings, if any, for use in HVI's operations and to finance expansion of its
business. With respect to the Common Stock, the declaration and payment of
dividends in the future, of which there can be no assurance, will be determined
by the Board of Directors in light of conditions then existing, including HVI's
earnings, financial condition, capital requirements and other factors.
Saba has never paid cash dividends on Saba Common Stock and does not
anticipate doing so in the foreseeable future. Saba's Series A Preferred Stock,
Debentures and principal revolving credit agreement restrict the payment of
dividends by Saba. On December 4, 1998, the last trading day immediately
preceding the public announcement of the exchange ratio terms of the Merger
Agreement, the shares of Saba Common Stock closed at $1.375. On January ____,
1999 (the last practicable date prior to the mailing of this Joint Proxy
Statement/Prospectus) the shares of Saba Common Stock closed at $__________.
BUSINESS OF HVI
Company Overview
During 1997, HVI, then named Petro Union, Inc., and all its subsidiaries
were essentially dormant pending reorganization and emergence from bankruptcy.
During this period of dormancy, management focused all its efforts on its plan
of reorganization, acquisitions and mergers, and restructuring the new combined
business to its new plan of operation and strategy. The Plan of Reorganization
was approved in Bankruptcy Court on August 28, 1997 and case closed on March 26,
1998 following successful implementation of all the objectives under the new
management team.
HVI's objective and strategy is firmly focused on its license to a niche
technology developed and patented by Amoco for horizontal drilling. As the first
two licensees of the technology, the HVI's personnel were instrumental in
successfully implementing and applying the technology in the field and have
continued field enhancements to the technology since inception.
Business Strategy
HVI's mission is to provide shareholder value through becoming an industry
leader in exploiting declining production wells by capitalizing on its
experience and field knowledge to a low cost horizontal drilling technology,
developed by and patented by Amoco Corporation, to significantly boost
production rates. Horizontal drilling, used in re-developing older reservoirs,
increases the recoverable oil in place due to various characteristics, such as,
a greater exposure of the reservoir to the well bore. Primary recovery methods
leave over 80% of the oil in place leaving significant reserves to be exploited.
HVI has a two-prong approach capitalizing on this niche technology to
obtain its objective and growth: Exploitation & Production and Contract
Services.
Exploitation & Production: Numerous mature fields worldwide are
experiencing declining production and even more have been abandoned. Even after
the latest recovery methods are applied, vast oil resources are left unrecovered
due to unfavorable economics. HVI having amassed the most experience in the
industry for applying Amoco's technology, has a low risk, high reward business
plan focused on acquiring fields with proven producing wells and applying this
niche technology to exploit and produce the remaining reserves. By targeting
these mature fields with the entire production infrastructure in place, HVI
substantially reduces the capital costs for production relative to its drilling
program. Furthermore, the existing and historical production providing actual
reservoir performance along with the comprehensive geological evaluations
essentially confirms the targeted zones eliminating the risks to drilling dry
holes.
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HVI intends to reactivate existing producing fields that have reached their
economic limit. The application of the its short radius horizontal drilling
technology in untapped reservoirs within the productive reach of an existing
well bore or in a reservoir that may have inefficient characteristics at the
vertical bore, which can lead to a several fold increase in production rates.
Increasing production rates through such enhancement programs will provide
significantly favorable effects to the reserve valuations and relative net
present value. HVI made its first such acquisition in September 1997.
The added strain to the operators of such mature fields as a result of the
declining oil prices helps facilitate these acquisitions under favorable terms
and further reduces the capital requirements to HVI.
Contract Services: In the last three years that the technology has been
commercialized in the industry, HVI has drilled over forty wells for various
clients such as Chevron, Texaco, Exxon, OXY, Oklahoma Natural Gas to name a few.
The Company intends to continue providing its services to the industry on a
contract basis. Such contract services are to be scheduled with coordination to
HVI's internal drilling programs thus enhancing the productivity and efficiency
of its service rigs and crews. Contract services are targeted to begin in the
late second quarter of 1998.
Exploration Strategy: In addition to its exploitation, production and
contract services activities, HVI is building a portfolio of exploration
prospects where the technical expertise in horizontal drilling adds
substantially to its reserve base and provides for internal drilling programs.
Exploration drilling involves substantially more risk than exploitation and
development drilling which is HVI's primary focus. HVI's existing prospects have
multiple pay objectives and are commonly located in association with existing
producing fields where the management has expertise or previous experience. HVI
plans to invest a small portion of its cash flow in exploration ventures.
Horizontal Drilling: Horizontal drilling has become widely accepted as a
standard option for exploiting oil & gas resources. The principle advantage of
horizontal drilling is that it results in a substantially greater surface area
for drainage, and thus extraction of the oil from the reservoir. In industry
terms this is referred to as communicating zones of permeability. The unique
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method of reentering a well and horizontal drilling patented by Amoco and
licensed to HVI, has the ability to turn while drilling causing a vertical well
to be horizontal in as little as twenty-five feet. Thus this technology provides
considerable flexibility to the geologists and engineers in designing their well
plans around geological formation and reservoir constraints to achieve the
maximum performance. Furthermore, this technique facilitates multi-laterals off
an existing well bore avoiding costly drilling of new wells and has considerable
advantages in shallow reservoirs where the traditional horizontal tools cannot
be utilized due to their larger radius requirements and related economics.
Drilling horizontal laterals has the potential to: tap fresh oil by
intersecting fractures, penetrating pay discontinuities and drain up-dip traps,
correct production problems such as water coning, gas coning, and excessive
water cuts from hydraulic fractures which extend below the oil-water contact,
and supplement enhanced secondary and tertiary oil recovery techniques.
The most common method of drilling a curved borehole utilizes a mud-motor
to rotate the drill bit. This is often too expensive to be economical for
re-entries in mature fields with well bore casings less than 5 1/2 inches. The
lack of a cost-effective method to increase production in mature wells led Amoco
Corporation to devote significant resources in research and development in this
area. The result was the development of it's patented short radius horizontal
drilling system. The primary advantages of the Amoco drilling system are its
short radius of curvature, costs approximately one-fifth of mud motors, takes
only ten days to drill and yet provides all the benefits of a horizontal well.
Short Radius Rotary Steerable Horizontal Drilling: The Amoco system is
capable of drilling a 3.875" inch hole from inside 4.5" inch casing, or a 4.5"
hole from inside 5.5" casing and larger. The radius of curvature ranges from 30
feet and up, with lateral departures up to 1,000 feet. Multiple laterals can be
drilled in opposing directions or in the same direction, with kick-off points
spaced a minimum of eight feet apart. Compatibility with any circulating medium
including mud, foam or air mist allows for a variety of applications.
The system consistently drills a predictable radius of curvature in the
desired direction, resulting in a smoother planar well bore, which facilitates
drilling the lateral and completing the well. Vertical target accuracy is plus
or minus two feet, and azimuth is plus or minus 20 degrees.
The system is rotary steerable, and there are no mud motors, steering tools
or MWD tools. The system is purely mechanical and very simple in design.
The Amoco bit is an anti-whirl, bi-center, low-friction PDC bit. Consistent
and reliable angle build and improved directional control is a result of
stabilizing the PDC bit to continually point along a curved path. The design of
the bit enables it to cut only in the direction it is pointed. The cutters are
positioned so that they direct a lateral force toward a smooth pad on the gauge
of the bit, which contracts the bore hole and acts as a bearing by transmitting
a restoring force to the bit. This force rotates with the bit, continually
pushing a side of the bit that does not have gauge cuter chips against the bore
hole wall. This design minimizes the side cutting action that is typically
observed with PDC bits and results in consistent well bore diameter.
The system drills a curved path by continually pointing the bit along a
tangent to the curved path. A contact point on the bit and smooth contact ring
at the flexible knuckle joint establishes two contact points and controls the
bit tilt. Tool design tilt allows the curve assembly to run smoothly, drill a
hole uniform in diameter, and negates the effects of varying lithology changes.
Various radii of curvatures are easily obtained by increasing or decreasing the
distance between the two contact points.
Azimuth or target direction is established by gyro orientation of the
eccentric deflection sleeve. Once oriented in the desired direction, the gyro is
released and orientation is monitored by pump pressures at the surface. These
signals are monitored throughout the curve drilling process, as repositioning of
the sleeve is required to maintain target direction.
Lateral drilling is strictly a rotary process. The lateral drilling
assemblies are not steerable, and there are no deflection sleeves or orientation
signals. At present, there are two lateral drilling assemblies, and both use the
anti-whirl PDC bit to achieve a smooth well bore and obtain fairly consistent
responses. Of the two lateral assemblies, one is engineered for gentle rise wit
angle build rates of 7 to 11 degrees per 100 feet. The second is for maintaining
inclination, and produces near-neutral responses of -2 to 2 degrees per 100
feet. The assemblies work on the same principle as any directional drilling
assembly. Both have been found to drill with minimal walk, right or left, but
inclination is somewhat sensitive to formation and weight on the bit.
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The predominate application of short-radius horizontal drilling is for
re-entries, a procedure that requires the sectional milling of at least 20 feet
of casing. Following sectioning, a cement kick-off plug is set in the vertical
well bore just below the kick-off depth. Cement is brought up through the
sectioned interval, and 60 to 100 feet inside the casing. This multi-purpose
plug must provide zone isolation from the original completion and mechanical
strength for the curve assembly to side track. Open-hole completions, either
from existing wells or new wells, can be kicked off from formation or a squeeze
cement plug. Torque, weight of the bit, drill-off rate, and cuttings are
monitored during the kick-off procedure as the bit makes the transition from
drilling 100 percent cement to 100 percent formation. This transition usually
occurs after drilling a minimum of six feet, and can be greater depending on the
radius of curvature.
With regard to equipment requirements, many types of workover rigs have
been used in conjunction with the system, ranging from small pole units to five
and six axle carriers. Drilling rigs have been used in several instances, but
are not necessary. A top-drive power swivel, the most predominate of which is
the Bowen 2.5, is used to rotate the drill string and bit. A single conductor
wireline unit is used for gyro orientation and to run all electronic and
magnetic surveys. Circulating and solids control equipment vary depending on
formation conditions.
Management of HVI considers this proprietary technology a leading edge and
a ground floor opportunity as both a producer and service provider to other
producers. It is believed by management that through the utilization of the
system HVI has the ability to cost-effectively drill lateral completions and
re-entries in shallow oil and gas producing zones where existing technology has
not been available or affordable. As drilling new wells from the surface is not
a necessity and current production infrastructures can be utilized, it is
anticipated that the economics will be improved. Potential zones such as shale
gas and coalbed methane that contain trillions of cubic feet of untapped
reserves in the United States are believed by management to be candidates for
short radius horizontal drilling technology. Drilling horizontal laterals has
the potential to: tap fresh oil by intersecting fractures, penetrating pay
discontinuities and drain up-dip traps, correct production problems such as
water coning, gas coning, and excessive water cuts from hydraulic fractures
which extend below the oil-water contact, and supplement enhanced secondary
tertiary oil recovery techniques.
History and Organization
1997 Events:
Current management was actively involved in significant corporate
re-structuring focused on creating a critical mass around the niche technology
patented by Amoco and raising the necessary working capital to implement the new
business strategy. The major milestones during 1997 were:
April: Takeover control of an Oklahoma company named Horizontal Ventures
Inc (HVI) which was the first licensee of the Amoco technology. HVI was clearly
recognized as the leader of field applications with a track record of technical
success with major companies in performing horizontal drilling on a contract
basis. It soon became apparent that while the technical aptitude was impeccable
the management had not been able to capitalize on their technical success and
thus the company was not commercially successful. HVI had the license from Amoco
to perform services in Europe in addition to the U.S.
June: As part of HVI's strategy to acquire all the field talent on the
Amoco technology, a merger agreement was signed with Petro Union Inc, pending
bankruptcy court approval, which was the second licensee of the technology and
the only other technically successful company in the field. To facilitate this
merger, the current management successfully negotiated a reverse merger and thus
took control of Petro Union Inc, which had been in bankruptcy since May 1996.
August: Management's re-organization plan was approved by court on August
28th. Petro Union was notified by NASDAQ of being de-listed. Negotiations begin
for the re-acquisition of the Hayes Field in Illinois.
September: HVI and Petro Union merger is concluded. NASDAQ de-listing
hearings and appeals continue. The Hayes field lease is acquired. Negotiations
begin on the acquisition of the Cat Canyon field in California.
October: Regulation S offering successfully completed for initial
capitalization of the HVI. $2.55 million was raised at a price of $10 per share
with one $15.00 warrant given for every two shares. The warrants are effective
January 1, 1998 and expire December 31, 1999. Cat Canyon field is acquired.
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November: Regulation S offering successfully completed for the continued
capitalization of HVI. $2.265 million was raised at a price of $10 per share.
Cat Canyon production operations were begun.
December: Re-listed on Nasdaq. Partial closing of third Regulation S
successfully concluded for continued capitalization of HVI. $1.171 million was
raised at a price of $13.875 per share. First horizontal well was drilled in Cat
Canyon.
1998 Event:
Management continued to focus in the first quarter on its drilling program
at Cat Canyon to emphasis the success of its horizontal drilling niche
technology in mature fields. Two horizontal wells have been drilled with a third
in progress.
Petro Union, Inc., was organized under the laws of the State of Colorado on
June 27, 1988 as Kiwi III, Ltd. to complete a public offering to raise funds to
acquire or merge with an operating business.
On September 29, 1989, HVI executed an agreement and plan of reorganization
to acquire all of the issued and outstanding shares of Beat the House
Enterprises, Inc. ("BTHE"), a closely-held Delaware corporation, in exchange for
151,000,000 shares of HVI's Common Stock. BTHE's plans never successfully
materialized and until July 28, 1992 HVI had no operations.
On July 28, 1992, HVI executed an agreement and plan of reorganization to
acquire Petro Union, Inc., an Indiana corporation, whereby HVI acquired 100% of
the outstanding shares of Petro Union, Inc., in exchange for the issuance of
7,240,000 shares (90.5%) of HVI's common stock. Kiwi III, Ltd. then changed its
name to Petro Union Inc. to reflect the new business of the Company. Petro Union
has the following subsidiaries: Calox, Inc., and American Energy Corporation.
On April 10, 1993, HVI acquired all of the issued and outstanding shares of
Green Coal Company, Inc. ("Green Coal") for $100,000 in cash, a promissory note
of $2,952,000 originally payable August 15, 1993, subsequently extended by
mutual consent, 1,000,000 shares of HVI's restricted common stock valued at
$3,950,000, and a 1% overriding royalty interest. The parties to this
transaction agreed that, at the time of payment of the balance due, Registrant
could forgive the note due the former principal shareholder in the amount of
$1,052,000 in exchange for payment in cash of that amount, leaving cash due of
$1,900,000. As a result of this transaction Green Coal became a wholly owned
subsidiary of HVI. On July 11, 1994, HVI filed a voluntary petition in the
United States Bankruptcy Court of the Western District of Kentucky, seeking to
reorganize Green Coal under Chapter 11 of the United States Bankruptcy Code. The
filing for protection under the Code was necessary due to the severe liquidity
problems caused by substantial increases in existing high debt service demands
and lack of profitability on some existing coal contracts. Due to these
liquidity problems, the Company and Green Coal were unable to pay the
acquisition liabilities due to the former stockholders of Green Coal. As a
result, in August of 1994, the bankruptcy court returned ownership of Green Coal
to the original owners.
On May 13, 1996, the Company filed a voluntary petition for relief pursuant
to Chapter 11 of the United States Bankruptcy Code. On August 28, 1997, the
Bankruptcy Court for the Southern District of Indiana (the "Court") issued an
order confirming the Company's First Amended Plan of Reorganization (the
"Plan"). The material features of the Plan were as follows: The Company paid all
of its administrative and priority claims in full. The reorganized Company
assumed the loans entered into with its two secured creditors, Ford Motor Credit
Company and National City Bank of Evansville. The unsecured creditors of the
Company received an aggregate of 100,000 shares of the Common Stock of the
Company (for clarity, the no par value Common Stock is sometimes referred to
herein as the "New Common Stock"). The holders of the Company's $.125 par value
common stock ("Old Common Stock") received one share of New Common Stock for
each 220 shares of Old Common Stock held, and the Old Common Stock was canceled.
Fractional shares were rounded up. Accordingly, the 17,537,945 outstanding
shares of Old Common Stock were converted into approximately 80,000 shares of
New Common Stock.
The Company satisfied the claims of its two debtor-in-possession
financiers, Pembrooke Holding Corporation ("Pembrooke") and International
Publishing Holding s.a. ("IPH") as follows. Pembrooke received $100,000 in cash
and 49,999 shares of New Common Stock. IPH received 40,000 shares of New Common
Stock and a call option exercisable for a period of 36 months to acquire ninety
percent of the Company's wholly-owned subsidiary, Calox Corporation, which holds
as its only asset a limestone reserve in Monroe County, Indiana. The purchase
price for such ninety percent interest will be $3.5 million.
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The Plan provided for issuance of 70,000 shares of New Common Stock to
Randeep S. Grewal, the Company's new Chief Executive Officer, and 70,000 shares
to Richard D. Wedel, the former C.O.O. of the Company, for services performed by
each of them during bankruptcy proceedings.
The Plan further provided for a share exchange transaction by which the
shareholders of Horizontal Ventures, Inc., an Oklahoma corporation ("HVI"),
acquired 590,000 shares of New Common Stock in exchange for all of the issued
and outstanding capital stock of HVI. Randeep S. Grewal was the President of
HVI. The share exchange transaction closed on September 9, 1997, subject to an
Agreement to Close which provided that the share exchange would be terminated
and unwound if certain contingencies were not met within sixty days. Pending
resolution of those contingencies, the Company suspended issuance of all shares
of New Common Stock. HVI waived those contingencies on October 10, 1997, and
accordingly the Company directed its transfer agent to issue all shares of New
Common Stock on October 15, 1997. The Bankruptcy court approved the final
accounting and closed the case on March 26, 1998.
The Plan also provided for the amendment and restatement of the Company's
Articles of Incorporation (i) to cancel the existing authorized series of Old
Common Stock and $.0001 par value preferred stock and to authorize the New
Common Stock as the sole class of voting stock; (ii) to fix the number of
directors at five and (iii) to eliminate the liability of officers and directors
to the extent allowed by Colorado law. The Company filed Restated Articles of
Incorporation with the Colorado Secretary of State reflecting the foregoing
amendments on September 9, 1997.
Exploitation and Production
California Cat Canyon Field
HVI acquired a 200 acre lease within the Santa Maria basin in California.
The purchase price was $1.65 million and included all the formations along with
all the infrastructures that includes two separate gathering systems and 20 well
bores of which ten are producing. The basin was discovered in 1908 with
cumulative production estimated over 300 million barrels and an estimated 500
million barrels of recoverable oil in place.
Following in-depth evaluations, HVI believes that significant enhancements
focused primarily on its niche short-radius horizontal drilling know-how can
result in sustained increase of oil production. Based on these evaluations, a
drilling program funded by HVI's financial resources has been activated that
will result in the drilling of six horizontals and other related re-work
programs. HVI has established a target of 500 barrels of production from this
field, which was producing 35 barrels of oil and had essentially been abandoned
when acquired by HVI.
Hayes Field
HVI re-acquired a 754 acre lease on September 23rd, 1997 from Panhandle
Pipeline Company and Gullickson Farms. The lease is held by drilling a well on a
six month cycle commencing December 1st, 1997 or paying $10,000 by February 1st,
1998. The Hayes filed was discovered in 1962 and indicates to have 9.9m barrels
of oil in place on the leased acreage with 2.5m barrels in recoverable oil from
techniques such as HVI's horizontal drilling.
HVI re-entered a well bore and drilled a lateral early November and thus
met its first requirement. In view of the subsequent acquisition in California
where all the gathering systems are already in place, the management made the
decision to focus its activities in California and thus placed the program in
Illinois on hold until preferable weather conditions in the summer to commence
drilling and completion programs.
Contract Services
In 1994, HVI acquired from Amoco Production Company ("Amoco") a U. S.
license to Amoco's Patented Slim Hole Short Radius Horizontal Drilling
Technology. Amoco initiated a project in 1989 to develop a short radius drilling
system for completing and re-completing wells to enhance the economical
production of oil and gas. The system has been developed and tested to the point
where, in management's opinion, it can now be offered as a commercial service to
other producers.
HVI assembled one (1) Amoco technology specific set of horizontal drilling
equipment and commenced field operations late in 1995. As a result of the
acquisition of HVI in October of 1997 it acquired three additional sets of
horizontal drilling and other related equipment. HVI continues to provide its
horizontal drilling services on a fee basis or partial fee plus working interest
basis in wells where its technology is used.
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In the last three years that the technology has been commercialized in the
industry, HVI has drilled over forty wells for various clients such as Chevron,
Texaco, Exxon, OXY, Oklahoma Natural Gas and Newstar Energy USA, Inc. to name a
few. HVI intends to continue providing its services to the industry on a
contract basis. Such contract services are to be scheduled with coordination to
HVI's internal drilling programs thus enhancing the productivity and efficiency
of its service rigs and crews. Contract services are targeted to begin in the
late second quarter of 1998.
Oil and Gas Reserves
HVI's oil and gas properties are primarily based in California and Illinois
though the area of focus since the acquisitions had been primarily California.
HVI engaged Netherland, Sewell & Associates, Inc. to evaluate the California
properties while the Illinois properties were evaluated by independent engineers
and geologists namely Mr. John Combs and Joseph Wilderman. Estimates are based
on a review of production histories and geologic reports provided to the
independent engineers by HVI.
The present values of estimated future net revenues (discounted at 10% per
annum) shown in the table are not intended to represent the current market value
of the estimated oil and gas reserves owned by HVI. For further information
concerning the present value of future net revenue from these proved reserves,
see the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
1997
----
Reserves Future Net
Revenue
Oil Gas (1)
(bbls) (mcf) Total Total PV-10
<S> <C> <C> <C> <C> <C>
Proven Developed
Producing 78,329 - 78,329 $ 96,500 $ 70,600
Proven Developed
Non-Producing 153,429 - 153,429 $ 1,841,992 $ 277,702
Proven
Undeveloped 2,321,249 - 2,321,249 $ 33,080,708 $ 4,578,798
Total Proven 2,553,007 - 2,553,007 $ 35,019,200 $ 4,927,100
Other 1,846,000 - 1,846,000 $ 15,177,000 $ 8,452,400
Total Reserves 4,399,007 - 4,399,007 $ 50,196,200 $13,379,500
</TABLE>
(1) Natural gas converted to oil at the ratio of six mcf of natural gas to one
bbl of oil. Natural gas liquids are included as natural gas in this
calculation without adjustment for higher BTU value.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth above represents only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment and the existence of
development plans. As a result, estimates of different engineers often vary. For
example, HVI has substantially increased its proved undeveloped reserves from
initial reserve estimates made at the time of certain acquisitions. In addition,
results of drilling, testing and production subsequent to the date of an
estimate may justify revision of such estimates. Accordingly, reserve estimates
are often different from the quantities of oil and gas that are ultimately
recovered. Further, the estimated future net revenues from proved reserves and
the present value thereof are based upon certain assumptions, including geologic
success, prices, future production levels and costs, that may not prove correct
over time. Predictions about prices and future production levels are subject to
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great uncertainty, and the meaningfulness of such estimates is highly dependent
upon the accuracy of the assumptions upon which they are based. Oil and gas
prices have fluctuated widely in recent years. The weighted average sales price
utilized for the purposes of estimating HVI's proved reserves and future net
revenues therefrom as of December 31, 1997 was $15.81 per Bbl for oil.
Production
The following table sets forth the average sale price, the average
production cost (lifting costs) and net production to HVI for each of the last
three fiscal years of oil and gas production in the Illinois Basin (Illinois,
Indiana, and Kentucky) per unit of production (oil barrels, bbl; gas, mcf;):
Illinois
--------
1995 1996 1997
---- ---- ----
Average Sales Price
Per Unit:
Oil $16.73 $20.42 $19.21
Gas -0- -0- -0-
Lifting Costs Per Unit:
Oil $11.88 $10.94 $ 6.80
Gas -0- -0- -0-
Net Production to
HVI:
Oil 1203 1252 450
Gas -0- -0- -0-
California
----------
1995* 1996* 1997
Average Sales Price
Per Unit:
Oil - - $10.55
Gas - - --
Lifting Costs Per Unit:
Oil - - $ 5.31
Gas - - --
Net Production to
HVI:
Oil - - 1,832
Gas - - --
*There was no activity in California prior to 1997.
Acreage
The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases held by HVI as of December 31, 1997, and includes
the 854 net acres owned as of year end. Undeveloped acreage includes leasehold
interests which may already have been classified as containing proved
undeveloped reserves.
Developed Acreage(1) Undeveloped Acreage
-------------------- -------------------
Gross Net Gross Net
California 190 150 - -
Illinois 115 80 754 377
Total 305 230 754 377
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Drilling Activity
The following table sets forth the wells drilled and completed by HVI
during the periods indicated:
Years ended December 31
1995 1996 1997
---- ---- ----
Gross Net Gross Net Gross Net
Development:
Oil 1 .125 3 .375 2 1.67
Gas - - - - - -
Non-Productive - - - - - -
Total 1 .125 3 .375 2 1.67
(1) Developed acreage is acreage assigned to producing wells for the spacing
unit of the producing formation. Developed acreage in certain of HVI's
properties that include multiple formations with different well spacing
requirements may be considered undeveloped for certain formations, but have
only been included as developed acreage in the presentation above.
Development Exploitation Acquisition Expenditures
The following table sets forth certain information regarding the costs
incurred by HVI in its development, exploration and acquisition activities
during the periods indicated:
Years Ended December 31
1995 1996 1997
----- ---- ----
Development Costs $108,229 $90,000 $ 132,564
Exploration Costs - - -
Acquisition Costs:
a) Unproved Properties - - -
b) Proved Properties - - $1,650,000
Total Capital Expenditure $108,229 $90,000 $1,782,564
Marketing
Exploitation, Development and Production. Significant and lucrative markets
exist for the application of the niche technology for HVI's short radius
horizontal drilling know-how. Mature fields are in abundance throughout the
world where the operators are faces with declining production, uncertain oil
prices and upcoming costs to abandon and plug the uneconomic wells at their
production rates. Such an environment creates a unique market for HVI in being
able to acquire through a conservative selection process. Primary acquisitions
candidates will have existing production, existing operating infrastructure and
facilities, geological formations conducive to the technology, well bores and
pay zones under ten thousand feet with sufficient recoverable oil in place. As
an example, HVI has found that California is a unique opportunity due to its
stringent new drilling regulations. HVI's activities are essentially "re-work"
negating any lengthy approvals through the regulatory authorities. Such an
environment has created "pockets" of opportunity whereby significant recoverable
oil has been left in place by the majors and thereafter operators rather than
attempt a costly endeavor to drill new wells in urban areas. HVI intends to
pursue such opportunities.
Service Marketing. As experienced by HVI, there exists a substantial market
for cost-effective horizontal drilling. HVI intends to concentrate its services
to drilling for majors and larger independents on a multi-well program basis
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rather than a single well approach for a small independent. Past experience has
proven that the success of its short radius drilling program is highly dependent
on the thorough evaluation, planning and discipline at the well bore which the
majors and larger independents value immensely. HVI has successfully performed
services for Texaco, Chevron, OXY, Exxon to name a few and intends to focus on
similar activities. Additionally, HVI intends to market its service within
Europe where the shallow fields, cost structure, lack of horizontal drilling
application are all ideal characteristics for an ideal service market.
Competition
Despite being a relatively small and young company, management of HVI
believes it has an advantage over its competition due to its level of field
expertise in applying the patented Amoco Short Radius Horizontal Drilling
technology and its ability to provide these at a fraction of the cost of the
competition. Although, Amoco has provided licenses to others, HVI feels that its
experience and two prong global approach is sheltered from any of the other
licensees who are concentrating on services within their respective geographical
area. The acquisition criteria is also unique to the application of the niche
short radius horizontal technology and as to the best of management's knowledge,
none of the other licensees are drilling for their own account, the Company has
not felt any competitive pressure relative to its acquisition strategy to date.
Regulation
The following discussion of regulation of the oil and gas industry is
necessarily brief and is not intended to constitute a complete discussion of the
various statutes, rules, regulations or governmental orders to which operations
of HVI may be subject.
Price Controls on Liquid Hydrocarbons
Oil sold by HVI is no longer subject to the Crude Oil Windfall Profits Tax
Act of 1980, as amended, which was repealed in 1988. As a result, HVI sells oil
produced from its properties at unregulated market prices.
Federal Regulation of First Sales and Transportation of Natural Gas
The sale and transportation of natural gas production from properties owned
by HVI may be subject to regulation under various federal and state laws
including, but not limited to, the Natural Gas Act ("NGA") and the Natural Gas
Policy Act ("NGPA"), both of which are administered by the Federal Energy
Regulatory Commission ("FERC"). The provisions of these acts and regulations are
complex. Under these acts, producers and marketers have been required to obtain
certificates from FERC to make sales, as well as obtaining abandonment approval
from FERC to discontinue sales. Additionally, first sales ("first sales") have
been subject to maximum lawful price regulation. However, the NGPA provided for
phased-in deregulation of most new gas production and, as a result of the
enactment on July 26, 1989 of the Natural Gas Wellhead Decontrol Act of 1989,
the remaining regulations imposed by the NGA and the NGPA with respect to "first
sales" were terminated by not later than January 1, 1993. FERC jurisdiction over
transportation and sales other than "first sales" has not been affected.
Because of current market conditions, many producers, including HVI, are
receiving contract prices substantially below most remaining maximum lawful
prices under the NGPA. Management believes that most of the gas to be produced
from HVI's properties is already price-deregulated. The price at which such gas
may be sold will continue to be affected by a number of factors, including the
price of alternate fuels such as oil. At present, two factors affecting prices
are gas-to-gas competition among various gas marketers and storage of natural
gas. Moreover, the actual prices realized under HVI's current gas sales
contracts also may be affected by the nature of the decontrolled price
provisions included therein and whether any indefinite price escalation clauses
in such contracts have been triggered by federal decontrol.
The economic impact on HVI and gas producers generally of price decontrol
is uncertain, but it currently appears to be resulting in lower gas prices.
Currently, there is a surplus of deliverable gas in most areas of the United
States and, accordingly, it remains possible that gas prices will continue to
remain at relatively depressed levels or decrease further. Moreover, many gas
sales contracts provide for price redetermination upon decontrol, and, as a
result, it is possible that the newly redetermined prices applicable under such
contracts are likely to reflect the lower prices prevalent in today's market.
Producers such as HVI or resellers may be required to reduce prices in order to
assure continued sales. It is also possible that gas production from certain
properties may be shut-in altogether for lack of an available market.
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Commencing in the mid-1980's, FERC promulgated several orders designed to
correct market distortions and to make gas markets more competitive by removing
the transportation barriers to market access. These orders have had a profound
influence upon natural gas markets in the United States and have, among other
things, fostered the development of a large spot market for gas. The following
is a brief description of the most significant of those orders and is not
intended to constitute a complete description of those orders or their impact.
On April 8, 1992, FERC issued Order 636, which is intended to restructure
both the sales and transportation services provided by interstate natural gas
pipelines. The purpose of Order 636 is to improve the competitive structure of
the pipeline industry and maximize consumer benefits from the competitive
wellhead gas market. The major function of Order 636 is to assure that the
services non-pipeline companies can obtain from pipelines is comparable to the
services pipeline companies offer to their gas sales customers. One of the key
features of the Order is the "unbundling" of services that pipelines offer their
customers. This means that pipelines must offer transportation and other
services separately from the sale of gas. The Order is complex, and faces
potential challenges in court. HVI is not able to predict the effect the Order
might have on its business.
FERC regulates the rates and services of "natural-gas companies", which the
NGA defines as persons engaged in the transportation of gas in interstate
commerce for resale. As previously discussed, the regulation of producers under
the NGA is being gradually phased out. Interstate pipelines, however, continue
to be regulated by FERC under the NGA. Various state commissions also regulate
the rates and services of pipelines whose operations are purely intrastate in
nature, although generally sales to and transportation on behalf of other
pipelines or industrial end-users are not subject to material state regulation.
There are many legislative proposals pending in Congress and in the
legislatures of various states that, if enacted, might significantly affect the
petroleum industry. It is impossible to predict what proposals will be enacted
and what effect, if any, such proposals would have on HVI.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds and reports concerning
operations. The states in which HVI operates also have statutes and regulations
governing a number of environmental and conservation matters, including the
unitization and pooling of oil and gas properties and establishment of maximum
rates of production from oil and gas wells. A few states also pro-rate
production to the market demand for oil and gas.
Limestone Reserves
Indiana - Monroe Field. HVI owns through its wholly owned subsidiary, Calox
Inc, a limestone reserve located in Monroe County, Indiana. The 355 acre
property is owned "in fee". That is, HVI owns the land, timber and all the
mineral rights associated with the property. The reserves are made up of Salem
limestone, which produces a high industrial grade calcium oxide or calcium
carbonate used in scrubbing machinery that cleans the gaseous emissions from
coal burning generators. Independent engineering reports obtained by HVI
indicate that there are 73,458,000 tons of proven reserves on the property.
As HVI is focused on its oil and gas activities, this reserve has been
identified as a non-core unit and thus optioned out. International Publishing
Holding s.a. ("IPH"), HVI's largest shareholder, holds a three year option
expiring on September 9, 2000 to acquire 90% of the shares of Calox for $3.5
million. Thus, HVI will retain a 10% interest in the reserve, divest itself from
its non-oil and gas activity and obtain $3.5 million of funds to invest in its
core industry. In the event, IPH does not exercise its option, HVI is confident
that it will be able to divest this lucrative property for at least the same
value to another company.
Limestone Reserves
Independent engineering reports acquired by HVI provide reserve estimates
and their present values analyzed from specific samples extracted from the
property.
As per 1997 reserve overview attached.
Location: Monroe County, Indiana
Means of access: State Highway 46 to County Road
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Title, claim, lease or option description: Owned in fee warranty deed
Conditions to obtain or retain the property: none
Expiration date of lease or option: N/A
Maps: Incorporated by reference from HVI's Annual Report on Form 10-KSB for
the year ended December 31, 1992
History of previous operators: none
Present condition of property: Timber land
Work completed by Registrant on the property: Drilling, testing and
engineering
Proposed program of exploration or development: Develop rock quarry to
produce rock and/or crushed limestone
Current state of exploration or development: none
Open pit or underground: Open pit
Source of Power: Public Service of Indiana
Rock formations and mineralization of existing or potential economic
significance: Limestone
Proven recoverable reserves: 73,458,000
Quality: 98% CA CO2
Name of person making estimates: John R. Coombs - geological engineer
Relationship to Registrant of such person making estimates: none
Environmental Regulations
Operations of HVI are subject to numerous laws and regulations governing
the discharge of materials into the environmental or otherwise relating to
environmental protection. These laws and regulations may require the acquisition
of a permit before drilling commences, prohibit drilling activities on certain
lands lying within wilderness and other protected areas and impose substantial
liabilities for pollution resulting from drilling operations. Such laws and
regulations may also restrict air or other pollution resulting from HVI's
operations. Moreover, many commentators believe that the state and federal
environmental laws and regulations will become more stringent in the future. For
instance, proposed legislation amending the federal Resource Conservation and
Recovery Act would reclassify oil and gas production wastes as "hazardous
waste". If such legislation were to pass, it could have a significant impact on
the operating costs of HVI, as well as the oil and gas industry in general.
State initiatives to further regulate the disposal of oil and gas wastes are
also pending in certain states, including states in which HVI has operations,
and these various initiative could have a similar impact on HVI.
HVI has not filed any reports with estimates of its reserves with any
federal authority or agency, other than the Securities and Exchange Commission
and the Department of Energy.
Title to Properties
Substantially all of HVI's property interests are held pursuant to leases
from third parties. A title opinion is typically obtained prior to the
commencement of drilling operations on properties. HVI has obtained title
opinions on substantially all of its producing properties and believes that it
has satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. HVI's properties are subject to customary
royalty interests, liens for current taxes and other burdens which HVI believes
do not materially interfere with the use of or affect the value of such
properties. HVI performs only a minimal title investigation before acquiring
undeveloped properties.
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Operational Hazards and Insurance
HVI's operations are subject to the usual hazards incident to the drilling
and production of oil and gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of
toxic gas and other environmental hazards and risks. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.
HVI has $2,000,000 of general liability insurance. HVI's insurance does not
cover every potential risk associated with the drilling and production of oil
and gas. In particular, coverage is not obtainable for certain types of
environmental hazards. The occurrence of a significant adverse event, the risks
of which are not fully covered by insurance, could have a material adverse
effect on HVI's financial condition and results of operations. Moreover, no
assurance can be given that HVI will be able to maintain adequate insurance in
the future at rates it considers reasonable.
Employees
As of November 30, 1998, HVI had 15 employees, consisting of 12 full-time
employees and 3 are part-time employees. None of HVI's employees is subject to a
collective bargaining agreement. HVI considers its relations with its employees
to be good.
Offices
HVI leases approximately ____ square feet of office space at 630 Fifth
Avenue, Suite 1501, New York, New York, for its executive offices on a one year
lease. HVI's operational headquarters is located in Tulsa, Oklahoma, where HVI
leases 1,500 square feet on a month to month basis. If it were to require added
space, HVI believes that additional space is readily available for lease. HVI
also leases field offices and storage facilities in Spencer County, Indiana,
Santa Monica, California and owns a field office in Kiefer, Oklahoma.
DESCRIPTION OF PROPERTIES
Except for the Kiefer, Oklahoma field office which is owned in fee, all of
HVI's property interests are held pursuant to leases from third parties. A title
opinion is typically obtained prior to the commencement of drilling operations
on properties. HVI has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. HVI's properties are subject to customary royalty interests, liens for
current taxes and other burdens which HVI believes do not materially interfere
with the use of or affect the value of such properties. HVI performs only a
minimal title investigation before acquiring undeveloped properties.
HVI LEGAL PROCEEDINGS
There are no material pending legal proceedings to which HVI is a party or
to which any of its property is subject except as set forth below.
On March 11, 1997, HVI commenced a lawsuit in the District Court for Tulsa
County, Oklahoma against David J. LaPrade, a former officer and director of an
HVI predecessor entity, and Mr. LaPrade's current employer. HVI seeks to recover
losses from the alleged breach of fiduciary duty, misappropriating confidential
information and property of HVI, using it in unfair competition with HVI,
interfering with HVI's existing and prospective relationships with its
customers, interfering with HVI's relationships with its employees, and
conversion of HVI property. Mr. LaPrade has made counterclaims against HVI for
breach of his employment agreement, libel and slander, and intentional
infliction of emotional distress; he seeks actual damages in excess of $10,000
and punitive damages in an unspecified amount. HVI believes that the ultimate
outcome of this litigation will not have a material adverse effect on HVI's
financial condition or results of operations.
HVI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Joint Proxy Statement/Prospectus.
66
<PAGE>
Overview
In view of significant material changes to HVI during 1997, management
believes that the revenue and results of operations reported herein are not
indicative of future operations and the results thereof. Furthermore, in
accordance with the pertinent accounting regulations related to the reverse
mergers, the income statements are not reflective of the combined revenues of
the merged companies on an annualized basis but rather reflect the combined
income from the merger date of September 9, 1997. Current management was
appointed during the latter part of the third quarter of 1997 and spent the
balance of the year re-structuring, re-capitalizing, and completing mergers and
acquisitions that all were part of a specific and focused strategy. Management
has established a clear directive to focus on capitalizing on its experience
with the low cost horizontal drilling technology developed and patented by Amoco
Corporation and thereafter licensed to HVI. It is the intent of management to
become a leader in applying this horizontal drilling technology and exploiting
declining production wells on properties acquired by HVI or on a service basis
for major oil and gas companies such as its clients Texaco, Chevron, Exxon to
name a few.
Since August of 1997 HVI, under its new management, emerged from
bankruptcy, accomplished a strategic merger with another Amoco technology
licensee, re-capitalized through three private placements, acquired two
development properties, commenced horizontal drilling operations on the newly
acquired Cat Canyon field, continued to perform horizontal drilling services on
a contract basis and optioned out its non-oil and gas businesses.
HVI's final accounting of the bankruptcy case was accepted and the case was
closed by the Bankruptcy Court for the Southern District of Indiana on March 26,
1998. This marked the end of almost a year of re-structuring by HVI. Management
spent a considerable amount of its time in this process and intends to now focus
on implementing its business strategy hereon.
HVI's business strategy since its emergence from bankruptcy in March 1998
has been to pursue acquisitions of oil and gas properties particularly suited to
exploitation by HVI's horizontal drilling technology. In connection therewith,
the Company has acquired 34.7% of Saba Common Stock and has entered into the
Merger Agreement with Saba whereby Saba is to become a wholly owned subsidiary
of HVI.
Since 1997, HVI has focused on its corporate restructuring and acquisition
efforts and its investment in a horizontal drilling pilot program in the Cat
Canyon field in California. During the first nine months of 1998, HVI drilled
three horizontal wells in the Cat Canyon field, namely UCB-09, UCB-38 and
UCB-28. Each well was drilled utilizing HVI's Short Radius horizontal drilling
technology, and resulted in a 47 foot radius with a 435 foot lateral on UCB-09,
a 60 foot radius with a 414 foot lateral on UCB-38 and a 50 foot radius with a
252 foot lateral on UCB-28. In view of HVI's long-term strategy and the known
sand problem in the Cat Canyon basin, HVI completed each well with a different
technique to establish a standard. UCB-09 was completed with a standard Ace
down-hole pump and a KD system, UCB-38 was completed with a KUDU pump, and
UCB-28 was completed with a Ace Teflon-Luber Plunger down-hole pump. The
kick-off point for each well was at a depth of 2,940-3,000 feet.
The variances in the completions allowed HVI to obtain direct experience on the
production capability from each of the techniques. UCB-09 net production
stabilized at 20 barrels of oil per day, UCB-38 sanded up following a few weeks
of production, while UCB-28 has net production of 65 barrels of oil per day.
Each of these wells were re-entries into an abandoned well bore in the Sisquoc
formation, which is one of the two pay zones within HVI's lease in the Cat
Canyon basin. Following this drilling operation and completion technique
definition, HVI proceeded with its discussions with Saba with the intent of
applying this technique on Saba's reserves.
HVI has primarily been focused on the Saba transactions and considerable
expenses have been incurred in connection with the Saba transactions. Additional
expenses are expected through the closing of the Merger Agreement.
Due to the significance to HVI of the Saba transactions, HVI's management and
staff have devoted a substantial amount of time and effort to the acquisition.
Accordingly, levels of other operational activities such as prior contract
drilling programs have declined. In connection with the Saba transactions, HVI
plans to establish and develop an extensive drilling program on Saba's
properties in California and commence such program late in the fourth quarter of
1998.
In view of the significant differences between HVI's corporate structure and
during the three months and nine months ended September 30, 1997 and that during
the comparable periods ended September 30, 1998, comparisons of HVI's results of
operations for those periods are considered by management not to be
representative of the Company's long-term potential.
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<PAGE>
This Joint Proxy Statement/Prospectus includes certain statements by HVI
that may be deemed to be "forward-looking statement" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements by HVI, other than
statements of historical facts, included herein that address activities, events
or developments that HVI expects, believes or anticipates will or may occur in
the future, including such matters as future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, expansion and
growth of HVI's operations and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by HVI in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, general economic and business conditions,
the business opportunities (or lack thereof) that may be presented to and
pursued by HVI, changes in laws or regulations and other factors, many of which
are beyond the control of HVI. Readers are cautioned that any such statements
are not guarantees of future performance and that actual results or developments
may differ materially from those projected in the forward-looking statements.
Results of operations
Comparison of the Years Ended December 31, 1997 and 1996.
Revenues decreased from $604,475 in 1996 to $211,696 in 1997. The 65% decline in
revenue was as a result of the dormancy state of HVI through its re-structuring
process. Minimum operations were maintained with only long-term service
contracts completed. As during these years HVI was primarily focused on
providing regional horizontal drilling services, the services were not marketed
nationally or overseas.
Cost of sales decreased from $367,419 in 1996 to $247,979. The 33% decline is
directly related to HVI's dormancy state in 1997. The decline in the cost of
sales is not directly proportional to the declines in revenue due to a continued
re-furbish program on some of the drilling assets which were continued to
maintain the equipment.
General and administration increased from $594,402 in 1996 to $780,373 or 31%.
The increase in general and administrative expenses was primarily associated
with the costs incurred in re-structuring HVI through bankruptcy and related
legal and accounting expenses.
Comparison of Three-Month Periods Ended September 30, 1998 and 1997
Revenues decreased from $31,659 for the third quarter of 1997 to $9,704 for the
third quarter of 1998. Third quarter 1998 revenues were from oil production at
the Cat Canyon field and reflect the decline of oil prices.
Cost of Revenues increased from $19,165 for the third quarter of 1997 to $29,942
for the third quarter of 1998. The nature and levels of such costs are
dissimilar since third quarter 1997 costs were related to contract drilling
while third quarter 1998 costs were related to production in California as a
result of HVI's change in business strategy.
General and Administrative expenses increased from $124,423 for the third
quarter of 1997 to $394,967 for the third quarter of 1998. The increase was
primarily attributable to legal and consulting fees resulting from HVI's
acquisition and financing efforts related to the Saba transactions.
Comparison of Nine-Month Periods Ended September 30, 1998 and 1997
Revenues decreased from $160,824 for the nine months ended September 30, 1997 to
$129,852 for the nine months ended September 30, 1998. Revenues for the nine
months ended September 30, 1998 were from oil production at the Cat Canyon
field. The decline in oil prices of over 50% coupled with the El Nino storms in
California that essentially shut the field down during February 1998 caused
revenues to be lower than initially expected.
Cost of Revenues decreased from $133,029 for the nine months ended September 30,
1997 to $119,334 for the nine months ended September 30, 1998. Planned pilot
program drilling operations in the Cat Canyon field account for most of the
expenses during the nine months ended September 30, 1998, and such expenses are
not proportional to revenues since the three wells drilled in the Cat Canyon
field were not in production during the entire period. In addition, HVI incurred
significant repair expenses resulting from the El Nino storms in California
during February 1998.
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<PAGE>
General and Administrative expenses increased from $296,509 for the nine months
ended September 30, 1997 to $1,270,978 for the nine months ended September 30,
1998. The increase was primarily attributable to legal and consulting fees
resulting from HVI's acquisition and financing efforts related to the Saba
transactions, the completion of HVI's bankruptcy reorganization, and related SEC
reporting requirements.
Liquidity and Capital Resources
During the twelve months ending 1997, the working capital increased
approximately $3.9 million or 4122% while the current liabilities increased from
$369,512 in 1996 to $820,327 in 1997. The $450,812 increase in current
liabilities was primarily due to the horizontal drilling programs on HVI's Cat
Canyon field in California. Total liabilities decreased from $910,945 in 1996 to
$897,413 or 1.5%.
During the fourth quarter of 1997, HVI successfully concluded three private
placements to re-capitalize the reorganized company. The first two placements
were done at $10 per share while the third was concluded at $13 7/8 per share.
HVI issued a total of 552,470 shares with gross proceeds of approximately
$5,801,518 that resulted in net proceeds of approximately $5,627,472.
On December 31, 1997 HVI's liquid assets totaled $3,932,647 which includes cash
and cash equivalents, time deposits and funds held in escrow. HVI's liquidity
position is primarily due to its successful re-capitalization activities during
the latter half of 1997 through private placements.
As of September 30, 1998, HVI had current assets in the amount of $854,482,
including cash and cash equivalents of $838,547, while current liabilities
amounted to $75,443. The $2,353,895 decrease in working capital from December
31, 1997 to September 30, 1998 was primarily attributable to HVI's final payment
on the Cat Canyon field and the drilling program expenditures related thereto,
and legal and consulting fees resulting from HVI's acquisition and financing
efforts during 1998. Long-term liabilities as of September 30, 1998 amounted to
$52,283.
HVI's net cash used by operating activities increased from $170,682 for the nine
months ended September 30, 1997 to $1,973,184 for the nine months ended
September 30, 1998. This increase was primarily attributable to the Cat Canyon
drilling program expenditures and legal and consulting payments resulting from
HVI's acquisition and financing efforts during 1998.
HVI's net cash used by investing activities increased from $76,477 for the nine
months ended September 30, 1997 to $1,180,560 for the nine months ended
September 30, 1998. This increase was primarily attributable to the payments for
the Cat Canyon field and other capital expenditures related thereto.
HVI's net cash provided by financing activities decreased from $602,722 for the
nine months ended September 30, 1997 to $59,644 for the nine months ended
September 30, 1998. Net cash provided by financing activities for the nine
months ended September 30, 1997 included the issuance of common stock for cash
in the amount of $600,000 and financing transactions related to the acquisition
of a limited partnership.
YEAR 2000
Computer programs or other embedded technology that have been written using two
digits (rather than four) to define the applicable year and that have
time-sensitive logic may recognize a date using "00" as the Year 1900 rather
than the Year 2000, which could result in widespread miscalculations or system
failures. Both information technology ("IT") systems and non-IT systems using
embedded technology may be affected by the Year 2000. HVI does not utilize any
proprietary computer software, but uses commercially available software programs
from vendors such as Microsoft Corporation and Peachtree. HVI has been advised
that the software it uses is Year 2000 compliant.
69
<PAGE>
HVI has not completed its assessment of Year 2000 issues, in particular the
process of verification of whether vendors, suppliers and significant customers
with which HVI has material relationships are Year 2000 compliant. If HVI and
such third parties are unable to address Year 2000 issues in a timely manner, it
could result in material financial risk to HVI, including loss of revenue and
substantial unanticipated costs. Accordingly, HVI plans to devote all resources
necessary to resolve significant Year 2000 issues in a timely manner. In
addition, HVI plans to develop a Year 2000 contingency plan. HVI is currently
not able to determine whether the Year 2000 will have a material effect on HVI's
financial condition, results of operations or cash flows.
INFLATION
HVI does not believe that inflation will have a material impact on HVI's
future operations.
HVI CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During HVI's two most recent fiscal years and through the date of this
Joint Proxy Statement/Prospectus, HVI has not had any changes in or
disagreements with its independent accountants on matters of accounting and
financial disclosure.
DIRECTORS AND EXECUTIVE OFFICER OF HVI
The directors and executive officer of HVI are as follows:
Name Age Positions
---- --- ---------
Randeep S. Grewal (A) 33 Chairman and Chief Executive Officer
and a Director(1)
Dr. Jan F. Holtrop (B) 62 Director(1)
George G. Andrews (B) 72 Director(1)
Dirk Van Keulen (C) 39 Director(1)
(1) The directors are divided into three classes, Class A, Class B, and Class
C, with each director serving for three years and rotating the class up for
election at each annual meeting.
(A) Class A Director.
(B) Class B Director.
(C) Class C Director.
Randeep S. Grewal - Chairman, Chief Executive Officer and Director. Mr.
Grewal 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. In October 1998, Mr. Grewal was appointed to the
Board of Directors of Saba, a publicly reporting company. Mr. Grewal has a
Bachelor of Science degree in Mechanical Engineering from Northrop University.
Dr. Jan Fokke Holtrop - Director. Mr. Holtrop has been a senior Production
Technology professor at the Delft University of Technology within the Faculty of
Petroleum Engineering and Mining in The Hague, Netherlands since 1989. Prior to
the Delft University, he served in various positions within the Shell Oil
Company where he started his career in 1962. Mr. Holtrop has almost forty (40)
years of experience within the oil and gas exploration, drilling and production
industry with a global hands-on background. Mr. Holtrop has a Ph.D. and a MSC in
Mining Engineering from the Delft University of Technology.
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<PAGE>
George G. Andrews - Director. Mr. Andrews has been a consultant and private
investor since his retirement from the oil and gas industry in 1987. From 1982
until 1987 he was employed as corporate Vice President of Intercontinental
Energy Corporation of Englewood, Colorado directing the company's land
acquisition, lease and management operations. Between June 1981 and November
1982 Mr. Andrews was Vice President of Shelter Hydrocarbons, Inc. of Denver,
Colorado where he directed all land management and operation procedures
including contract systems and negotiations of acquisition agreements. From 1979
to June of 1981 Mr. Andrews was Senior Landman for the National Cooperative
Refinery Association in Denver, Colorado where he was responsible for
negotiation and acquisition of oil and gas leases, certifying title requirements
and ongoing daily operations in his office. Mr. Andrews obtained his B.S. degree
from the University of Tulsa, Tulsa, Oklahoma in 1947 where he majored in
Economics.
Dirk Van Keulen - Director. Mr. Van Keulen has served since January 1996 as
a Director of Horizontal Ventures, Inc., which was one of the first licensees of
the Amoco technology and is currently Petro Union's core business. He served as
a tax official in the Dutch Ministry of Finance from 1979 through 1987 and then
as a tax consultant with Koolman & Co., until 1989. Since 1984 Mr. Van Keulen
has been actively involved in various investment activities. He studied higher
education in fiscal law and accounting under the Dutch Ministry of Finance.
There are no family relationships among the directors. There are no
arrangements or understandings between any director and any other person
pursuant to which that director was elected.
During the past five years, there have been no petitions under the
Bankruptcy Act or any state insolvency law filed by or against, nor have there
been any receivers, fiscal agents, or similar officers appointed by any court
for the business or property of any of HVI's directors or executive officers, or
any partnership in which any such person was a general partner within two years
before the time of such filing, or any corporation or business association of
which any such director or executive officer was an executive officer within two
years before the time of such filing. During the past five years, no incumbent
director or executive officer of HVI has been convicted of any criminal
proceeding (excluding traffic violations and other minor offenses) and no such
person is the subject of a criminal prosecution which is presently pending.
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth in summary form the
compensation received during each of HVI's last two completed fiscal years by
HVI's Executive Officers.
(a) Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
------------ ------------
Year Salary Bonus(2) Awards
Stock Awards Options
Name/Position
<S> <C> <C> <C> <C> <C>
Randeep S. Grewal 1997 $120,000 0 70,000(3) 150,000
Chairman and Chief
Executive Officer
Richard Wedel, 1997 $ 90,000 0 70,000(3)
COO 1996 90,000(1) 0
Resigned 3/12/98
</TABLE>
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<PAGE>
- -------------
(1) Salaries were accrued, but not paid in cash. A total of 2,273 shares of
Common Stock were issued to Mr. Wedel in 1996 as payment in full for the
$90,000 of salary accrued in 1995.
(2) During the period covered by the Table, HVI did not pay its executive
officers any bonuses or other compensation.
(3) Stock grants approved as part of HVI's bankruptcy reorganization plan.
No other officer, director or employee of HVI or its subsidiaries received
total compensation in excess of $100,000 during the last two fiscal years. The
Company has an employment agreement with Randeep S. Grewal. No other form of
compensation was paid during 1997.
(b) Option and Long-Term Compensation Tables
<TABLE>
<CAPTION>
Long Term Compensation
Awards Payouts
------ -------
Restricted Securities LTIP
Stock award(s) Underlying Payouts
($) Options/SAYS (#) ($)
------------- ---------------- ------
Name/Position
- -------------
<S> <C> <C> <C>
Randeep S. Grewal 1997 70,000 $80,000(1)
Chairman and Chief
Executive Officer
Richard Wedel, 1997 70,000
COO, CEO 1996
Resigned 3/12/98
</TABLE>
(1) Includes 150,000 stock options and a 30,000 share deferred stock grant both
issued as part of the bankruptcy reorganization.
(c) Options and Stock Appreciation Rights
-------------------------------------
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
Number of Securities Percent of total Exercise
Underlying options/SAYS granted or base
Options/SAYS granted(#) to employees price Expiration
Name granted # in fiscal year ($/Sh) date
---- --------- -------------- ------ ----
<S> <C> <C> <C> <C> <C>
Randeep S. Grewal 150,000 100% $5.00 9/7/07
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Value of
Number of unexercised in-the-
unexercised options money options/SAYS
Shares SAYS at FY-end (#) at FY-end (4)
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) un-exercisable un-exercisable
---- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Randeep S. Grewal --- --- 0/150,000 0/$975,000
</TABLE>
HVI has not granted any other options or stock appreciation rights to any
of its directors or executive officers.
(d) Employment Contracts and Termination Agreements
-----------------------------------------------
On September 9, 1997, HVI entered into an employment agreement with Mr.
Grewal for a five-year term. His current salary is $120,000 per year.
Compensation is reviewed annually. Mr. Grewal participates in HVI's benefit
plans and is entitled to bonuses and incentive compensation as determined by the
Board of Directors of HVI. The agreement is terminable for cause or by the death
or disability of Mr. Grewal. Upon termination of the agreement by the Company
for any reason other than for cause, death or disability, the Company is
obligated to pay within 30 days after the date of termination (1) Mr. Grewal's
Base Salary through the date of the Severance Period, (2) Mr. Grewal's base
salary for the balance of the term of the agreement if the Date of Termination
is within the first three years of the Employment Agreement (Base Salary is the
rate in effect at the Date of Termination), (3) the Annual Bonus paid to Mr.
Grewal for the last full fiscal year during the Employment Period and (4) all
amounts of deferred compensation, if any. The agreement allows Mr. Grewal to
receive an assignment of 2% overriding royalty of all oil and gas production
received by HVI.
On March 12, 1998, HVI entered into a Confidential Termination and
Settlement Agreement and Complete Release with Mr. Wedel relating to his
resignation as an executive of HVI and as a member of the Board of Directors.
Mr. Wedel will receive a $50,000 one-time severance payment. Additionally, HVI
agreed to loan to Mr. Wedel $100,000 with interest payable at the prime rate as
established by the Wall Street Journal secured by a stock pledge agreement and
10,000 shares of HVI's common stock. HVI agreed to maintain Mr. Wedel's medical
insurance coverage as currently in effect through July 31, 1998. In exchange for
the above consideration, Mr. Wedel agreed not to compete with HVI and
specifically with HVI's Amoco technology based horizontal drilling business for
a period of three years after his date of termination. Mr. Wedel also agreed not
to disclose any confidential information of HVI which he acquired as a result of
his employment. HVI and Mr. Wedel agreed to mutually release the other from any
claim or action arising from Mr. Wedel's Executive Employment Agreement with
HVI.
(e) Director Compensation
---------------------
Each director who is not an employee of HVI (the "Outside Directors") will
be reimbursed for expenses incurred in attending meetings of the Board of
Directors and related committees. As of the date of this Joint Proxy
Statement/Prospectus, HVI has three Outside Directors. No compensation was paid
to any Outside Director during fiscal 1997 and is none is planned for the
immediate future.
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<PAGE>
HVI has no knowledge of any arrangement or understanding in existence
between any executive officer named above and any other person pursuant to which
any such executive officer was or is to be elected to such office or offices.
All officers of HVI serve at the pleasure of the Board of Directors. No family
relationship exists among the directors or executive officers of HVI. All
Officers of HVI will hold office until the next Annual Meeting of the
shareholders of HVI. There is no person who is not a designated Officer who is
expected to make any significant contribution to the business of HVI. The
executive officers of HVI serve at the pleasure of the Board of Directors and do
not have fixed terms. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board whenever in its judgment the best
interests of HVI will be served thereby without prejudice, however, to
contractual rights, if any, of the person so removed.
Working Interests
- -----------------
There are no agreements in which any employee of HVI receives a working
interest in HVI's oil and gas properties.
Overriding Royalty Income
- -------------------------
HVI has historically assigned overriding royalty interests to certain of
its employees. Employees own overriding royalty interests on oil and gas wells
invested in by HVI. Conflicts of interest may arise between employees owning
overriding royalty interests in HVI-operated locations and HVI.
As part of Mr. Grewal's employment agreement, he is to receive a two
percent (2%) overriding royalty of all oil and gas production received by HVI.
Josh Stark, Vice President of Exploitation and Exploration will receive 2%
override on the Ohio and Reo oil prospects should they be developed.
Future Transactions
- -------------------
All transactions between HVI and an officer, director, principal
stockholder or affiliate of HVI will be approved by a majority of the
uninterested directors, only if they have determined that the transaction is
fair to HVI and its stockholders and that the terms of such transaction are no
less favorable to HVI than could be obtained from unaffiliated parties.
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<PAGE>
HVI SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 18, 1998, the Common Stock
ownership of each person known by HVI to be the beneficial owner of 5% or more
of HVI's Common Stock ("Principal Shareholders"), all directors and the
executive officer individually and all directors and the executive officer of
HVI as a group. Except as noted, each person has sole voting and investment
power with respect to the shares shown. There are no contractual arrangements or
pledges of the Company's securities, known to HVI, which may at a subsequent
date result in a change of control of HVI. As of December 18, 1998, there were
2,910,981 shares of HVI Common Stock issued and outstanding.
Amount of Beneficial
Ownership
---------
Name and Address Common Percent of
of Beneficial Owner Stock(1) Class
------------------- -------- --------
International Publishing 276,093 9.5%
Holding s.a. ("IPH")
Postbus 84019
2508 AA The Hague
The Netherlands
Capco Resources Ltd.(2) 1,340,000 46.0%
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
Randeep S. Grewal 1,560,000 (3) 51.0%
Chairman and
Chief Executive Officer
10815 Briar Forest Drive
Houston, TX 77042/
630 Fifth Avenue, Suite 1501
New York, NY 10111
Dr. Jan F. Holtrop 6,108 Less than 1%
Director
Van Alkemadelaan
2596 AS The Hague
The Netherlands
Dirk Van Keulen -0- -0-%
Director
Heemraadslag 14
2805 DP Gauda
The Netherlands
George G. Andrews 0 Less than 1%
Director
7899 West Frost Drive
Littleton, CO 80123
-------- -------
All directors and the
executive officer 1,566,117 51.2%
as a group (4 persons)
- ---------------
(1) Rule 13d-3 under the Securities Exchange Act of 1934, as amended, 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.
(2) Capco Resources Ltd. is controlled by Ilyas Chaudhary, a former executive
officer, director and principal shareholder of Saba. Capco Resources Ltd.
has delivered a proxy to Randeep S. Grewal conforming on Mr. Grewal voting
power with respect to the HVI common stock owned by Capco.
(3) Includes presently exercisable options to acquire 150,000 shares of HVI
Common Stock and 1,340,000 shares as to which Mr. Grewal has voting power
under a proxy from Capco
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RELATED PARTY TRANSACTIONS
During the last two fiscal years, there have been no transactions between
HVI and any officer, director, nominee for election as director, or any
shareholder owning greater than five percent (5%) of HVI's outstanding shares,
nor any member of the above referenced individuals' immediate family, except as
set forth below.
Randeep S. Grewal, HVI's Chairman and Chief Executive Officer, also
receives an overriding royalty of 2 percent of all oil and gas production
received by HVI during the term of his employment.
On March 12, 1998, Richard Wedel, then an executive officer and director of
HVI, resigned and entered into an agreement providing for certain severance
benefits and mutual covenants. HVI agreed to pay Mr. Wedel a severance payment
of $50,000, and agreed to loan him $100,000 at prime, payable in full in six
months, secured by shares of HVI Common Stock held by Mr. Wedel.
It is HVI's policy that any future material transactions between it and
members of its management or their affiliates shall be on terms no less
favorable than those available from unaffiliated third parties.
BUSINESS OF SABA
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. Saba has grown primarily through the acquisition and
exploitation of producing properties in California, Louisiana and Colombia. Saba
has assembled a portfolio of over 200 potential development drilling locations.
Based on current drilling forecasts, Saba estimates that such locations
represent a five-year drilling inventory. The preponderance of those drilling
locations are in Colombia's Middle Magdalena Basin. Saba also has drilling
locations in California, New Mexico and Louisiana. Saba however is pursuing the
sale of its interests in properties located in Louisiana. See "Recent
Developments - Sale of Assets." Saba intends to continue using advanced drilling
and production technologies to enhance the returns from its drilling programs.
On its California properties, Saba 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, Saba initiated exploration projects in California, Indonesia and Great
Britan. (See Note 16 to the Consolidated Financial Statements for a description
of operating results by geographic region)
At December 31, 1997, Saba 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 Saba's proved reserves and the PV-10 value of such reserves.
See "Properties - Reserve Estimates."
Saba also owns an asphalt refinery in Santa Maria, Calaifornia, where it
currently possesses approximately 4,000 Bopd. See "Description of Property -
Asphalt Refinery". Incident to its gas and oil operations, Saba has acquired fee
interests in real estate. See "Description of Property - Principal Properties -
Colombian Properties".
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RECENT DEVELOPMENTS
GOING CONCERN STATUS
Saba'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 Saba is attempting to address
funding the current deficit, there is no assurance that it will be able to do so
timely. Further while Saba 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 resolution accomplished. Finally, as
discussed below, the Company has terminated a definitive agreement that is had
previously entered into with Omimex Resources, Inc. ("Omimex") to conclude a
business combination. As a result of this termination, Saba'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 December 14, 1998. The
promissory note was not 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 "Saba - 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 Saba and the lack
of working capital available to Saba. In March 1998, Oppenheimer presented the
Board with its recommendations, which include exploring a possible business
combination of Saba with another oil and gas company. In March 1998, Saba
entered into a preliminary agreement with Omimex, a privately held Fort Worth,
Texas oil and gas company which operates a substantial portion of Saba's
producing properties, to enter into a business combination (the "Merger").
Subsequent to the execution of the preliminary agreement, Saba negotiated a
required consent from the holder ("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 Saba's financial condition and the price of the Common Stock.
Saba's deteriorating financial condition precluded Saba from raising funds with
which to redeem the Series A Preferred Stock as had been Saba's intention.
In June 1998, Saba, Omimex, the shareholders of Omimex and, for limited
purposes, Mr. Ilyas Chaudhary, an officer and director of Saba at that time,
(the "Parties") entered into the Merger Agreement. As part of the Merger
Agreement, Omimex lent to Saba 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
Saba'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 Saba and as a
result thereof the Merger be cancelled, Saba was required to pay a break-up fee
of $1 million to Omimex.
In July 1998, Saba terminated the engagement of Oppenheimer effective
August 1998.
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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 right, title and
interest of Sabacol in and to the Velasuez-Galan pipeline 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 terms of an
escrow agreement entered into between Sabacol, 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 Sabacol the deeds and the irrevocable letter of authority relating thereto
for cancellation. In the event payment of the Loan in full was 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 requirement 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 Saba
$4.2 million, of which $2 million was applied to Saba'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 Saba, the Bank and Saba 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. Saba's entire principal indebtedness to the Bank of $20.1
million was classified by Saba as currently payable at September 30, 1998.
Additionally, Saba was not in compliance with the loan agreement's financial
covenants at September 30, 1998. Saba and the Bank are in discussions to address
such non-compliance. There is not any assurance that Saba will be successful in
its discussions with the Bank to address such non-compliance.
On November 12, 1998, Ilyas Chaudhary resigned as Saba's Chairman, chief
Executive Officer, and President in Order to facilitate the closings of the
pending transactions with Horizontal Ventures, Inc. (see "The Company - 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 Saba's debt to such bank.
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SALE OF CERTAIN ASSETS
Saba 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. Saba 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, Saba 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, 1999, subject to certain conditions and adjustments. At the
closing, those properties of SETI that will be part of the sale shall include
certain interests of SETI 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 Saba, which have
been reported in a Schedule 13# 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 Saba 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 Saba's
Common Stock based on a conversion price negotiated by HVI and Saba. 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 Saba agreed to sell and
issue to HVI by December 4, 1998, an aggregate of 2.5 million shares of Saba's
Common Stock in exchange for cash in the aggregate amount of $7.5 million. HVI
delivered to Saba on November 6, 1998 $1.0 million in exchange for 333,333
shares of Saba's Common Stock as part of an interim closing of the Common Stock
Purchase Agreement. On December 3, 1998, Saba and HVI extended the final closing
date of the Common Stock Purchase Agreement from December 4, 1998 to January 3,
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 Saba's Common Stock in open market
purchases and other negotiated transactions.
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Upon the execution of the Common Stock Purchase Agreement, Randeep S.
Grewal, a director and executive officer of HVI, was appointed to Saba's Board
of Directors. Upon the closing of the Common Stock Purchase Agreement, a second
director designated by HVI is to be appointed to Saba's Board of Directors. In
addition, a letter agreement between HVI and Saba dated October 8, 1998,
provides that upon HVI's conversion of the 7,000 shares of Series A Preferred
Stock purchased from RGC a third director designated by HVI shall be appointed
to Saba's Board of Directors. In connection with the foregoing, Saba agreed to
obtain the resignations of three of its directors, which will result in the
three designees of HVI representing a majority of seats on Saba's five member
Board of Directors.
On December 7, 1998, HVI and Saba disclosed that the Board of Directors of
Saba approved HIV's proposal to merge with Saba. A majority of Saba's
disinterested Board of Directors voted in favor of the proposed merger. Saba's
Board of Directors plans to call a special meeting of Saba's stockholders to
approve the merger. Under the proposed merger, Saba's stockholders will receive
one share of HVI common stock for each six shares of Saba's common stock
outstanding. That exchange ratio is based upon (IP 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 Saba's common stock based on a 55 percent premium over the average
closing price of Saba'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 Company as a
combined company have been included with this Prospectus. See "Financial
Statements."
PREFERRED STOCK
Saba 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 Saba 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, Saba and the Holders executed a letter agreement, which was approved
by Omimex, pursuant to which Saba 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 Saba 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 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 Saba 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 Saba's Common Stock outstanding as of December 31, 19997) 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 Saba'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, Saba will
obtain stockholder approval of the issuance of those shares or a waiver from
AMEX Rule 13.
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BANKRUPTCY OF SABACOL, INC.
On December 15, 1998, the Company disclosed that 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 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
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 willl 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 Listing
In August 1998, the American Stock Exchange contacted Saba to inquire about
Saba's continued listing eligibility following its report of losses, bank
indebtedness, and going concern and to in quire about the independent status of
Saba's outside directors.
PRINCIPAL PROPERTY AREAS
Saba owned interests in approximately 845 wells at September 30, 1998. The
majority of these wells are concentrated along the central cost 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 Saba's
near-term development drilling activities. Saba also operates wells and has
exploration and development activities in several states outside of California
and, through a majority-owned subsidiary, in western Canada. Saba's evaluation
of international projects resulted in the acquisition of exploration projects in
Indonesia and Great Britain.
UNITED STATES
CALIFORNIA
Approximately 20.3% of Saba'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 Saba's total production. Saba operates all of its
wells in the Central Coast Fields. Saba also holds interests in other California
areas, which represented 7.2% (2.1 MMBOE) of Saba'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 Saba's total
production. Further, Saba has interests in several high risk exploratory
projects.
LOUISIANA
Approximately 11.0% of Saba'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. Saba'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, Saba owns producing
properties in a number of other states, primarily New Mexico, Michigan, Texas
and Oklahoma, which collectively represented 9.3% of Saba'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
Saba'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 Developments
- - Sale of Certain Assets."
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INTERNATIONAL
COLOMBIA
Approximately 43.3% of Saba'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 Saba's total production. Saba 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." Saba and
Omimex, the operator of the fields, have formulated a plan for drilling
approximately 200 development wells.
During 1997, Saba 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.
Saba and the operator also reentered a suspended well acquired from Texaco and
drilled to an are under the Magdelena River and recompleted the well as
productive of approximately 30 Bopd without artifical stimulation. Both Saba 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, Saba 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 Saba'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 Saba, averaged 495 BOE
for the nine months ended September 30, 1998, representing 7.8% of Saba's total
production.
OTHER INTERNATIONAL PROPERTIES
In September 1997, Saba 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 Saba 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. Saba 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, Saba 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, Saba
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,
Saba sold on behalf of its net interest in this concession to Omimex at Saba's
cost. A formal assignment has not been conveyed to Omimex and Saba continues to
hold Omimex's interest in the prospect in trust. Saba 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. Saba has not yet executed
the joint operating agreement for the prospect. While holding Omimex's interest
in trust, Saba 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.
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BUSINESS STRATEGY
Saba's strategy is to emphasize growth through exploration and development
drilling. Saba 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. Saba has an extensive
inventory of drilling locations, which Saba intends to exploit over
the next five years. Saba's program includes exploitation of existing
producing properties located in California, Colombia, New Mexico and
Louisiana. Saba believes that this program will provide it with a
cost-effective means to significantly increase proved reserves,
production rates and operating cash flow.
Acquisition of producing properties with significant development
potential. Saba 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. Saba intends to concentrate these domestic activities in
California where Saba 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. Saba plans to expand its
reserve base by acquiring or participating in exploration prospects in
California, New Mexico, Louisiana and internationally. Saba believes
these activities complement its traditional development and
exploitation activities. In pursuing these exploration opportunities,
Saba plans to use advanced technologies, including 3-D seismic and
satellite imaging, where appropriate. Saba intends to increase its
exposure to natural gas and lighter oil prospects. In addition, Saba
may seek to limit its direct financial exposure in exploration
projects by entering into strategic partnerships.
There is not any assurance that Saba will be successful in pursuing such
strategies.
HISTORY OF SABA
Saba'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. Saba 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 Saba
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 Saba grew through such acquisitions, it developed expertise in
heavy oil projects, drilling and enhanced recovery techniques, field management
and cost controls. Saba 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.
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From January 1, 1992 through December 31, 1997, Saba completed 26 property
acquisitions with an aggregate purchase price of approximately $43 million.
These properties, as improved through Saba's development efforts and including
associated drilling activities, represented approximately 29.1 MMBOE of proved
reserves as of December 31, 1997. Saba's all-in-finding costs for these
acquisitions and related activities have averaged $2.71 per BOE.
EXPLORATION AND DEVELOPMENT DRILLING ACTIVITIES
Saba 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, Saba has identified a number of drilling locations
on its properties located in the United States, primarily in California,
Louisiana and New Mexico. Saba also pursues the acquisition of high potential
exploration prospects to enhance its inventory of drilling opportunities.
Beginning in 1997, Saba 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 Saba 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."
Saba's capital expenditure budget for 1998 is dependent upon the price for
which its oil is sold and upon the ability of Saba to obtain external financing.
Subject to these variables, Saba originally budgeted a minimum of $12.0 million
and a maximum of $18.3 million for capital expenditures during 1998. In Saba's
present financial condition, it is budgeting, on a current basis, only
absolutely essential capital expenditures. Saba currently is budgeting one year
at a time and has deferred any long term capital expenditure program. Saba has
deferred certain capital expenditures in the following areas: (i) Coallnga
exploration project in California, (ii) other California projects, where Saba 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 Saba's growth
rate. Saba 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.
Saba's exploration and development drilling programs are conducted by its
in-house technical staff of petroleum engineers and geologists. In addition,
Saba retains the services of several consulting geologists and engineers to
evaluate and develop exploration projects in California and internationally.
These consultants report to Saba's professional staff, which evaluates the
consultants' recommendations and determines what, if any, actions are to be
taken. Saba's professional staff oversees Saba'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 Saba's development program is its use of horizontal
drilling technology. In general, a horizontal well is able to encounter a
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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 Saba'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, Saba 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, Saba anticipates that it will result in increased rates of
production and recovery and lower per-unit production costs. Saba 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
Saba'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. Saba 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. Saba also has producing properties in Ventura, Solano, Kern and Orange
Counties, California. Of these properties, Saba 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
Saba presently produces from the properties. The recent decline in oil prices
coupled with the drilling results of the 1997 program render it doubtful that
Saba will realize its initially projected rates of return. In addition to the
producing properties, Saba has several exploratory projects in California. See
"Property-California Exploration Ventures."
Overall, Saba 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 Saba in California during 1997 were $12.8 million.
The economic benefits derived from the program were substantially below Saba's
expectations. Notwithstanding the 1997 results, Saba 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 Saba's production from the
Central Coast Fields and its asphalt refinery located in Santa Maria, in that
Saba is able to sell its production to the refinery at a price reflecting a
premium to market. Generally, the crude oil produced by Saba 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. Saba believes that as road building and repair increase
in California and surrounding western states, the market for asphalt will expand
significantly.
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To date, Saba 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 Saba is attempting to rectify. Saba 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 1999. During 1997, Saba drilled one well in the Casmalia Field which was
non-productive.
LOUISIANA
Saba acquired an 80% working interest in the Potash Field in September 1997
and the remaining 20% working interest in April 1998. Proved reserves of Saba's
interest in the field were approximately 13.9 Bcf and approximately 1.3 MMBbl at
December 31, 1997. Saba'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 Saba lands associated with this field. Saba owned a 40.5% working interest in
the Manila Village Field and acquired an additional 10.2% working interest in
April 1998. Saba may be subject to certain environmental liabilties with respect
to its interest in the Manila Village Field. See "Risk Factors - Property
Matters." Saba's net reserves at December 31, 1997, including the 1998 acquired
interest, were approximately 327 MBbl and 156 MMcf. Saba'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
Saba 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 Saba'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.
Saba 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, Saba 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 Saba 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. Saba 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
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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. Saba continues
its plans to increase production from the property. Saba 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
Saba's Canadian properties, which are owned through Beaver Lake (Alberta
Stock Exchange), represented approximately 8.5% of Saba'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, Saba 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. Saba
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. Saba expects to identify drilling locations based on geologic
trends identified through its review of existing seismic data, satellite images
and the results of a potential 3-D seismic program to be performed in 1998 and
1999. Saba has held discussions with several potential joint venture partners
with a view to negotiate a participation agreement. In view of this, Saba has
slowed its pace of activity. The recent civil and economic turmoil in Indonesia
may affect the timing and the terms of such agreement.
In July 1997, Saba entered into an agreement to participate in two
exploration licenses which cover a 123,000 acre exploration area in southern
Great Britain in which Saba had a right to acquire a 75% working interest earned
upon drilling and payment of its share of costs. On March 31, 1998, Saba
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,
Saba sold one half of its net interest in this concession to Omimex at Saba's
cost. A formal assignment has not been conveyed to Omimex and the Company
continues to hold Omimex's interest in the prospect in trust. Saba 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. Saba has not yet
executed the joint operating agreement for the prospect. While holding Omimex's
interest in trust, Saba 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, Saba 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. Saba 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. Saba 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, Saba 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. Saba also plans to expand its
existing reserve base by acquiring or participating in high potential
exploration prospects in known productive regions. Saba believes these
activities complement its traditional development and exploitation activities.
In pursuing these exploration opportunities, Saba may use advanced technologies,
including 3-D seismic and satellite imaging. In addition, Saba may seek to limit
its direct financial exposure in exploration projects by entering into strategic
partnerships. In July 1998 and September 1998, Saba sold its interest in over
150 wells in Michigan and two wells in Alabama, respectively.
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PROPERTY
At December 31, 1997, on a PV-10 Value basis, approximately 16.9% of Saba's
proved reserves were in California, primarily in the Central Coast Fields and
approximately 48.2% were attributable to Saba's Colombian properties.
The following table summarizes Saba'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 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 Saba'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 Saba and its operations.
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<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------
Proved Reserves, net PV-10 Value
Gross Oil Gas
Property Wells (1) (MBbls) (MMcf) MBOE Dollar 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 1945 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 Saba holds royalty interests.
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CALIFORNIA
PRODUCING PROPERTIES
Saba 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 Saba's principal California
producing property, representing approximately 8.7% of Saba'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 Saba 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
Saba'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.
Saba 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. Saba 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, Saba drilled its first horizontal well into the Monterey
formation. The well developed mechanical problems and operations were suspended.
Saba has deferred attempts to correct the problem until such time as oil prices
increase sufficiently to justify further efforts. In 1996, Saba 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, Saba 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. Saba 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 Saba'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 Saba's expectations and continuing study is being given to the field to
determine how to maximize production. In addition, Saba has implemented measures
designed to ensure that operations are conducted with greater efficiency than
was the case during 1997.
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In addition to the Cat Canyon Field, Saba 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 Saba'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 Saba'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. Saba
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(Degree)) from the same formations as those
underlying the Cat Canyon Field. In 1997, Saba 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. Saba 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, Saba 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 Saba's PV-10 Value at December 31, 1997, is located in
Orange County, California and covers approximately 420 acres. Saba 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. Saba conducted remedial operations on this property
during 1997 which resulted in increasing production by approximately 100 Bopd.
Saba owns fee interests in lands in this unit which it believes will be
developable for real estate purposes as oil operations are curtailed.
Other. Saba 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 Saba's PV-10 Value at December 31, 1997.
CALIFORNIA EXPLORATION VENTURES
Coalinga Exploratory Prospect, Kern County, California. Saba 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. Saba 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. Saba 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, Saba intends to seek an extension of time to drill such a test well.
Under the agreement, Saba 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. Saba would have an 85% working (68% net revenue) interest
in the wells.
Northern California Exploratory Project. In late 1997, Saba 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. Saba 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. Saba 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.
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LOUISIANA
Manila Village is located in Jefferson Parish, Louisiana. Saba 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 Saba'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. Saba is participating in a 3-D seismic
program which includes the field and expects that the results of the survey will
assist Saba in its evaluation of additional drilling opportunities in the field.
In April of 1998, Saba acquired an additional 10.2% working interest in this
property.
Potash Field, which is located in Plaquemines Parish, Louisiana, was
acquired by Saba in September 1997. Saba operates all of the wells in the
property that represented approximately 13.4% of Saba'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, Saba 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. Saba 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. Saba 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, Saba acquired the
remaining working interest in this property.
The Louisiana properties in which Saba 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. Saba's insurance carrier has been contacted to process a claim.
OTHER UNITED STATES PROPERTIES
In addition to its California and Louisiana properties, Saba owns producing
properties in a number of states, primarily New Mexico, Michigan, Texas and
Oklahoma, which collectively represented approximately 11.1% of Saba'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 "Saba - Recent Developments - Sale of Certain Assets") The
principal producing property is:
92
<PAGE>
Southwest Tatum Field, which is located in Lea County, New Mexico was
acquired by Saba as an exploratory project in late 1996. Saba holds leases
covering approximately 2,000 gross acres of land, in which Saba has a working
interest of 50% (38.75% net revenue interest). During the last part of 1996,
Saba, 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. Saba 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 Saba'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
Saba'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. Saba 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 Saba. The three areas cover 52,894 gross acres of
land. The Nare Association is the northernmost area in which Saba 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 Saba 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, Saba 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 Saba 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 Saba under their current terms. Saba understands
that legislation is being considered by the Colombian government which would
permit such extensions to be obtained. Saba 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 Saba. 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, Saba 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 Saba 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."
93
<PAGE>
Generally, as in the case of Saba'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 Saba, 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 Saba 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 Saba 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). Saba's Teca
and Nare Fields, which represented approximately 40.0% of Saba'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. Saba 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.
Saba's Colombian properties in the aggregate represented 12.6 MMBOE at
December 31, 1997 or approximately 43.1% of Saba's total proved reserves and
approximately 48.2% of Saba's PV-10 Value at that date. The following table
provides information concerning Saba's interest in the commercial areas and fee
minerals in Colombia.
94
<PAGE>
<TABLE>
<CAPTION>
Proved Reserves Average Daily Barrels of
at Dec. 31, 1997 oil produced for the
Field Name (MMBbls) Number of Wells nine months ended
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(Degree) to 13(Degree) 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, Saba 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, Saba and
the operator participated in the drilling and completion of seven wells in the
Teca and South Nare Fields.
Saba 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 Saba 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, Saba 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 Saba 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. Saba is also considering joining in a
development program at the Velasquez property. Saba 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.
95
<PAGE>
See "The Company - Recent Developments - Terminated Business Combination;
Bankruptcy of Sabacol, Inc."
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 Columbian 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 Saba's crude oil produced at Saba'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 Saba has an interest
may be reduced significantly as of January 1, 1999. In conjunction with its
purchase of interests in the Nare Association, Saba 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 Saba's fields, together with a lighter crude oil supplied by
Ecopetrol which acts as a diluent to Saba'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 Saba's share was approximately 2,100 Bopd. In
addition to the operator and Saba, three other companies transport their crude
oil through the pipeline at tariff rates established by Colombian authorities.
Saba and the operator have considered expansion of the pipeline system if
additional production is developed by operators in the area. See "Saba -
Recent Developments - Terminated Business Combination; Bankruptcy of Sabacol,
Inc."
CANADIAN PROPERTIES
Saba's Canadian properties, which are owned through Beaver Lake,
represented approximately 8.5% of Saba'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
Saba has oil and gas projects in Indonesia and Great Britain as described
in "Exploration and Development Drilling Activities."
96
<PAGE>
OIL AND GAS RESERVES
Saba'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 Saba's reserves in the United
States and Colombia and Sproule Associates Limited ("Sproule") prepared a report
on Saba'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 Saba. In accordance with
the Commission's guidelines, Saba's estimates of future net revenues from Saba'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 Saba participates in a Department of Energy annual survey,
which includes furnishing reserve estimates of certain of Saba'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.
97
<PAGE>
ESTIMATED PROVED OIL AND GAS RESERVES
At December 31,
---------------------------------
1995 1996 1997
------ ------ ------
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
====== ====== ======
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 Saba's reserves, are, by their
nature, much less certain than proved developed reserves.
ESTIMATED PRESENT VALUE OF PROVED RESERVES
At December 31,
-------------------------------------
1995 1996 1997
---- ---- ----
PV-10 Value (In thousands)
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
======== ======== ========
98
<PAGE>
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 Saba, including domestic and foreign production rates of
oil and gas, market demand and the effect of governmental regulations and
incentives. Substantially all of Saba'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 Saba's North American production during 1997 except PetroSource
which accounted for 33.2% of such sales. Saba'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 Saba 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.
Saba's Santa Maria refinery uses essentially all of Saba's Central Coast Fields'
crude oil, in addition to third party crude oil, to produce asphalt, among other
products. Ownership of the refinery gives Saba a steady market for its local
crude oil which is not enjoyed by producers generally. See "Property- Asphalt
Refinery".
COLOMBIA
Oil produced from Saba's Middle Magdelena Basin Fields, after being sold to
Ecopetrol, is processed in a 250,000 Bopd government owned refinery in
Barrancabermeja, Colombia. Saba believes that the refinery has sufficient unused
throughput capacity to satisfy any reasonably foreseeable increase in production
that might be achieved from Saba's Colombian exploration and development
program. The refinery is connected to Saba's Colombian fields through the
118-mile Velasquez-Galan Pipeline owned by Saba 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. Saba 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 Compnay - Recent
Developments - Terminated Business Combination."
99
<PAGE>
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, Saba 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, Saba 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 Saba'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 Saba'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>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Production Data:
<S> <C> <C> <C> <C> <C>
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.
100
<PAGE>
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 Saba's participation in the drilling of
exploratory and development wells in:
United States
<TABLE>
<CAPTION>
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.
101
<PAGE>
Colombia and Great Britain
<TABLE>
<CAPTION>
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>
<CAPTION>
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 .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>
102
<PAGE>
- ------------
(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 Saba
owned a working interest:
<TABLE>
<CAPTION>
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.
103
<PAGE>
In addition to its working interests, Saba held royalty interests in
approximately 82 productive wells in the United States and Canada at September
30, 1998 . Saba 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 Saba owned a working interest:
<TABLE>
<CAPTION>
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 Saba's oil and gas properties are held in the form of mineral
leases, licenses, reservations, concession agreements and similar agreements. In
general, thee agreements do not convey a fee simple title to Saba, but rather,
depending upon the jurisdiction in which the apposite property is situated,
create lesser interests, varying from a profit a prendre to a determinable
interest in the minerals. In some jurisdictions, notably non-US jurisdictions,
Saba's 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. Saba 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 interst 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 lienholders 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.
104
<PAGE>
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 Saba's oil and gas production for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 3, September 30,
------------------------------------------------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
Average sales price per BOE
<S> <C> <C> <C> <C> <C>
California $ 12.55 $ 15.10 $ 13.49 $ 13.21 $ 7.94
Colombia 9.44 12.49 11.96 8.37
12.04
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 Saba's oil and gas properties in Santa Barbara County, California,
Saba acquired from Conoco Inc. ("Conoco") and Douglas Oil Company of California
an asphalt refinery in Santa Maria, California, which had been inoperative since
1992. Saba 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 Saba 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 Saba. This fact presents the possibility of
significant liability to Saba 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."
Saba 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
Saba), delivers it to the refinery, reimburses Saba's out-of-pocket refining
costs, markets the asphalt and other products and generally shares any profits
equally with Saba. The processing agreement has a term that ends December 31,
1998. Saba is evaluating various strategies with respect to the foregoing.
105
<PAGE>
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 storage 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.
Saba 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. Saba believes that as road building and repair increase in California
and surrounding western states, the market for asphalt will expand
significantly.
REAL ESTATE ACTIVITIES
Saba 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, Saba purchased
approximately 1,707 acres in Santa Barbara County for an aggregate purchase
price of $465,000. In addition, Saba acquired approximately 370 acres in Santa
Maria, California in June 1994 in connection with the acquisition of its Santa
Maria refinery. In addition, Saba entered into 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, Saba
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. Saba has used a portion of its real estate holdings for agricultural
purposes. Saba plans to retain some of these real estate holdings for asset
appreciation which may include developmental activities at a future date. Saba
has listed for sale with sales agents some of those real estate properties in
California. See "Recent Developments - Sale of Certain Assets."
OFFICE FACILITIES
Saba's executive offices are located in Santa Maria, California. In
September, Saba moved its accounting offices from Irvine, California, to the
executive office location in Santa Maria. In October 1998, Saba downsized it
Edmond, Oklahoma office. Saba 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. Saba owns its office
facilities at the asphalt refinery in Santa Maria, which occupy approximately
1,500 square feet of space.
106
<PAGE>
EMPLOYEES
As of October 31, 1998, Saba employed 90 persons in the operation of its
business, 39 of whom were administrative employees. Saba 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 Saba'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
Saba 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
Saba's commercial general liability policy pursuant to a claim caused by a
subcontractor of Saba. It is anticipated by Saba 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 subcontractor's insurance carrier. In 1998, two
deaths occurred on properties in which Saba has an interest that have been
reported to Saba's insurance carrier. The first occurrence, which Saba
understands was reported as a homicide, involved an unknown person on its
agricultural property in California, and the second occurrence, which Saba
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, Saba 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 Saba. The remaining purchase price of $350,000 was to be paid
through overriding royalty payments of Saba'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 Saba's payment obligation, Saba 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 Saba 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. Saba was unable to procure either instrument and the
note became all due and payable on February 27, 1998. Notwithstanding attempted
settlement conferences by Saba with GTI, GTI filed a claim against Saba 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. Saba has interposed certain defenses
and the matter is in discove.
107
<PAGE>
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, Saba'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 Saba 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 Saba 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 Saba's acquisition
of the subject property was approximately $372,000 which Saba had applied as an
adjustment to the purchase price. Saba and/or its subsidiary bears the
obligation to pay the royalties upon resolution. Failure to pay timely or a
judgement for the Levee Board may result in Saba 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, Saba 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 Saba operates and which he claims
occurred while supervising the installation of a pump into a well operated by
Saba and on a drilling rig owned by a co-defendant. Saba is represented by
counsel appointed by Saba's insurance carrier pursuant to a claim submitted
under Saba'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). Saba instituted an action for declaratory judgment for the validity of
Saba's oil, gas and mineral lease as being superior to the prior lease covering
the subject lands, said prior lease, as Saba asserts, having expired pursuant to
cessation of production. If Saba prevails, it will be obligated to pay
consideration of approximately $55,000 to Saba's predecessor, the seller of the
lease interest.
Schwier v. Saba Petroleum, Inc. (Case No. MC 980427, 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, Saba 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 Saba's
understanding that it received this Notice as a potential party who may have
provided confidential information to the Kern County Assessor. Saba had not
responded to nor attended the hearing.
108
<PAGE>
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 Saba's failure to respond to
demands that it observe requirements of 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 Saba. Saba 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, Saba was notified by a representative of a
shareholder of Saba that an investigation of alleged violations of section 16(b)
of the Exchange Act was underway, and Saba 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 Saba for Saba'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 Saba's subsidiaries for
the payment of trade payables. Saba 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.
Saba 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 alien was filed in Louisiana was paid by Saba to
the vendor; the vendor agreed to forbear any further action on the lien until
such time as Saba paid vendor's attorney's fees, said amount which vendor was to
supply to Saba. While Saba 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 Saba of
attorney's fees in the approximate amount of $4,600. Saba agreed to secure its
approximate payment of $133,000 to a trade vendor who had supplied equipment to
Saba by two pumps used on Saba's producing properties located in Louisiana.
109
<PAGE>
Property Interests. In connection with an Exchange Agreement that closed on
April 6, 1998, for Saba's acquisition of the remaining 20% working interest in
the Potach Field located in Louisiana and an additional 10.2% working interest
in the Manila Village Field in Louisiana, Saba 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 Saba, in exchange for its receipt of 200,000
unrestricted shares of Saba Common Stock. Saba 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 Saba with respect to the disposition of the 10%
interest.
In March 1998, the Louisiana Department of Natural Resources claimed to
Saba an audit exception for royalties paid on lease use gas in the approximate
amount of $7,000 that was unpaid at September 30, 1998.
110
<PAGE>
Property Matters. In March 1997, Saba 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 Saba. A
proposed settlement agreement and copies of EPA Administrative Orders were
delivered to Saba. The settlement agreement proposed that Saba participate in
the percentage of 0.05% or $4,001 in exchange for which Saba would receive an
indemnification from certain future exposures; the indemnity was unacceptably
narrow in scope and was rejected by Saba. Saba counter-offered with a settlement
contribution of $2,000. The matter is currently pending.
Saba 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 Saba 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 Saba's payroll tax and
information returns for the years ended 1993-1996, the Internal Revenue Service
proposed adjustments based upon the assertions that Saba misclassified as
independent contractors various persons who were employees of Saba, that Saba
did not withhold income taxes from payments made to such persons, and that Saba
failed to file its information returns timely. In addition, the Service proposed
to impose interest and penalties on Saba. At September 30, 1998, there was no
pending or threatened litigation. The matter has been under review by Saba and
the Service. Saba filed a protest letter with the IRS on November 21, 19997, 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. Saba
has requested or plans to request that the penalties for the year ended 1996 be
waived. It is Saba's hope that these issues can be resolved without litigation
in the U.S. Tax Court. Saba anticipates that a number of the proposed
assessments will be reduced and, in some cases, such as penalties, eliminated.
Saba believes that its ultimate exposure as a result of these matters should not
exceed $115,000. Based upon its assessment of the matter, Saba has made a
provision for these contingencies in its year end 1997 financial statements in
the amount of $90,000.
From time to time, Saba 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 Saba's financial condition or results of operations. Saba may be
subject to legal actions that have been threatened with Saba's knowledge.
COMPETITION
The oil and gas industry is highly competitive in all its phases. Saba
encounters competition from a substantial number of companies, many of which
have greater financial and other resources than Saba 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."
111
<PAGE>
SABA 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 Saba and
significant subsidiaries (references are to offices or directorships held in
Saba unless otherwise indicated):
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dr. Charles A. Kohlhaas........ 63 Director, President of Sabacol, Inc.
Alex S. Cathcart............... 64 Director
William N. Hagler.............. 66 Director, Chairman of the Board, and Chairman of the Management
Committee of Saba
Randeep S. Grewal.............. 33 Director, Member of the Management Committee of the Company;
Chairman/CEO of Sabacol, Inc.
Imran Jattala.................. 40 Member of the Management Committee, Executive Vice President and
Chief Operating Officer, Chief Financial Officer and Principal
Accounting Officer of Saba; President and Chief Operating Officer
of Saba Petroleum, Inc.; and Vice President of Saba Energy of
Texas, Incorporated.
Burt M. Cormany................ 70 President and Chief Operating Officer of Santa Maria Refining
Company
Herb Miller.................... 63 President Beaver Lake Resources Corp.
Susan M. Whalen................ 36 Secretary of Saba
</TABLE>
Each Director of the Company 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 Saba since January 1997 and has
served as Executive Vice President of Saba 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 Saba. 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 Saba, 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
Saba'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
Saba for several months prior to becoming President of Santa Maria Refining
Company later that year.
112
<PAGE>
Randeep S. Grewal became a director of Saba on October 8, 1998, a member of
Saba'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 Saba since 1994 and became
Chairman of Saba'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 Saba'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 Saba's California properties, in December
1997. Mr. Jattala joined Saba in 1992 as Assistant Controller for Saba and its
subsidiaries. Since that time, Mr. Jattala had worked in various capacities for
Saba, 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.
113
<PAGE>
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 Saba'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 Saba'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 Saba in August 1998 and was appointed
as Saba's General Counsel in July 1998. During 1997, she practiced contract and
corporate law as an independent contractor for several clients, including Saba,
before she was employed by Saba 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 Saba was established by Saba's Board of
Directors in November 1998 to manage the day-to-day affairs of Saba with the
powers and duties generally prescribed in Saba's Bylaws to the President
continuing up to the closing of the transactions with respect to Saba's
securities and the designation of directors on Saba's Board of Directors as
described in "Saba - Recent Developments - Transactions Involving Horizontal
Ventures, Inc." William N. Hagler, Imran Jattala and Randeep S. Grewal have been
appointed by Saba to serve as members of the Management Committee, with Mr.
Hagler further appointed as Chairman.
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DIRECTOR COMPENSATION
Saba 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 Saba 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 Saba'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 Saba and the four other most highly compensated
executive officers of Saba who received salary and bonuses of over $100,000 in
any of the years 1995, 1996 or 1997.
<TABLE>
<CAPTION>
Long Term
Compensation
Securities
Annual Compensation Other Annual Underlying All Other
- -------------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Compensation Options Compensation (4)
- --------------------------- ---- ------ ----- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ilyas Chaudhary............... 1997 $ 183,500 $ 2,885 (3) 500,000 (5) $ 4,420
Chairman of the Board, 1996 153,000 20,000 (3) --- 4,750
Chief Executive Officer(1) 1995 150,000 (2) 1,731 (3) 200,000 ---
Walton C. Vance............... 1997 $ 120,700 $ 2,254 (3) --- $ 4,009
Vice President, 1996 101,633 20,000 (3) --- 2,259
Chief Financial Officer, and 1995 --- --- --- --- ---
Secretary(6)
Burt Cormany.................. 1997 $ 110,040 $ 9,170 (3) 20,000 $ 1,351
President and 1996 113,386 8,330 (3) --- 5,549
Chief Operating Officer 1995 --- --- --- --- ---
of Santa Maria Refining
Company
Bradley T. Katzung .......... 1997 $ 77,655 $ 70,200 (3) --- $ 1,097
Executive Vice President & 1996 --- --- --- --- ---
General
Manager - USA (7) 1995 --- --- --- --- ---
Rodney C. Hill .............. 1997 $ 121,636 --- --- 125,000 ---
Vice President-Legal 1996 --- --- --- --- ---
Affairs (8) 1995 --- --- --- --- ---
</TABLE>
115
<PAGE>
- ------------------
(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 Saba 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 $50,000 or 10% of
such officer's annual salary and bonus for such year.
(4) Represents the contributions made by Saba on behalf of these individuals to
Saba's 401(k) Plan.
(5) Consists of options covering 200,000 shares granted pursuant to Saba's 1996
Incentive Equity Plan; 200,000 shares of deferred Common Stock; and 100,000
performance shares issuable if Saba meets 1998 earnings test.
(6) Resigned from all offices including Chief Financial Officer and Secretary
on July 21, 1998 and as a director on August 28, 1998.
(7) Employment Agreement expired November 8, 1998.
(8) Resigned as Vice President - Legal Affairs on December 31, 1997 and as a
director on June 6, 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following stock options were granted during 1997 by Saba to the named
executives.
<TABLE>
<CAPTION>
Potential
Realized Value At
Assumed annual
Rates of Stock Alternative
Price to (f) and
Individual Grants Appreciation For (g); Grant
Option Term Date Value
- -------------------------------------------------------------------------- ------------------- --------------
- -------------------------------------------------------------------------- ------------------- --------------
(a) (b) (c) (d) (e) (f) (g) (h)
Number of
Securities % of Total
Underlying Options/
Options/ SARs
SARs Granted to
Granted (f) Employees Exercise or Grant Date
Name (in in Fiscal Base Expiration Present
thousands) Year Price($/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
</TABLE>
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.
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<PAGE>
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 Saba at
December 31, 1997:
<TABLE>
<CAPTION>
Securities Underlying
Number of Unexercised Value of Unexercised,
Options SARs at In-the Monty Options at
Shares Acquired on Value Fiscal Year-End (#) Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----- ------------------- ------------ -------------------------- --------------------------
<S> <C> <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 Saba served as members of the Compensation and Options Committee of the Board
of Directors: Messrs. Faysal Sohail, Ronald Ormand and Hagler. Neither Mr.
Sohail nor Mr. Ormand were formerly, nor are they currently, officers or
employees of Saba or any of its subsidiaries. Mr. Hagler, although currently not
an officer or employee of Saba or any of its subsidiaries, was President from
July 1997 through September, 1997 of Capco, an affiliate of Saba.
BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
EMPLOYMENT AGREEMENTS
Alex S. Cathcart Employment Agreement. Saba 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 Saba. 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, Saba 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 Saba 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 Saba 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 Saba at a compensation rate of 75% ($86,250) of that called
for by the agreement.
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<PAGE>
Burt Cormany Employment Agreement. Santa Maria Refining Company, a wholly
owned subsidiary of Saba, 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 Saba 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. Saba 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 Saba 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 Saba 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 Saba, 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 Saba.
Herb Miller Employment Agreement. Beaver Lake Resources Corporation, a
74%-owned subsidiary of Saba, 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.
BENEFIT PLANS
Stock Option Plans. In June 1996, Saba's stockholders approved Saba's 1996
Incentive Equity Plan (the "Incentive Plan"). The purpose of the Incentive Plan
is to enable Saba 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 Saba'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, Saba's stockholders approved Saba'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 Saba'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, Saba issued options for 560,000 shares
of Common Stock to certain employees of Saba, 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. Saba sponsors a defined contribution retirement savings
plan (the "401(k) Plan"). Saba currently provides matching contributions equal
to 50% of each employee's contribution, subject to a maximum of 4% of employee
earnings. Saba'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 Saba 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 Saba may
arise.
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<PAGE>
In 1997, Saba adopted a policy whereby all transactions by and between Saba
and any affiliate of Saba shall be conducted on an arm's-length basis, and all
substantial transactions shall be approved by a majority of Saba's directors
without an interest in such transactions.
In 1995, Saba 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.
Saba 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 Saba are open accounts and are
unsecured. The transactions giving rise to such matters are as follows:
In 1995, Capco loaned $2,221,900 to Saba at 9% per annum; the proceeds were
used to acquire certain of Saba'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, Saba borrowed $10,500 from SEDCO on a short-term basis and repaid
such amount during 1996.
In 1995, Saba paid SEDCO $10,700 for reimbursement of prior year charges to
Saba.
In 1995, Saba received $210,100 from Capco for reimbursement of prior year
charges and advances and was charged $22,700 for interest on advances.
In 1995, Saba remitted $92,100 to Capco and affiliates in settlement of
prior year charges.
During 1995, Saba 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
Saba. The note's principal and accrued, but unpaid, interest is due December 31,
1998.
In 1996, Saba 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, Saba 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.
Saba 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.
119
<PAGE>
During 1996, a subsidiary of Capco participated in the drilling of one of
Saba's exploratory wells on the same basis as did Saba. Saba has billed the
subsidiary a total of $112,200, of which $64,700 was outstanding at December 31,
1996.
During 1996, Saba provided a short-term advance to SEDCO amounting to
$10,000. No interest was charged on the advance.
During 1996, Saba 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 Saba. In September 1997, Saba commenced amortization of the note by
applying twenty percent of Mr. Chaudhary's salary thereto.
During 1996, Saba 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.
Saba 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.
Saba 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, Saba 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 Saba.
During the year ended December 31, 1997, Saba 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 Saba's oil properties.
During the year ended December 31, 1997, Saba charged interest to SEDCO,
Ilyas Chaudhary and William Hickey (a former director of Saba) in the amounts of
$8,800, $27,500, and $2,700, respectively, on outstanding, interest-bearing
indebtedness to Saba.
During the year ended December 31, 1997, Saba incurred interest charges in
the total amount of $60,200 on the notes payable to Capco. Saba 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 Saba chartered from a non-affiliated airplane leasing
service, a jet airplane acquired by Mr. Chaudhary in 1997. When chartering the
airplane, Saba paid the rate charged others by the leasing service, less a
discount, so that the rate paid by Saba 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, Saba 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, Saba advanced $36,000 to
Capco, evidenced by an unsecured promissory note.
During the nine months ended September 30, 1998, Saba 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
Saba. Saba received $13,400 from Mr. Chaudhary for accrued interest on his loan
from Saba, and $29,500 from SEDCO for accrued interest and principal on the loan
to that Company.
During the nine months ended September 30, 1998, Saba charged Capco $1,500
for interest on outstanding advances to that company.
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<PAGE>
In July 1997, Saba 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 Saba 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 Saba. 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, Saba 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, Saba entered into an agreement with Capco by
which Saba transferred to Capco its rights under such agreements in exchange for
Capco's agreement to convey to Saba a 2% overriding royalty on the project
(commencing after the project generated $10 million in gross revenues) and
granted to Saba 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 Saba. Neither of these
events has occurred. In the investigation and negotiations of the acquisition of
the tar sands project, Saba and Capco had agreed that Saba would bear all costs,
internal and third party, incurred by Saba 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 Saba in August 1998. Saba's
total costs in respect of the acquisition (excluding the loans) are
approximately $60,000.
In November 1997, Saba 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 Saba is a member, providing for Saba 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 Saba
and 60% in the case of the large independent) of a consideration of $100,000 to
members of Hamar, including Rodney C. Hill. Saba 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 Saba. Save for the issuance of the Common Stock, the terms of
participation are the same for Saba 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 Saba, is the sole stockholder of
Rodney C. Hill, a Professional Corporation, which has acted as general counsel
to Saba. In 1997, such corporation was engaged to provide legal services to Saba
pursuant to a retainer agreement, which may be canceled by Saba 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 Saba 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 Saba 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 expenses 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 Saba for month to month
consulting services commencing October 1, 1998, for $6,000 per month plus
exepnses 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, Saba was indebted to the corporation controlled by Mr. Hill
in an aggregate amount of $123,400, representing accrued fees and
reimbursements.
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<PAGE>
Ronald D. Ormand, who served as a director of Saba from May 1997 to July
1998, is a Managing Director of CIBC-Oppenheimer & Co., Inc., which has rendered
investment banking services to Saba. During January 1998, Saba engaged
CIBC-Oppenheimer to advise Saba 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 Saba, or any part, is consummated wih any of
thirty-four parties identified by CIBC and Saba as having been contacted during
the engagement by CIBC on behald of Saba.
William N. Hagler, a director of Saba, was formerly the President of Unico,
Inc. and was the President of Capco from July 1997 to September 1997.
In January 1998, Saba engaged Faysal Sohail, a former director of Saba, to
render investor relations services to Saba 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 Saba
whereby Saba 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, Saba 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 Saba was thereafter assigned to Capco in
April 1998, and the sale closed in May 1998. Capco had agreed to reimburse to
Saba 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 Saba, earned a bonus of one
percent of the net proceeds of the sale of Saba'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 Saba
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, Saba was obligated to tender 200,000 shares of
Company Common Stock, free of all restrictions, to the Seller, while Saba 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 Saba at a cost of $750,000 based
upon the closing price of Saba'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 Saba purchased property
adjoining Saba'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 Saba 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, Saba 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 Saba and a
member of Saba'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 Saba's securities and the designation of directors
on Saba's Board of Directors as described in "SABA - Recent Developments -
Transactions Involving Horizontal Ventures, Inc."
122
<PAGE>
Saba 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 Saba as its Chief Executive Officer and
President on an interim basis. Saba 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 Saba in New Mexico.
In December, 1998, Saba 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 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 Saba. 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 Saba'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, Saba 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 Saba 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 Saba authorized the issuance to Mr. Chaudhary of 100,000 shares of the
Common Stock should Saba meet certain earnings benchmarks during 1997.
On November 12, 1998, Mr. Chaudhary stepped down as chief Executive Officer
and President of Saba 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.
Saba is in discussions with Mr. Chaudhary, Capco, and their affiliates for
a global settlement of all related party transactions.
123
<PAGE>
SELECTED FINANCIAL DATA OF SABA
The following table presents selected historical consolidated financial
data for Saba 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 Saba and the related notes thereto
included elsewhere herein. (in thousands, except for per share data)
<TABLE>
<CAPTION>
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
------------- -------------- ------------- ------------- -------------- ------------- -------------
10,530 12,954 17,694 33,202 35,996 26,778 18,683
Total revenues
------------- -------------- ------------- ------------- ----------------------------------------------
Expenses:
Production 5,857 7,547 10,561 14,604 16,607 12,250 10,140
costs (1)
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 - - - - - - 17,852
properties (6)
------------- -------------- ------------- ------------- -------------- ------------- -------------
Total 10,213 11,470 15,393 24,051 28,997 20,729 38,466
expenses
------------- -------------- ------------- ------------- -------------- ------------- -------------
Operating 317 1,484 2,301 9,151 6,999 6,049 (19,783)
income (loss)
------------- -------------- ------------- ------------- -------------- ------------- -------------
Other income
(expense):
Interest (443) (634) (1,364) (2,402) (2,305) (1,421) (2,519)
expense
Gain on
issuance
of shares - - 125 8 4 - -
of subsidiary
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 (125) 893 1,052 6,964 4,329 4,438 (23,427)
taxes
Provision
(benefit) for
taxes on (37) 384 450 2,958 1,876 1,800 149
income
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)
============= ============== ============= ============ ============ ============== ===============
124
<PAGE>
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
(used in)
financing
activities $ 958 $ 860 $ 14,850 $ 5,037 $ 21,991 $ 18,331 $ (4,397)
Other Financial
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
125
<PAGE>
December 31,
--------------------------------------------------------------------- September
1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------- -------------
Balance Sheet Data
Working capital $ (860) $ (2,422) $ 2,471 $ 2,418 $(11,724) $(29,752)
(deficit)
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 4,875 5,323 23,543 20,812 19,610 5,347
debt, net (5)
Redeemable -- -- -- -- 8,511 7,169
preferred stock
Stockholders' 4,407 6,283 7,848 17,715 23,640 30
equity
</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.
(7) 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 Saba's operating
performance. This information should be read in conjunction with the
Consolidated Statements of Cash Flows contained in the Consolidated
Financial Statements of Saba and the Notes thereto included elsewhere in
this Prospectus.
(8) 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 Saba in 1995 and 1996. For additional information,
see Note 2 of Notes to Consolidated Financial Statements of Saba.
(9) For information on terms and interest, see Note 8 of Notes to Consolidated
Financial Statements of Saba.
(10) See Note 4 of Notes to Consolidated Financial Statements for more
information about the write down of oil and gas properties.
126
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for each of Saba's last eleven quarters in the period ended
September 30, 1998. The data has been prepared on a basis consistent with Saba'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>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------------- --------------------------------------- --------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30
------ ------- ------ ------ ------ ------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil and
gas $ 6,963 $ 7,641 $ 7,472 $ 9,445 $ 9,668 $ 7,695 $ 7,919 $8,687 $ 6,110 $ 5,503 $ 4,155
sales
Other $ 424 $ 362 $ 291 $ 604 ($ 105) $ 577 $ 1,024 $ 531 $ 364 $ 902 $ 1,649
Total
$ 7,387 $ 8,003 $ 7,763 $ 10,049 $ 9,563 $ 8,272 $ 8,943 $9,218 $ 6,473 $ 6,406 $ 5,804
revenues
Depletion,
depreciation
and
amortization $ 1,140 $ 1,228 $ 1,247 $ 1,912 $ 1,587 $ 1,646 $ 1,778 $2,253 $ 2,019 $ 1,835 $ 1,646
Writedown -- -- -- -- -- -- -- -- $ 10,700 $ 7,095 $ 57
of oil
and gas
properties
Net income
(loss) $ 755 $ 734 $ 731 $ 1,544 $ 1,442 $ 507 $ 599 (150) $(12,016) $(9,577) $(1,905)
Netearnings
(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>
127
<PAGE>
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 Saba and the Notes thereto and the
"Selected Financial Data" included elsewhere in this Prospectus.
GENERAL
Saba is an independent energy company engaged in the acquisition,
exploration and development of oil and gas properties. To date, Saba 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 Saba to assemble a significant inventory of properties over the past
six years. From January 1, 1992 through December 31, 1997, Saba completed 26
property acquisitions. During that six year period, Saba'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, Saba broadened its
strategy to include growth through exploration and development drilling.
The current focus of Saba'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 Saba's 1997 drilling program. Seven of the wells are currently in
production, three wells have encountered formation problems which Saba 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, Saba
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").
Saba's revenues are primarily comprised of oil and gas sales attributable
to properties in which Saba owns a substantial interest. Saba accounts for its
oil and gas producing activities under the full cost method of accounting.
Accordingly, Saba 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. Saba'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 Saba 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 Saba's California properties is
predominantly a heavy grade of oil, which is typically sold at a discount to
lighter oil. The oil produced from Saba's Colombian properties is also
predominantly a heavy grade of oil. The prices received by Saba 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 Saba'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 Saba 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.
128
<PAGE>
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 Saba'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 Saba'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 Saba 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
Saba'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 Saba'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
Saba 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 Saba'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.
129
<PAGE>
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 Saba'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 Saba 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 Saba's
asphalt refinery.
PRODUCTION COSTS
Production costs decreased 17.2% to $10.1 million and 18.4% to $3.1 million for
the nine and three month periods ended September 30, 1998, from $12.2 million
and $3.8 million for the same periods of 1997. Average production costs per BOE
decreased 10.6% to $5.84 and increased 1.3% to $6.17 for the nine and three
month periods ended September 30, 1998, from $6.53 and $6.09 for the same
periods of 1997.
In the United States, production decreased 6.6% to 972,900 BOE and 25.3% to
272,000 for the nine and three month periods ended September 30, 1998, from
1,042,000 BOE and 364,200 BOE for the same periods of 1997. Production costs per
BOE decreased 9.2% to $6.71 and 3.1% to $6.97 for the nine and three month
periods ended September 30, 1998, from $7.39 and $7.19 for the same periods of
1997. The decreases in production volume and production costs per BOE resulted
in decreases in production costs of 15.6% to $6.5 million and 26.9% to $1.9
million for the nine and three month periods ended September 30, 1998, from $7.7
million and $2.6 million for the same periods of 1997.
In Canada, production decreased 19.5% to 135,100 BOE and 21.2% to 41,300 BOE for
the nine and three month periods ended September 30, 1998, from 167,900 BOE and
52,400 BOE for the same periods of 1997. Production costs per BOE decreased 1.1%
to $4.67 and increased 8.7% to $5.99 for the nine and three month periods ended
September 30, 1998, from $4.72 and $5.51 for the same periods of 1997. The
variances in production volume and production costs per BOE resulted in
decreases in production costs of 20.4% to $631,000 and 14.4% to $247,300 for the
nine and three month periods ended September 30, 1998, from $792,500 and
$288,900 for the same periods of 1997.
In Colombia, production decreased 5.6% to 628,400 BOE and 6.8% to 195,500 BOE
for the nine and three month periods ended September 30, 1998, from 665,500 BOE
and 209,700 BOE for the same periods of 1997. Production costs per BOE decreased
15.8% to $4.75 and increased 18.1% to $5.10 for the nine and three month periods
ended September 30, 1998, from $5.64 and $4.32 for the same periods of 1997. The
variances in production volume and production costs per BOE resulted in a 21.1%
decrease to $3.0 million and a 10.0% increase to $997,900 of production costs
for the nine and three month periods ended September 30, 1998, from $3.8 million
and $906,800 for the same periods of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 42.9% to $5.0 million and
decreased 7.1% to $1.3 million for the nine and three month periods ended
September 30, 1998, from $3.5 million and $1.4 million for the same periods of
1997. The increase in general and administrative expenses for the nine months
ended September 30, 1998, was due, in part, to the increase in employment levels
to administer planned acquisitions and Saba's drilling programs. In addition,
Saba 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. Saba 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.
130
<PAGE>
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 Saba 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
Saba 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 Saba'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 Saba
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 Saba'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 Saba'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. Saba'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)
Saba 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.
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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.
Saba'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 Saba'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 Saba'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 Saba 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 Saba'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 Saba's domestic offices to support its oil and gas property
development programs in California, New Mexico and Louisiana.
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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 Saba 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
Saba'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 Saba'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. Saba'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
Saba'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.
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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 Saba's Colombian
properties, which were completed in the second half of 1995, and Saba'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 Saba acquired a 50% interest in September 1995. In addition, Saba'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. Saba'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, Saba'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. Saba'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 Saba'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 Saba 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 Saba'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 Saba's acquisition and development program during 1996. The weighted
average interest rate for Saba'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. Saba's effective tax rate for 1996 was 44.0%, a
decrease from 45.1% in 1995 due to the impact of foreign tax credits.
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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, Saba's strategy has emphasized growth through the acquisition
of producing properties with significant exploration and development potential.
In 1996, Saba expanded its focus to emphasize drilling, enhanced recovery
methods and increased production efficiencies. During the past five years, Saba
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, Saba'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 Saba could borrow and cash
flow with which to service debt and fund its ongoing operations. Saba 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. Saba had sold certain producing oil and gas assets,
the proceeds of which were used to reduce bank indebtedness and provide working
capital. In September 1998, Saba listed certain of its California real estate
properties with a broker, and in October 1998, Saba 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. In December 1998, Saba entered into a letter of intent to sell
all of the oustanding stock of its wholly-owned subsidiary, Saba Energy of
Texas, Inc. ("SETI"), resulting in the sale of properties of SETI including
certain interests in Michigan, New Mexico, Oklahoma, Texas, Utah and Wyoming and
excluding interests of SETI in Louisiana for a contract price of $5 million and
a closing scheduled for December 31, 1999, subject to certain conditions, and
adjustments. The consummation of the Common Stock Purchase Agreement between
Saba and HVI will result in an aggreagate cash infusion into Saba of $7.5
million.
Saba'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 Saba, became due and payable in its entirety on December 13, 1998. The
promissory note was not paid in full by December 14, 1998. Also, Saba has
deferred the semi-annual interest payment of $162,000 due in December 1998 on
the Debentures. Saba intends to make the interest payment within the thirty
daycure period provided by the debentures and avoid default.
WORKING CAPITAL
Saba'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 Saba'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 Saba's
drilling and development activities and contributed to the increase in the
working capital deficit.
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In addition, Saba 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 Saba's short-term bank loans. The indebtedness is
classified as a current liability.
During the third quarter of 1998, Saba 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.
Saba 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 Saba of $7.5 million.
Saba's auditors included an explanatory paragraph in their opinion on Saba's
1997 financial statements to state that there is substantial doubt as to Saba's
ability to continue as a going concern. The cause for inclusion of the
explanatory paragraph in their opinion is the apparent lack of Saba's current
ability to service its bank debt as it comes due (see Note 8 to Condensed
Consolidated Financial Statements). In the past, Saba 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. Saba 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 Saba 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 Saba'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.
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In conjunction with Saba's intention to divest itself of several producing
properties in the mid-continent area, Saba had downsized its Edmond, OK office
in October, 1998. Employment levels in California have also been reduced as a
result of Saba'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, Saba renegotiated the pricing structure for oil
produced in the SMV and sold to its asphalt refinery. Such oil sells at a
minimum of $7.00 per barrel. At November 16, 1998, postings were approximately
$5.85 per barrel of oil. Saba produces approximately 1,610 barrels of oil per
day in the SMV area.
OPERATING ACTIVITIES
Saba's operating activities during 1998 provided net cash flow of $4.7 million.
The net loss for the period of $23.5 million, adjusted for non-cash charges and
credits, was responsible for a cash outflow of $540,400.
Changes in other assets and liabilities provided $5.2 million of cash inflow.
Operating activities provided net cash flow of $12.0 million in 1997. Net income
of $2.5 million, adjusted for non-cash charges and credits, provided cash inflow
of $8.3 million. Changes in other asset and liabilities provided $3.7 million of
cash inflow.
The decrease in cash flow from operations in 1998 was due principally to a
decrease in oil and gas sales from $25.3 million in 1997 to $15.8 million in
1998. A 32.6% decrease in average sales price per BOE from $13.48 to $9.08, and
a 10.5% decrease in production from 1.9 MMBOE to 1.7 MMBOE resulted in the $9.5
million decrease in oil and gas sales.
INVESTING ACTIVITIES
Investing activities during 1998 resulted in a net cash outflow of $599,100.
Approximately $5.7 million was expended for oil and gas property acquisition,
exploration and development activities. Expenditures for domestic activities,
including the drilling of a noncommercial exploratory well in California and two
oil wells in New Mexico, amounted to approximately $3.5 million, while foreign
activities, including an unsuccessful exploratory well in the United Kingdom and
the drilling and completion of seven oil wells in Colombia, resulted in
expenditures of approximately $2.2 million. An additional $507,000 was incurred
for other capital expenditures. Saba realized proceeds in the total amount of
$5.3 million from the sale of producing oil and gas properties in Michigan,
Alabama and Canada, and $366,100 was collected on notes receivable.
Investing activities during 1997 resulted in a net cash outflow of $30.8
million. Approximately $26.7 million was expended for oil and gas property
acquisition, exploration and development activities. Expenditures for domestic
activities, including the drilling of eight horizontal wells and a pair of SAGD
wells in California, two oil wells in New Mexico, and acquisitions in Michigan
and Louisiana in the total amount of $8.4 million, amounted to approximately
$22.4 million. Foreign activities, including an acquisition in Canada, the
drilling of three wells in Canada, and the drilling and completion of seven
wells in Colombia, resulted in expenditures of approximately $4.3 million. In
addition, Saba 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 Saba'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.
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Financing activities during 1997 resulted in net cash inflow of $18.3 million.
Transactions under Saba's principal credit facilities, including a loan of
approximately $9.7 million to fund a property acquisition in Louisiana, resulted
in net borrowings of approximately $18.6 million. Activities under other credit
arrangements resulted in a net cash outflow of approximately $535,400. Proceeds
from the exercise of Common Stock options provided a cash inflow of $227,500.
CREDIT FACILITIES
In September 1993, Saba 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.
Saba 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, Saba 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, Saba 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.
Saba'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
Saba 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 Saba and borrowings under bank credit facilities. The
producing property acquisition in September 1997 was funded in total by a
short-term bank loan. Saba 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 Saba's present
financial condition, it is budgeting, on a current basis, only absolutely
essential capital expenditures. Saba currently is budgeting one year at a time
and has deferred any long term capital expenditure program. Saba has deferred
certain capital expenditures in the following areas: (i) Coalinga exploration
project in California, (ii) other California projects, where Saba 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 Saba's growth rate. Saba
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.
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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. Saba 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 Saba's
annual financial statements.
IMPACT OF INFLATION
The price Saba 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, Saba'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.
Saba 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 Saba's financial position. Saba has not automated many of its
operations with information technology ("IT") systems and non-IT systems, and
presently believes that Saba's existing computer systems and software will not
need to be upgraded to mitigate the Year 2000 issues except that Saba must
replace its current integrated accounting software in order to accurately
process data beginning with the year 2000. Should it not do so, Saba 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.
Saba's third-party accounting software vendor has modified the current operating
system utilized by Saba and expects to provide the modified system to Saba 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 Saba.
Saba has not incurred material costs associated with its assessment of the Year
2000 problem. In the event that Year 2000 issues impact Saba's accounting
operations and other operations aided by its computer system, Saba 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.
Saba believes that some of the third parties with whom Saba 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. Saba does not know whether the other third parties
with whom Saba has material relationships will be affected by the Year 2000
issues. If Saba 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 Saba, including loss of revenue and substantial unanticipated costs.
Accordingly, Saba plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
SABA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During Saba's two most recent fiscal years and through the date of this
Joint Proxy Statement/Prospectus, Saba has not had any changes in or
disagreements with its independent accountants on matters of accounting and
financial disclosure.
SABA 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 Saba and
significant subsidiaries (references are to offices or directorships held in
Saba unless otherwise indicated):
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<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dr. Charles A. Kohlhaas........ 63 Director
Alex S. Cathcart............... 64 Director, President of Sabacol, Inc.
William N. Hagler.............. 66 Director, Chairman of the Board, and Chairman of the Management
Committee of Saba
Randeep S. Grewal.............. 33 Director, Member of the Management Committee of Saba
Imran Jattala.................. 40 Member of the Management Committee, Executive Vice President and
Chief Operating Officer, Chief Financial Officer and Principal
Accounting Officer of Saba; President and Chief Operating Officer
of Saba Petroleum, Inc.; and Vice President of Saba Energy of
Texas, Incorporated.
Burt M. Cormany................ 69 President and Chief Operating Officer of Santa Maria Refining
Company
Herb Miller.................... 63 President Beaver Lake Resources Corp.
Susan M. Whalen................ 36 Secretary of Saba
</TABLE>
Each director is elected for a term of one year and the term of each
director expires in 1999.
Executive Officers and Directors
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. 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.
Alex S. Cathcart has been a director of Saba since January 1997 and has
served as Executive Vice President of Saba 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 Saba. 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 Saba, from
December 1996 to August 1997 and was re-appointed to these positions in
December, 1997. 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.
William N. Hagler has been a director of Saba since 1994 and became
Chairman of Saba'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.
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Randeep S. Grewal became a director of Saba on October 8, 1998 and a member
of Saba's Management Committee on November 12, 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.
Imran Jattala became a member of Saba'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 Saba's California properties, in December
1997. Mr. Jattala joined Saba in 1992 as Assistant Controller for Saba and its
subsidiaries. Since that time, Mr. Jattala had worked in various capacities for
Saba, 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.
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
Saba'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
Saba for several months prior to becoming President of Santa Maria Refining
Company later that year.
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 Saba'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 Saba'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 Saba in August 1998 and was appointed
as Saba's General Counsel in July 1998. During 1997, she practiced contract and
corporate law as an independent contractor for several clients, including Saba,
before she was employed by Saba 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 Saba was established by Saba's Board of
Directors in November 1998 to manage the day-to-day affairs of Saba with the
powers and duties generally prescribed in Saba's Bylaws to the President
continuing up to the closing of the transactions with respect to Saba's
securities and the designation of directors on Saba's Board of Directors as
described in "Saba - Recent Developments - Transactions Involving Horizontal
Ventures, Inc." William N. Hagler, Imran Jattala and Randeep S. Grewal have been
appointed by Saba to serve as members of the Management Committee, with Mr.
Hagler further appointed as Chairman.
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Director Compensation
Saba 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 Saba 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 Saba'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 Saba and the four other most highly compensated
executive officers of Saba who received salary and bonuses of over $100,000 in
any of the years 1995, 1996 or 1997.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Other Securities
------------------------ Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation (4)
- --------------------------- ---- ------ ----- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ilyas Chaudhary.............. 1997 $ 183,500 $ 2,885 (3) 500,000 (5) $ 4,420
Chairman of the Board, 1996 153,000 20,000 (3) --- 4,750
Chief Executive Officer(1) 1995 150,000 (2) 1,731 (3) 200,000 ---
Walton C. Vance.............. 1997 $ 120,700 $ 2,254 (3) --- $ 4,009
Vice President, 1996 101,633 20,000 (3) --- 2,259
Chief Financial Officer, 1995 --- --- --- --- ---
and Secretary(6)
Burt Cormany................. 1997 $ 110,040 $ 9,170 (3) 20,000 $ 1,351
President and 1996 113,386 8,330 (3) --- 5,549
Chief Operating Officer 1995 --- --- --- --- ---
of Santa Maria Refining
Company
Bradley T. Katzung........... 1997 $ 77,655 $ 70,200 (3) --- $ 1,097
Executive Vice President & 1996 --- --- --- --- ---
General Manager - USA (7) 1995 --- --- --- --- ---
Rodney C. Hill............... 1997 $ 121,636 --- --- 125,000 ---
Vice President-Legal 1996 --- --- --- --- ---
Affairs (8) 1995 --- --- --- --- ---
</TABLE>
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<PAGE>
- ------------------
(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 Saba in 1995 to SEDCO, a corporation wholly
owned by Ilyas Chaudhary, of $75,000 for management services performed by
Mr. Chaudhary.
(9) "Other Annual Compensation" was less than the lesser of $50,000 or 10% of
such officer's annual salary and bonus for such year.
(10) Represents the contributions made by Saba on behalf of these individuals to
Saba's 401(k) Plan.
(11) Consists of options covering 200,000 shares granted pursuant to Saba's 1996
Incentive Equity Plan; 200,000 shares of deferred Common Stock; and 100,000
performance shares issuable if Saba meets 1998 earnings test.
(12) Resigned from all offices including Chief Financial Officer and Secretary
on July 21, 1998 and as a director on August 28, 1998.
(13) Employment Agreement expired November 8, 1998.
(14) Resigned as Vice President - Legal Affairs on December 31, 1997 and as a
director on June 6, 1998.
Option/SAR Grants In Last Fiscal Year
The following stock options were granted during 1997 by Saba to the named
executives.
<TABLE>
<CAPTION>
Potential Realized
Value At
Assumed annual
Rates of Stock Alternative
Price to (f) and
Individual Grants Appreciation For (g); Grant
- ------------------------------------------------------------------------ Option Term Date Value
- ------------------------------------------------------------------------ ------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h)
Number of
Securities % of Total
Underlying Options/
Options/ SARs
SARs Granted to
Granted (f) Employees Exercise or Grant Date
Name (in in Fiscal Base Expiration Present
thousands) Year Price($/Sh.) Date 5% ($) 10% ($) Value $
- ------------------------------------------------------------------------- ------------------ ----------
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
(3) Resigned from all offices including Chief Executive Officer and President
and as a director and Chairman of the Board on November 12, 1998.
(4) Resigned as Vice President - Legal Affairs on December 31, 1997 and as a
director on June 6, 1998.
143
</TABLE>
<PAGE>
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 Saba at
December 31, 1997:
<TABLE>
<CAPTION>
Securities Underlying
Number of Unexercised Value of Unexercised,
Options SARs at In-the-Money Options at
Shares Acquired on Value Fiscal Year-End (#) Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/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 Saba served as members of the Compensation and Options Committee of the Board
of Directors: Messrs. Faysal Sohail, Ronald Ormand and Hagler. Neither Mr.
Sohail nor Mr. Ormand were formerly, nor are they currently, officers or
employees of Saba or any of its subsidiaries. Mr. Hagler, although currently not
an officer or employee of Saba or any of its subsidiaries, was President from
July 1997 through September, 1997 of Capco, an affiliate of Saba.
Benefit Plans and Employment Agreements
Employment Agreements
Alex S. Cathcart Employment Agreement. Saba 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 Saba. 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, Saba 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 Saba 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 Saba 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 Saba at a compensation rate of 75% ($86,250) of that called
for by the agreement.
Imran Jattala Employment Agreement. Saba 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 Saba and its
subsidiary, Saba Petroleum, Inc. The agreement provides for an annual salary of
$72,000 subject to a 10% increase on July 23, 1999 and a 5% increase on July 23,
2000. Mr. Jattala is eligible to participate in the stock option plan of Saba
and is provided a Company automobile under the agreement. Either party may
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<PAGE>
terminate the employment with or without cause upon thirty days' written notice;
upon termination by Saba, 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 Saba.
Burt Cormany Employment Agreement. Santa Maria Refining Company, a wholly
owned subsidiary of Saba, 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 Saba and will receive a base salary of $110,000 in the
first year of the agreement and $120,000 in the second year.
Herb Miller Employment Agreement. Beaver Lake Resources Corporation, a
74%-owned subsidiary of Saba, 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, Saba's stockholders approved Saba's 1996
Incentive Equity Plan (the "Incentive Plan"). The purpose of the Incentive Plan
is to enable Saba 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 Saba'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, Saba's stockholders approved Saba'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 Saba'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, Saba issued options for 560,000 shares
of Common Stock to certain employees of Saba, 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. Saba sponsors a defined contribution retirement savings
plan (the "401(k) Plan"). Saba currently provides matching contributions equal
to 50% of each employee's contribution, subject to a maximum of 4% of employee
earnings. Saba's contributions to the 401(k) Plan were $25,745 in 1995, $44,014
in 1996, and $42,016 in 1997.
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<PAGE>
Certain Relationships and Related Transactions
Certain officers, directors and key employees of Saba 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 Saba may
arise.
In 1997, Saba adopted a policy whereby all transactions by and between Saba
and any affiliate of Saba shall be conducted on an arm's-length basis, and all
substantial transactions shall be approved by a majority of Saba's directors
without an interest in such transactions.
In 1995, Saba 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.
Saba 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 Saba are open accounts and are
unsecured. The transactions giving rise to such matters are as follows:
In 1995, Capco loaned $2,221,900 to Saba at 9% per annum; the proceeds were
used to acquire certain of Saba'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, Saba borrowed $10,500 from SEDCO on a short-term basis and repaid
such amount during 1996.
In 1995, Saba paid SEDCO $10,700 for reimbursement of prior year charges to
Saba.
In 1995, Saba received $210,100 from Capco for reimbursement of prior year
charges and advances and was charged $22,700 for interest on advances.
In 1995, Saba remitted $92,100 to Capco and affiliates in settlement of
prior year charges.
During 1995, Saba 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
Saba. The note's principal and accrued, but unpaid, interest is due December 31,
1998.
In 1996, Saba 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, Saba 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.
Saba 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
Saba's exploratory wells on the same basis as did Saba. Saba has billed the
subsidiary a total of $112,200, of which $64,700 was outstanding at December 31,
1996.
During 1996, Saba provided a short-term advance to SEDCO amounting to
$10,000. No interest was charged on the advance.
During 1996, Saba 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 Saba. In September 1997, Saba commenced amortization of the note by
applying twenty percent of Mr. Chaudhary's salary thereto.
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<PAGE>
During 1996, Saba 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.
Saba 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.
Saba 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, Saba 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 Saba.
During the year ended December 31, 1997, Saba 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 Saba's oil properties.
During the year ended December 31, 1997, Saba charged interest to SEDCO,
Ilyas Chaudhary and William Hickey (a former director of Saba) in the amounts of
$8,800, $27,500, and $2,700, respectively, on outstanding, interest-bearing
indebtedness to Saba.
During the year ended December 31, 1997, Saba incurred interest charges in
the total amount of $60,200 on the notes payable to Capco. Saba 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 Saba chartered from a non-affiliated airplane leasing
service, a jet airplane acquired by Mr. Chaudhary in 1997. When chartering the
airplane, Saba paid the rate charged others by the leasing service, less a
discount, so that the rate paid by Saba 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, Saba 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, Saba advanced $36,000 to
Capco, evidenced by an unsecured promissory note.
During the nine months ended September 30, 1998, Saba 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
Saba. Saba received $13,400 from Mr. Chaudhary for accrued interest on his loan
from Saba, and $29,500 from SEDCO for accrued interest and principal on the loan
to that Company.
During the nine months ended September 30, 1998, Saba charged Capco $1,500
for interest on outstanding advances to that company.
In July 1997, Saba 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 Saba 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 Saba. 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, Saba 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, Saba entered into an agreement with Capco by
which Saba transferred to Capco its rights under such agreements in exchange for
Capco's agreement to convey to Saba a 2% overriding royalty on the project
(commencing after the project generated $10 million in gross revenues) and
granted to Saba 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 Saba. Neither of these
events has occurred. In the investigation and negotiations of the acquisition of
the tar sands project, Saba and Capco had agreed that Saba would bear all costs,
internal and third party, incurred by Saba prior to August 13, 1997, and that
Capco would bear the expenses incurred subsequent to said date. Such costs
147
<PAGE>
include $100,000 lent to Solv-Ex as an inducement to negotiate and execute a
purchase agreement the amount of which was repaid to Saba in August 1998. Saba's
total costs in respect of the acquisition (excluding the loans) are
approximately $60,000.
In November 1997, Saba 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 Saba is a member, providing for Saba 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 Saba
and 60% in the case of the large independent) of a consideration of $100,000 to
members of Hamar, including Rodney C. Hill. Saba has 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 Saba. Save for the issuance of the Common Stock, the terms of
participation are the same for Saba 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 Saba, is the sole stockholder of
Rodney C. Hill, a Professional Corporation, which acts as general counsel to
Saba. In 1997, such corporation was engaged to provide legal services to Saba
pursuant to a retainer agreement, which may be canceled by Saba 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 Saba 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 Saba 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. The agreement was
further updated by Saba for month to month consulting services commencing
October 1, 1998, for $6,000 per month. At September 30, 1998, Saba 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 Saba from May 1997 to July
1998, is a Managing Director of CIBC-Oppenheimer & Co., Inc., which has rendered
investment banking services to Saba. During January 1998, Saba engaged
CIBC-Oppenheimer to advise Saba with respect to strategies and procedures to
adopt in an effort to maximize shareholder values. This engagement was
terminated effectively in August 1998.
William N. Hagler, a director of Saba, was formerly the President of Unico,
Inc. and was the President of Capco from July 1997 to September 1997.
In January 1998, Saba engaged Faysal Sohail, a former director of Saba, to
render investor relations services to Saba 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 Saba
whereby Saba 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, Saba 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 Saba was thereafter assigned to Capco in
April 1998, and the sale closed in May 1998. Capco had agreed to reimburse to
Saba the $36,000 deposit, with interest at the rate of 12% per annum, within 90
days of closing.
148
<PAGE>
In July 1998, Bradley Katzung, an officer of Saba, earned a bonus of one
percent of the net proceeds of the sale of Saba'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 Saba
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, Saba was obligated to tender 200,000 shares of
Company Common Stock, free of all restrictions, to the Seller, while Saba 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 Saba at a cost of $750,000 based
upon the closing price of Saba'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 Saba purchased property
adjoining Saba'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 Saba 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, Saba sold its interest 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 Saba and a
member of Saba'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 Saba's securities and the designation of directors
on Saba's Board of Directors as described in "SABA - Recent Developments -
Transactions Involving Horizontal Ventures, Inc."
Saba 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 Saba as its Chief Executive Officer and
President on an interim basis. Saba is unsure as to what rights, if any, may be
continuing under the August letter of understanding.
149
<PAGE>
PRINCIPAL STOCKHOLDERS OF SABA
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 Saba to be a beneficial owner of more than 5% of the
Common Stock, (ii) each director and named executive officer of Saba and (iii)
all directors and officers of Saba as a group. Shares Beneficially Owned and
Ownership as a Percent of Common Stock is given as of December 8, 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 Saba, HVI and RGC,
that all 269,663 Warrants issued in connection with the Series A Preferred Stock
are exercised, and that Saba 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 4,535,604 shares
to 15,587,997. 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. [TO BE REVISED]
<TABLE>
<CAPTION>
Ownership as a Percent of
Shares Beneficially Ownership as a Percent of Common Stock Assuming Full
Owned (1) Common Stock Conversion and Exercise
--------- ------------ -----------------------
Principal Stockholders:
- -----------------------
<S> <C> <C> <C>
Saba Acquisub Inc. (2) 3,000,000 26.3% _____%
3201 Airport Drive, Suite 201
Santa Maria, CA 93455
Horizontal Ventures, Inc. (2)(3) 6,380,012 46.1% _____%
630 Fifth Avenue, Suite 1501
New York, New York
Other Directors and Named
Executive Officers:
- -------------------
Dr. Charles A. Kohlhaas 0 * *
William N. Hagler 14,000 * *
Randeep S. 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 * *
- -------------
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, Saba 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, Saba 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 former shareholders of SAI. Prior to the
150
</TABLE>
<PAGE>
consummation of the Stock Exchange Agreement, SAI was owned by Capco
Resources Ltd. (26.67%), Capco Acquisub, Inc., a wholly owned subsidiary of
Capco Resources Ltd. (63.62%), SEDCO, Inc. (5.54%) and Parkfield Management
Limited (4.17%). The former shareholders of SAI have the right until
December 31, 1998 to unanimously terminate the agreement and reacquire
their 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
Resources Ltd. 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 Saba into
which the 690 shares of Saba'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.
SHAREHOLDER PROPOSALS
It is anticipated that HVI's 1999 Annual Meeting of Shareholders will be
held in July 1999. Shareholders of HVI who intend to present proposals at such
Annual Meeting must submit their proposals to HVI on or before December 31,
1998, for inclusion, if appropriate, in HVI's proxy statement and form of proxy
relating to the 1999 Annual Meeting.
EXPERTS
The consolidated financial statements of HVI as of December 31, 1997 and
for each of the years in the two-year period ended December 31, 1997 included in
this Joint Proxy Statement/Prospectus have been audited by Bateman & Co., Inc.,
P.C., independent certified public accountants, as indicated in their report
dated April 14, 1998 with respect thereto and are included herein in reliance
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Saba as of December
31, 1996 and 1997 and for each of the three years in the period ended December
31, 1997 included in this Joint Proxy Statement/Prospectus have been audited by
PricewaterhouseCoopers, LLP, independent certified public accountants, as
indicated in their report dated April 15, 1998, which report contains an
explanatory paragraph concerning substantial doubt regarding Saba's ability to
continue as a going concern, and are included herein in reliance upon the
authority of such firm as experts in accounting and auditing.
Certain estimates of HVI oil and gas reserves as of December 31, 1995, 1996
and 1997 appearing in this Joint Proxy Statement/Prospectus were based upon
engineering reports prepared by the independent petroleum engineering firms of
Netherland, Sewell & Associates, Inc. Such estimates are included herein in
reliance upon the authority of such firms as experts in such matters.
Certain estimates of Saba oil and gas reserves as of December 31, 1995,
1996 and 1997 appearing in this Joint Proxy Statement/Prospectus were based upon
engineering reports prepared by the independent petroleum engineering firms of
Netherland, Sewell & Associates, Inc. and Sproule Associates Limited. Such
estimates are included herein in reliance upon the authority of such firms as
experts in such matters.
151
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of HVI Common
Stock to be issued upon consumption of the Merger Agreement have been passed
upon by Cohen Brame & Smith Professional Corporation.
WHERE YOU CAN FIND MORE INFORMATION
HVI and Saba file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that the companies file and the SEC's public
reference rooms in Washington, D.C., Chicago, Illinois, and New York, New York.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. HVI and Saba public filings are also available to the public
from commercial document retrieval services and at the Internet World Wide Web
maintained by the SEC at "http://www.sec.gov." Reports, proxy statements and
other information concerning HVI also may be inspected at the offices of the
NASD, 1735 K Street, Washington, D.C. 20006. Reports, proxy statements and other
information concerning Saba also may be inspected at the offices of the American
Stock Exchange at 86 Trinity Place, New York, New York 10006-1881.
HVI has filed the Registration Statement to register with the SEC the
shares of HVI common stock to be issued to Saba shareholders in the merger. This
Joint Proxy Statement/Prospectus is a part of the Registration Statement and
constitutes a prospectus of HVI, a proxy statement for the HVI Special Meeting
and a proxy statement of Saba for the Saba Special Meeting.
As allowed by SEC rules, this Joint Proxy Statement/Prospectus does not
contain all the information that shareholders can find in the Registration
Statement or the exhibits to the Registration Statement.
HVI has supplied all information contained in this Joint Proxy
Statement/Prospectus relating to HVI, and Saba has supplied all such information
relating to Saba.
You should rely only on the information contained in this Joint Proxy
Statement/Prospectus to vote your shares at the HVI Special Meeting or Saba
Special Meeting. HVI and Saba have not authorized anyone to provide you with
information that is different from what is contain in this Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus is dated January
____, 1999. You should not assume that the information contained in the Joint
Proxy Statement/Prospectus is accurate as of any date other than that date, and
neither the mailing of this Joint Proxy Statement/Prospectus to shareholders nor
the issuance of HVI common stock in the merger shall create any implication to
the contrary.
GENERAL
The costs of soliciting proxies of HVI and Saba will be paid by HVI and
Saba. In addition to the use of the mails, proxies may be personally solicited
by directors, officers or regular employees of HVI or Saba (who will not be
compensated separately for their services) by mail, telephone, telegraph, cable
or personal discussion. HVI and Saba will also request banks, brokers, and other
custodians, nominees and fiduciaries to forward proxy materials to the
beneficial owners of stock held of record by such persons and request authority
for the execution of proxies. HVI or Saba will reimburse such entities for
reasonable out-of-pocket expenses incurred in handling proxy materials for the
beneficial owners of HVI's and Saba's Common Stock.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted by delivering to the Chairman and Chief
Executive Officer of HVI or the Secretary of Saba, a written notice of
revocation bearing a later date than the proxy, by duly executing a subsequent
proxy relating to the same shares, or by attending the Meeting and voting in
person. Attendance at the Meeting will not in itself constitute revocation of a
proxy unless the shareholder votes their shares of Common Stock in person at the
Meeting. Any notice revoking a proxy should be sent to the Chairman and Chief
Executive Officer of HVI, Randeep S. Grewal, at 630 Fifth Avenue, Suite 1501,
New York, New York 10111, or the Secretary of Saba, Susan M. Whalen, 3201
Airpark Drive, Suite 201, Santa Maria, California 93455.
All shares represented at the HVI Special Meeting or the Saba Special
Meeting by a proxy will be voted in accordance with the instructions specified
in that proxy. Proxies received and marked "Abstain" as to any particular
proposal, will be counted in determining a , however, such proxies will not be
counted for the vote on that particular proposal. A majority of the shares
represented at the meeting is required to ratify any proposal presented. If no
instructions are marked with respect to the matters to be acted upon, each proxy
will be voted FOR the matter to be voted upon.
Please complete, date, sign and return the accompanying proxy promptly.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WE URGE YOU TO COMPLETE,
DATE, SIGN AND RETURN THE ACCOMPANYING PROXY, NO MATTER HOW LARGE OR SMALL YOUR
HOLDING MAY BE.
152
<PAGE>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
UNAUDITED
--------------------------------------------------------------------------------------------
SABA HVI ADJUSTMENTS REF COMBINED
--------------------------------------------------------------------------------------------
<S> <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>
153
<PAGE>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA STATEMENT OF OPERATIONS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
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>
154
<PAGE>
<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>
155
<PAGE>
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.
156
<PAGE>
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.
157
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
HORIZONTAL VENTURES, INC.
Reports of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of December 31, 1997. . . . . . . . . . . F-3
Consolidated Statements of Operations for the Two Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the Two Years
Ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Two Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . F-9
Consolidated Balance Sheet as of September 30, 1998 (Unaudited) . . . . F-
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 1998 and 1997 (Unaudited). . . F-
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited). . . . . . . . . . . . F-
Notes to Unaudited Consolidated Financial Statements, September 30,
1998 and 1997 (Unaudited). . . . . . . . . . . . . . . . . . . F-
Financial statement schedules have been omitted since they are either not
required, are not applicable or the required information is included in the
consolidated financial statements or the notes thereto.
SABA PETROLEUM COMPANY
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . F-
Consolidated Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . F-
Consolidated Statements of Operations for the three years ended
December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998 (unaudited) . . . . . . . . . . . F-
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 and 1998 (unaudited) . . . . . . . F-
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995, 1996 and 1997 and the six months ended
June 30, 1997 and 1998 (unaudited) . . . . . . . . . . . . . . F-
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-
Supplemental Information About Oil and Gas Producing
Activities (unaudited) . . . . . . . . . . . . . . . . . . . . F-
Supporting Financial Statement Schedule:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . F-
Schedule II - Valuation and Qualifying Accounts, years ended
December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . . . F-
Financial statement 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
F-1
<PAGE>
Bateman & Co., Inc. P.C. 5 Briardale Court
Certified Public Accountants Houston, TX 77027-2904
(713) 552-9800
Fax (713) 552-9700
www.batemanhouston.com
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
Petro Union, Inc., dba Horizontal Ventures, Inc.
We have audited the accompanying consolidated balance sheet of Petro Union,
Inc. (a Colorado corporation), dba Horizontal Ventures, Inc., as of December 31,
1997, and the related consolidated statements of operations, owners' equity
(deficit), and cash flows for the years ended December 31, 1997 and 1996. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Petro Union, Inc., dba
Horizontal Ventures, Inc., as of December 31, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
/S/ BATEMAN & CO., INC., P.C.
Houston, Texas
April 14, 1998
F-2
<PAGE>
PETRO UNION, INC., d/b/a HORIZONTAL VENTURES, INC.(Note 1)
Consolidated Balance Sheet
December 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 2,318,952
Time deposits and funds held in escrow 1,613,695
Accounts receivable:
Trade, net of allowance for doubtful accounts of $74,092 17,181
Other 3,433
------------
Total current assets 3,953,261
Properties and equipment, at cost, net of accumulated depreciation
and depletion of $597,926 6,794,847
Other assets:
Deposits, prepayments, and deferred charges 54,514
------------
Total other assets
54,514
------------
Total Assets $ 10,802,622
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term notes $ 21,782
Accounts payable and accrued expenses 271,045
Other current liabilities 527,500
------------
Total current liabilities 820,327
Noncurrent liabilities:
Long term note payable, net of current maturities 77,086
------------
Total liabilities $ 897,413
------------
Commitments and contingencies --
Stockholders' equity:
Common stock, no par value, 50,000,000 shares authorized,
1,558,843 shares issued and outstanding 11,588,073
Accumulated deficit (1,682,864)
------------
Total owners' equity (deficit) 9,905,209
------------
Total liabilities and owners' equity
$ 10,802,622
============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Operations
For The Years Ended December 31, 1997 and 1996
Years Ended December 31,
1997 1996
---- ----
Revenues $ 211,696 $ 604,475
Cost of revenues 247,979 367,419
--------- ---------
Gross profit (36,283) 237,056
--------- ---------
General and administrative expenses:
Salaries and wages 213,213 235,701
Depreciation and amortization 24,016 19,174
Rentals 31,262 9,891
Taxes, other than on income 16,059 21,737
Other administrative expenses 495,823 307,899
--------- ---------
Total general and administrative expenses 780,373 594,402
--------- ---------
Loss from operations (816,656) (357,346)
--------- ---------
Other income (expense):
Gain (loss) on
sale of assets ( 21,062) 15,091
Interest income 11,873 61
Interest expense (25,271) (34,939)
--------- --------
Net other income (expense) (34,460) (19,787)
--------- --------
Loss before taxes on income (851,116) (377,133)
Provision for taxes on income -- --
--------- ---------
Net loss ($851,116) ($377,133)
========= =========
($ 1.44) ($ 4.70)
Loss per share of common stock ========= =========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Owners' Equity (Deficit)
For The Years Ended December 31, 1997 and 1996
Capital
Common Stock Series A Preferred Stock Capital In Contributed by
Excess of Accumulated Limited
Shares Amount Shares Amount Par Value Deficit Partners Total
------ ------ ------ ------ --------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,200 $ 1,200 -- $ -- -- $(454,615) $ 760,000 $ 306,585
Change in par value
from 1.00 per share
to $.01 per share -- (1,188) -- -- 1,188 -- -- --
Stock issued for
services 2,490 25 -- -- 2,257 -- -- 2,282
Partner's capital
interest issued for
services -- -- -- -- -- -- 58,000 58,000
Net loss (377,133) (377,133)
------- ------- ------- -------- --------- -------- -------- --------
Balance, December 31, 1996 3,690 37 -- -- 3,445 (831,748) 818,000 (10,266)
Stock issued for
services 30,000 300 -- -- -- -- -- 300
Stock issued in
exchange for
subordinated
convertible
debentures, and net
assets of limited
partnership 725,770 7,258 -- -- 1,398,831 -- (818,000) 588,089
Stock issued for cash -- -- 3,000,000 30,000 570,000 -- -- 600,000
------- ----- --------- ------- --------- -------- --------- --------
F-5
<PAGE>
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Owners' Equity (Deficit)
For The Years Ended December 31, 1997 and 1996
(Continued)
Capital
Common Stock Series A Preferred Stock Capital In Contributed by
Excess of Accumulated Limited
Shares Amount Shares Amount Par Value Deficit Partners Total
------ ------ ------ ------ --------- ------- -------- -----
Balance prior to
reverse merger with
Petro Union, Inc. 759,460 7,595 3,000,000 30,000 1,972,276 (831,748) -- 1,178,123
Effect of reverse
merger with Petro, Inc. 240,805 6,174,675 (3,000,000) (30,000) (1,972,276) -- -- 4,172,399
Stock issued for cash
in Reg "S" offerings 552,470 5,801,518 -- -- -- -- -- 5,801,518
Less, Related
offering costs -- (454,837) -- -- -- -- -- (454,837)
Issuance of stock to
retire note payable
to related party 6,108 59,122 -- -- -- -- -- 59,122
Net loss -- -- -- -- -- (851,116) -- (851,116)
Balance December
31, 1997 1,558,843 $ 11,588,073 -- $ -- $ -- $ (1,682,864) $-- $ 9,905,209
========= ============ ============ ============ ============ ============ ===== ============
The accompanying notes are an integral part of these financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1997 and 1996
Years Ended December 31,
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net (loss) ($ 851,116) ($ 377,133)
Adjustments to reconcile net loss to
net cash provided (used) by operations:
Depreciation and amortization 177,426 121,708
(Gain) loss on sale of assets 21,062 (15,091)
Stock and partners' capital interests
issued for services 300 60,282
(Increase) decrease in accounts receivable 66,040 (35,705)
(Increase) decrease in accounts
receivable, employees 3,953 (3,953)
(Increase) in accounts receivable,
related parties -- 1,200
(Increase) in accounts receivable, other (3,433) --
Increase (decrease) in accounts
payable and accrued expenses 136,716 109,955
----------- -----------
Net cash (used) by operating activities (449,052) (138,737)
----------- -----------
Cash flows from investing activities:
(Increase) in time deposits and funds
held in escrow (1,613,695) --
(Increase) in property and equipment (2,157,320) (381,215)
Proceeds from sale of property and equipment 55,181 86,672
(Increase) decrease in deposits and prepayments 1,286 (8,066)
----------- -----------
Net cash (used) by investing activities (3,714,548) (302,609)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in due to related parties -- (36,785)
Proceeds from notes payable -- 161,959
Repayments of notes payable (206,084) (150,589)
Proceeds from loan from related party 59,122 --
Increase in other current liabilities, incurred to
finance acquisition of property and equipment 500,000 --
Change in customer payments received in advance (30,000) 30,000
Proceeds from subordinated convertible debentures -- 433,231
F-7
<PAGE>
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1997 and 1996
(Continued)
Proceeds from sale of stock, net of expenses 5,946,681 --
Stock issued for net assets of limited partnership 972,858 --
Less, Partners' prior capital contributions (818,000) --
Other 51,517 --
----------- -----------
Net cash provided by financing activities 6,476,094 437,816
----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,312,494 (3,530)
Cash and cash equivalents:
Beginning of period 6,458 9,988
----------- -----------
End of period $ 2,318,952 $ 6,458
=========== ===========
Non-cash financing and investing activities:
Stock issued for services $ 300 $ 2,282
Partners' capital interests issued for
services -- 58,000
Stock issued for subordinated convertible
debentures 433,231 --
Stock issued for net assets of limited
partnership 972,858 --
Property and equipment acquired by
issuance of notes payable 500,000 20,159
Property and equipment acquired in
reverse merger with Petro Union, Inc.,
net of debt assumed 4,120,882
Supplementary cash flow data:
Interest paid 26,324 33,886
Income taxes paid -- --
The accompanying notes are an integral part of these financial statements.
F-8
</TABLE>
<PAGE>
Petro Union, Inc. dba Horizontal Ventures, Inc. (Note 1)
Notes to Consolidated Financial Statements
December 31, 1997 and December 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business and organization - Petro Union, Inc. ("PUI"), dba
Horizontal Ventures, Inc., is engaged in contract drilling of oil and gas wells
and in development of oil and gas properties for its own account. Its executive
offices are located in New York, New York, and it has field offices in Tulsa,
Oklahoma and Evansville, Indiana. It offers its services primarily in the
western, midwestern, and southwestern United States. It has oil and gas
properties in California and oil, gas, and limestone properties in the
midwestern United States.
Petro Union was a debtor in possession under Chapter 11 of the U.S.
Bankruptcy Code until August 28, 1997, at which time the Bankruptcy Court
approved its plan of reorganization. As a part of its plan of reorganization,
PUI agreed to acquire all the outstanding stock of Horizontal Ventures, Inc.
("HVI"). The acquisition of HVI was completed on September 9, 1997, and after
the acquisition, HVI shareholders owned more than 50% of the outstanding shares
of PUI. Therefore, pursuant to the rules of the Securities and Exchange
Commission, the transaction has been accounted for as a "reverse merger."
Accordingly, the accompanying consolidated statements of operations and
consolidated statements of cash flows reflect the historical operations and cash
flows of HVI (including those of PUI after September 9, 1997, the effective date
of the merger), whereas previous reports filed by the Company reflected
operations and cash flows of PUI. Horizontal Ventures, Inc. and Petro Union,
Inc. completed a statutory merger under the laws of the State of Colorado
effective December 31, 1997. The name of the merged entity, Petro Union, Inc.,
is intended to be changed to Horizontal Ventures, Inc. when approved by
shareholders.
Horizontal Ventures, Inc. (the "Company") was organized under the laws of
the State of Oklahoma on September 2, 1994. It was engaged in organizational
activities through the end of 1994, and commenced operations in 1995. On
December 23, 1994, the Company organized an Oklahoma limited partnership,
Horizontal Ventures 1995 Limited Partnership (the "Limited Partnership"), in
which it was the sole general partner. The Limited Partnership commenced
operations in 1995. The Company retained a 20.83% interest in the Limited
Partnership for its services in forming and managing the entity, and limited
partners received the remaining interests in exchange for cash contributions of
$760,000. As the sole general partner, the Company maintained operational
control over the activities of the Limited Partnership. As indicated below, the
Limited Partnership was merged into the Company effective January 1, 1997 in an
exchange of Company stock for the limited partners' interests, which was
accounted for using the companies' historical accounting bases, similar to
pooling of interests accounting.
Basis of presentation - The accounting and reporting policies of the
Company conform to generally accepted accounting principles.
Principles of combination - Pursuant to guidance contained in Statement of
Position Number 78-9 issued by the Accounting Standards Division of the American
Institute of Certified Public Accountants, the Limited Partnership is considered
to be a wholly-owned subsidiary of the Company for 1995 and 1996, the periods
during which it existed. Accordingly, the financial statements for December 31,
1996 include the accounts and transactions of the Company and the Limited
Partnership. As indicated below, the Limited Partnership was merged into the
Company effective January 1, 1997, and its assets and liabilities are thereafter
included in the Company's accounts, using their historical bases similar to
pooling of interests accounting. The consolidated financial statements also
include the accounts and transactions of Calox, Inc. a subsidiary of Petro
Union, whose principal asset is nonproducing limestone reserves, and HVI Cat
Canyon, Inc. All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
Uses 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 amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
Cash and cash equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Fair value of financial instruments and derivative financial instruments -
The Company has adopted Statement of Financial Accounting Standards number 119,
Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments. The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, other current liabilities and
notes payable, approximate fair value because of the short maturity of these
items. These fair value estimates are subjective in nature and involve
uncertainties and matters of significant judgment, and , therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates. At and December 31, 1997, the Company had no derivative
financial instruments.
Accounts receivable - The Company provides an allowance for uncollectible
receivables when it is determined that collection is doubtful. Substantially all
of the Company's trade receivables are from its directional drilling services.
Concentrations of credit risk - Substantially all of the Company's accounts
receivable are from companies engaged in the oil and gas business, and
concentrated in the Southwestern United States. Generally, the Company does not
require collateral for its accounts receivable. The Company has performed
services for only a limited number of customers each period; therefore, each
customer may be considered a major customer.
Properties and equipment - Properties and equipment are stated at cost. The
Company follows the "full-cost" method of accounting for oil and gas property
and equipment costs. Under this method, all productive and nonproductive costs
incurred in the acquisition, exploration, and development of oil and gas
reserves are capitalized. Such costs include lease acquisitions, geological and
geophysical services, drilling, completion, equipment, and certain general and
administrative costs directly associated with acquisition, exploration, and
development activities. General and administrative costs related to production
and general overhead are expensed as incurred. No gains or losses are recognized
upon the sale or disposition of oil and gas properties, except in transactions
that involve a significant amount of reserves. The proceeds from the sale of oil
and gas properties are generally treated as a reduction of oil and gas property
costs. Fees from associated oil and gas exploration and development
partnerships, if any, will be credited to oil and gas property costs to the
extent they do not represent reimbursement of general and administrative
expenses currently charged to expense.
Future development, site restoration, and dismantlement and abandonment
costs, net of salvage values, are estimated on a property-by-property basis
based on current economic conditions and are amortized to expense as the
Company's capitalized oil and gas property costs are amortized. The Company's
properties are all onshore, and the Company expects that the salvage value of
the tangible equipment offsets any site restoration and dismantlement and
abandonment costs.
The provision for depreciation, depletion, and amortization of oil and gas
properties is computed on the unit-of-production method. Under this method, The
Company computes the provision by multiplying the total unamortized costs of oil
and gas properties - including future development, site restoration, and
dismantlement and abandonment costs, but excluding costs of unproved properties
- - by an overall rate determined by dividing the physical units of oil and gas
produced during the period by the total estimated units of proved oil and gas
reserves. This calculation is done on a country by country basis for those
countries with oil and gas production. The Company currently has production in
the United States only. The cost of unproved properties not being amortized is
assessed quarterly to determine whether the value has been impaired below the
capitalized cost. Any impairment assessed is added to the cost of proved
properties being amortized. To the extent costs accumulated in the Company's
international initiatives will not result in the addition of proved reserves,
any impairment would be charged to income upon such determination.
At the end of each quarterly reporting period, the unamortized cost of oil
and gas properties, net of related deferred income taxes, is limited to the sum
of the estimated future net revenues from proved properties using current
prices, discounted at 10%, and the lower of cost or fair value of unproved
properties, adjusted for related income tax effects ("Ceiling Limitation"). This
calculation is done on a country by country basis for those countries with
proved reserves. Currently the Company has proved reserves in the United States
only.
F-10
<PAGE>
The calculation of the Ceiling Limitation and provision for depreciation,
depletion, and amortization is based on estimates of proved reserves. There are
numerous uncertainties inherent in estimating quantities of proved reserves and
in projecting the future rates of production, timing, and plan of development.
The accuracy of any reserves estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserves estimates are often
different from the quantities of oil and gas that are ultimately recovered.
Depreciation for all other property and equipment is provided over
estimated useful lives using the straight line method of depreciation for
financial reporting purposes and the accelerated cost recovery system for income
tax purposes. Renewals and betterments are capitalized when incurred. Costs of
maintenance and repairs that do not improve or extend asset lives are charged to
expense.
The Company's investment in limestone reserves will be amortized on a
unit-of-production basis as the reserves are mined and produced. Since the
acquisition of the limestone reserves in 1993, there has been no development or
production of these properties. Management has determined that there is no
impairment in value of the reserves at December 31, 1997.
License agreements and organization expenses - The Company has acquired
certain licenses for the use of horizontal drilling technology developed by
Amoco Corporation. License agreements and organization expenses are amortized
over a fifteen and five year life respectively using the straight line method of
amortization. Amortization charged to operations was $16,593 (1997), and $16,510
(1996).
Environmental expenditures - If and when remediation of a property is
probable and the related costs can be reasonably estimated, the
environmentally-related remediation costs will be expensed and recorded as
liabilities. If recoveries of environmental costs from third parties are
probable, a receivable will be recorded. Management is not currently aware of
any required remediation.
Revenue recognition - For financial reporting purposes, revenues from
drilling operations are recognized in the accounting period which corresponds
with the performance of the service to the customer. Revenue from oil and gas
production is recognized in the period in which the product is sold. The related
costs and expenses are recognized when incurred.
Federal income tax - The Company follows SFAS No. 109, "Accounting for
Income Taxes", which accounts for income taxes using the liability method. Under
SFAS No. 109, deferred tax liabilities and assets are determined based on
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates expected to be in effect for the year in
which the differences are expected to reverse. The net change in deferred tax
assets and liabilities is reflected in the statement of operations. The primary
differences between financial reporting and tax reporting relate to the
availability of a net operating loss carryover, the use of accelerated methods
of depreciation for income tax purposes, and the taxation of the Limited
Partnership's operations to its individual partners.
NOTE 2 - MERGER OF PETRO UNION, INC. AND HORIZONTAL VENTURES, INC.:
On June 13, 1997, Horizontal Ventures, Inc. and Petro Union, Inc. entered
into an agreement under which all of the outstanding common and preferred shares
of HVI would be acquired by Petro Union. Petro Union was also engaged in
performing contract drilling services using the licensed Amoco technology, and
its stock had been listed on the NASDAQ SmallCap Market. Petro Union was subject
to supervision in the U.S. Bankruptcy Court for the Southern District of Indiana
under Chapter 11 of the U.S. Bankruptcy Code, and the agreement with HVI was
part of Petro Union's Plan of Reorganization. On August 28, 1997, the Bankruptcy
Court approved the Plan, the principal points of which are as follows:
- The par value of Petro Union stock was converted from $.125 par value
to no par value.
- All secured debt was paid according to the terms previously contracted
for.
F-11
<PAGE>
- Unsecured creditors in class C-1 received 20,000 shares of new Petro
Union no par value stock in satisfaction of their claims, and
unsecured creditors in class C-2 received 80,000 shares of new Petro
Union no par value stock in satisfaction of their claims.
- The priority post-petition promissory note of Pembrooke Holding Co.,
in the amount of $150,000 was paid with $100,000 in cash and the
issuance of 49,999 shares of new Petro Union no par value stock valued
at $50,000.
- Existing shareholders of Petro Union received new Petro Union no par
value stock in the ratio of 1 new share for each 220 shares of old
stock.
- Randeep C. Grewal, CEO of Horizontal Ventures, Inc. and Richard D.
Wedel, President of Petro Union received 70,000 shares each of new
Petro Union no par value stock valued at $20,000 each, or $40,000 in
total.
- International Publishing Holding s.a. ("IPH"), a Luxembourg societe
anonyme, loaned $200,000 to Petro Union secured by 50% interest in its
nonproducing limestone reserves; the loan was then be converted into
40,000 shares of new Petro Union no par value stock.
- Petro Union issued 590,000 shares of new no par value stock for all
the outstanding common and preferred stock of Horizontal Ventures,
Inc.
After the Plan was consummated on September 9, 1997, Horizontal Ventures'
shareholders owned approximately 63% of the new Petro Union no par value stock.
Pro-forma summary statements of operations, combining Petro Union, Inc.,
and Horizontal Ventures, Inc., are as follows, assuming the merger had occurred
January 1, 1996:
Year Ended December 31, 1997
-----------------------------------------
Petro Union,
Inc. (January Petro Union
1 through Inc., d/b/a
September Horizontal
9, 1997 Ventures, Inc. Pro-Forma
----------- -------------- -----------
Revenues $ 311,798 $ 211,696 $ 523,494
Cost of revenues 237,801 247,979 485,780
----------- ----------- -----------
Gross profit 73,997 (36,283) 37,714
General and administrative
expenses 264,550 780,373 1,044,923
----------- ----------- -----------
(Loss) from operations (190,553) (816,656) (1,007,209)
Other income (expense) (7,933) (34,460) (42,393)
----------- ----------- -----------
(Loss) before tax (198,486) (851,116) (1,049,602)
Provision for taxes -- -- --
----------- ----------- -----------
Net (loss) ($ 198,486) ($ 851,116) ($1,049,602)
=========== =========== ===========
F-12
<PAGE>
Year Ended December 31, 1996
--------------------------------------------
Petro Horizontal
Union, Ventures,
Inc. Inc. Pro-Forma
Revenues $ 403,968 $ 604,475 $ 1,008,443
Cost of revenues 239,008 367,419 606,427
------------ ------------ ------------
Gross profit 164,960 237,056 402,016
General and administrative
expenses 354,299 594,402 948,701
------------ ------------ ------------
(Loss) from operations (189,339) (357,346) (546,685)
Other income
(expense) (81,462) (19,787) (101,249)
------------ ------------ ------------
(Loss) from continuing
operations before tax (270,801) (377,133) (647,934)
Provision for
taxes -- -- --
------------ ------------ ------------
Net (loss) from
continuing operations (270,801) (377,133) (647,934)
------------ ------------ ------------
Loss from discontinued
operations (24,092,791) -- (24,092,791)
------------ ------------ ------------
Net (loss) ($24,363,592) ($ 377,133) ($24,740,725)
============ ============ ============
F-13
<PAGE>
NOTE 3 - ACQUISITION OF HORIZONTAL VENTURES 1995 LIMITED PARTNERSHIP AND
RETIREMENT OF SUBORDINATED CONVERTIBLE DEBENTURES:
In December, 1994, the Company organized a limited partnership, Horizontal
Ventures 1995 Limited Partnership, in which the Company was the sole general
partner, retaining an interest of 20.83% for its services in organizing the
Limited Partnership. Limited partners contributed $760,000 in 1995 for the
limited partners' interests. The Limited Partnership commenced operations in
1995. In 1996, one of the limited partners performed services for the Company
and the Limited Partnership, and was given credit for an additional capital
contribution of $58,000 for such services.
Substantially all drilling operations of the combined entities were
conducted through the Limited Partnership, while the Company's role was to
manage the Limited Partnership and perform administrative functions. Due to the
Company's control over the Limited Partnership, the Limited Partnership is
deemed to be a subsidiary of the company for the purposes of financial
reporting.
On October 4, 1996, the then six limited partners, along with an officer
and shareholder of the Company, loaned the Company $433,231, evidenced by
subordinated convertible debentures. The debentures bore a stated interest rate
of 30% per annum, were unsecured, and were due October 4, 1999. The holders had
the right to convert the debentures into shares of the Company's common stock
within thirty days of maturity at the rate of 1 share of stock for each $1.00 of
debt.
The Company issued 2,280 shares of its common stock to the six limited
partners as partial consideration for making the loans. The transaction was
valued at $1 per share, or $2,280.
By agreement with the limited partners, the interest on the debentures was
waived by the limited partners. Accordingly no interest was accrued and none is
reflected in the accompanying financial statements.
In early 1997, one of the limited partners, International Publishing
Holding s.a. ("IPH"), a Luxembourg societe anonyme, acquired all of the limited
partners' interests and all of the debentures from the other limited partners
and debenture holders. Then, effective January 1, 1997, the Company issued
725,770 shares of its common stock to IPH in exchange for the net assets of the
Limited Partnership and in exchange for cancellation of the subordinated
convertible debentures, and the Limited Partnership was merged into the Company
using the companies' historical accounting bases similar to pooling of interests
accounting.
The net loss of the respective entities for the years ended December 31,
1996 and 1995 were as follows:
1996 1995
---- ----
Horizontal Ventures, Inc. ($123,371) ($ 53,601)
Horizontal Ventures
1995 Limited Partnership (320,887) (473,879)
--------- ---------
Subtotal ($444,258) ($527,480)
Less, Horizontal Ventures, Inc.'s share
of partnership loss, eliminated in
consolidation 67,125 104,696
--------- ---------
Net loss ($377,133) ($422,784)
========= =========
NOTE 4 - PROPERTY AND EQUIPMENT:
A summary of the Company's property and equipment is as follows:
F-14
<PAGE>
December 31, December 31,
1997 1996
---- ----
Proved oil and gas properties:
Leasehold costs $2,034,190 $ --
Intangible development costs 132,564 --
Lease and well equipment 133,675 --
Storage facilities and gathering systems 62,908 --
---------- ----------
Total 2,363,337 --
Nonproducing limestone reserves 3,500,000 --
---------- ----------
Total mineral interests 5,863,337 --
Land and buildings 135,826 85,814
Drilling equipment 1,183,546 638,382
Transportation equipment 162,111 135,442
Office and computer equipment 47,953 17,434
---------- ----------
Subtotal 7,392,773 877,072
Less, Accumulated depreciation 597,926 142,418
---------- ----------
Net property and equipment $6,794,847 $ 734,654
========== ==========
Depreciation charged against income was $160,833 (1997), and $105,198
(1996).
In the fourth quarter of 1997, HVI Cat Canyon, Inc., a subsidiary of the
Company, acquired certain proven oil and gas properties located in California,
known as the Cat Canyon properties. Total consideration was $1,650,000, payable
$900,000 in cash at closing and an additional $250,000 for each of three wells
to be drilled into the Sisquoc formation on the property. At December 31, 1997,
one of the wells had been drilled and completed, and the first installment of
$250,000 had been paid. A second well had been commenced, but not completed
until early 1998. The third well was completed in early 1998, and the remaining
balance of $500,000 was paid; the accrued balance of $500,000 is included in
other current liabilities on the accompanying balance sheet. All three wells
have been placed on production in 1998, and additional drilling on the property
is expected throughout 1998.
In November and December, 1997, the Company drilled, but did not place on
production, a horizontal well on its Hayes lease in Illinois.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
The Company is obligated on an operating lease for office space requiring
rentals of $1,106 per month, and expiring in April, 2000. The Company has an
option to renew the lease for an additional one year period at the market rate.
Aggregate commitments under the lease at December 31, 1997 were as follows:
Year ending December 31: Amount
----------------------- ------
1998 $13,272
1999 13,272
2000 4,424
-------
Total $30,968
Rent expense included in the accompanying statements of operations was
$31,262 (1997), and $9,891 (1996). The Company also occupies offices under a
month to month lease requiring monthly rentals approximating $2,000.
In October 1994, the Company licensed certain directional drilling
technology from Amoco Corporation, a major oil corporation. The license requires
minimum annual payments of $15,000 per year or $1,500 per well drilled under the
license, whichever is greater, and the amounts are adjusted periodically for
inflation. The minimum amount had been adjusted to $1,630 effective January 1,
1996 and $1,639 effective January 1, 1997. The Company incurred license payments
approximating $20,000 for the year ended December 31, 1997, and $19,900 for
1996. Quarterly settlements are required under the license, and Amoco has the
right to terminate the license for non-payment. If Amoco were to terminate the
Company's license, it could have an adverse affect on the Company's operations.
F-15
<PAGE>
NOTE 6 - FEDERAL INCOME TAXES:
The Limited Partnership filed a U.S. Partnership Income Tax Return for the
years ended December 31, 1996 and 1995. Accordingly, its income (loss) was
taxable to (deductible by) the limited partners. Petro Union and HVI will file a
consolidated U.S. Corporation Income Tax Return for calendar year 1997, as a
result of their merger.
A summary of the principal differences between book and taxable income is as
follows:
<TABLE>
<CAPTION>
Taxed To
-----------------------
Limited The
Partners Company Total
-------- ------- -----
Year ended December 31, 1997:
<S> <C> <C> <C>
Net (loss) of HVI -- ($ 851,116) ($ 851,116)
Net (loss) of Petro Union (198,486) (198,486)
------------ ------------
Combined (1,049,602) (1,049,602)
============ ============
Rounded to (1,050,000) (1,050,000)
Permanent differences 6,600 6,600
Timing differences:
Depreciation (60,000) (60,000)
Net operating loss
carryover (36,900,000) (36,900,000)
------------ ------------ ------------
Taxable (loss) -- ($38,003,400) ($38,003,400)
============ ============ ============
Calendar year 1996:
Net (loss) - see Note 2 ($ 253,762) ($ 123,371) ($ 377,133)
Permanent differences 3,747 1,793 5,540
Timing differences:
Depreciation (60,944) (16,038) (76,982)
Net operating loss carryover -- (89,548) (89,548)
------------ ------------ ------------
Taxable (loss) ($ 310,959) ($ 227,164) ($ 538,123)
============ ============ ============
</TABLE>
The Company follows SFAS No. 109, "Accounting for Income Taxes" in
accounting for deferred Federal income taxes. Pursuant to the requirements of
SFAS No. 109, the Company has recorded deferred tax assets and liabilities,
using an expected tax rate of 35%, as follows:
December 31, December 31,
1997 1996
------------ ------------
Deferred tax asset (liability) attributable to:
Net operating loss carryover $ 13,300,000 $ 79,500
Accumulated depreciation (96,000) (7,700)
------------ ------------
Subtotal 13,204,000 71,800
Less, Valuation allowance (13,204,000) (71,800)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
F-16
<PAGE>
As indicated above, a significant net operating loss carryover has been incurred
in prior years, primarily by Petro Union. Management has not yet determined the
extent to which the net operating loss will be limited, if any, as a result of
the merger. The net operating loss expires, if unused, as follows:
Expires in: Amount
----------- ------
2007 $ 214,000
2008 7,236,400
2009 4,551,900
2010 510,700
2011 24,437,600
2012 1,103,400
-----------
Total $38,054,000
===========
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
1997 1996
-------- --------
Accounts payable, trade $265,862 $123,604
Accrued royalty payable,
Amoco Corporation -- 19,900
Other accruals and payables 5,183 18,325
-------- --------
Total $271,045 $161,829
======== ========
NOTE 8 - NOTES PAYABLE:
Details of long term notes payable are as follows:
December 31, December 31,
1997 1996
------------ -------------
Note to investment company dated June 9,
1995, payable $1,006 monthly including
10.50% interest, due in June, 2005,
collateralized by land and building
costing $85,814 $62,489 $67,700
Note to bank dated February 28, 1995,
payable $549 monthly including 9.99%
interest, due in March 2000,
collateralized by vehicle costing
$25,757 13,305 18,500
Note to bank dated October 18, 1996, payable
$456 monthly including 12.50% interest,
due in November 2001, collateralized by
vehicle costing $36,830 6,198 19,917
F-17
<PAGE>
Note to bank dated July 30, 1996, payable
$4,000 monthly plus 12% interest, due
in July, 1997, collateralized by all
remaining equipment -- 54,280
Note to bank dated February 28, 1995, payable
$400 monthly including 9.99% interest,
due in March 2000 but paid in April 1997,
collateralized by vehicle costing $18,741
which was disposed of in April 1997 -- 13,468
Note to automobile finance company dated
April 21, 1995, payable $673 monthly
including 16.2% imputed interest, due in
April, 2000, collateralized by
vehicle costing $27,410 16,876 --
-------- --------
Total 98,868 173,865
Less, Amount due within one year (21,782) (65,663)
-------- --------
Net long term portion $77,086 $108,202
======== ========
Maturities of long term notes are as follows:
December December
Due during year 31, 31,
ending December 31: 1997 1996
-------- --------
1998 $22,253 $25,160
1999 20,741 20,995
2000 12,724 14,187
2001 7,917 12,627
Thereafter 35,233 35,233
------- --------
Total $98,868 $173,865
======= ====-===
NOTE 9 - LITIGATION:
At December 31, 1997, the Company was the plaintiff in a lawsuit against David
J. LaPrade, a shareholder, former officer and director, and an organizer of the
Company, and Mr. LaPrade's current employer. The Company seeks to recover losses
from alleged breach of fiduciary duty, misappropriating confidential information
and property of the Company, using it in unfair competition with the Company,
interfering with the Company's existing and prospective relationships with its
customers, interfering with the Company's relationships with its employees, and
conversion of Company property. Mr. LaPrade has made counterclaims against the
Company for breach of his employment agreement, libel and slander, and
intentional infliction of emotional distress; he seeks actual damages in excess
of $10,000 and punitive damages in an unspecified amount. Management believes
that its claims against Mr. LaPrade will be successful and that it will recover
damages; moreover, management believes that Mr. LaPrade's counterclaim will not
result in a material liability to the company. The accompanying financial
statements do not include provision for any loss which might result from Mr.
LaPrade's counterclaim, nor do they include any asset that might result from the
Company's claims against Mr. LaPrade.
F-18
<PAGE>
Also at December 31, 1997, the Company was a defendant in a lawsuit by Dr.
Warren G. Gwartney to collect for sums due on a promissory note in the original
principal amount of $50,000 entered into individually by Mr. LaPrade and another
former officer and employee, A.B.C. Paulsen. The lawsuit seeks repayment of the
$25,000 balance due on the note, plus interest at 9-3/4% from October 28, 1996,
costs and attorney fees. During the first quarter of 1998, the Company settled
the lawsuit by the payment of $25,000, which has been accrued at December 31,
1997 and included among Other current liabilities in the accompanying balance
sheet.
At December, 1997, the Company had trade accounts receivable approximating
$74,000 from several debtors, some of whom have refused to pay. Although no
lawsuits have been filed to collect these debts, management is currently
continuing to have discussions with the debtors in an effort to resolve any
disputes and collect the amounts due. In one case, the Company has a lien
against an oil and gas property, and in another it has received a written
promise to pay the amount due. If continuing efforts are unsuccessful, the
Company intends to pursue its claims through other legal actions, and believes
it will be successful. An allowance for doubtful accounts of $74,092 has been
provided for any uncollectible amounts, and management believes it will be
adequate to absorb any losses.
NOTE 10 - RELATED PARTY TRANSACTIONS:
From time to time, certain officers, directors, or limited partners have loaned
funds to the Company. At December 31, 1997, the Company was indebted to related
parties as follows:
December
31, 1997
--------
Advance from shareholder
and former President, not
evidenced by a promissory note,
unsecured, currently due $ 2,500
========
The Company has an agreement with Grupo de Creacion, Ltd. ("GDC"), a Gibraltar
corporation and a shareholder of the Company, for financial consulting services.
Pursuant to the agreement, GDC assisted the Company in arranging three "Reg S"
securities offerings during 1997, resulting in proceeds of approximately
$5,800,000 for the sale of Company stock. As compensation, GDC receives a
negotiated commission of not less than 7% of any financing up to $10 million,
and reduced percentages over that amount; in addition, it receives an overriding
royalty of 2% of all oil and gas production received by the Company during the
term of the agreement. The agreement expires December 31, 2004. GDC received
commissions of approximately $337,400 for completed financings in 1997, and
overriding royalty approximating $500.
The Company's Chairman and CEO also receives an overriding royalty of 2% of all
oil and gas production received by the Company during the term of his
employment.
On March 12, 1998, an officer of the Company resigned and entered into an
agreement providing for certain severance benefits and mutual covenants. The
Company agreed to pay the former officer a severance payment of $50,000, and
agreed to loan him $100,000 at prime, payable in full in six months, secured by
stock in the Company.
NOTE 11 - ADVERTISING:
The Company expense the production costs of advertising the first time the
advertising takes place. The Company has not engaged in direct response
advertising through December 31, 1997. There was no prepaid advertising reported
as assets at December 31, 1997 or 1996. Advertising expense approximated $4,100
(1997), and $7,900 (1996).
NOTE 12 - YEAR 2000 COMPUTER COSTS:
The Company does not utilize any proprietary computer software. Instead, it uses
commercially available software programs from vendors such as Microsoft
Corporation and Peachtree. The Company has been advised that the software it
uses is Year 2000 compliant. Accordingly, it does not expect to incur
significant expense in converting software to be Year 2000 compliant.
F-19
<PAGE>
NOTE 13 - STOCK OPTIONS AND WARRANTS:
On September 9, 1997, the Company's Chairman and CEO was granted options to
purchase an aggregate of 150,000 shares of the Company's no par value common
stock at an option price of $5 per share, exercisable at the rate of 30,000
shares per year, with the first such installment becoming exercisable September
9, 1998, and an additional 30,000 share on each succeeding September 9
thereafter. A similar option was granted the Company's President, but the option
lapsed upon his resignation in 1998. No compensation expense was recorded in
connection with the granting of these options. A summary of the outstanding
options follows:
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, January 1, 1997 - -
Options granted 300,000 $5.00
Options terminated - -
Options exercised - -
-------
Options outstanding, December 31, 1997 300,000 $5.00
=======
The Company also granted warrants to purchase common stock to the
purchasers of shares from one of the 1997 "Reg S" offerings. A summary is
as follows:
Date Granted Number of Option Effective Expiration
Shares Price Date Date
- ----------------------------------------------------------------------
September 29, 127,750 $15.00 January 1, December
1997 1998 31, 1998
NOTE 14 - TIME DEPOSITS AND FUNDS HELD IN ESCROW AND RESTRICTED CASH:
Time deposits and funds held in escrow consisted of the following:
December 31,
1997
----------
Time deposit, 5%, matures June, 1998 $ 100,000
Time deposit, 4.28 %, matures May, 1998 32,178
Funds held by escrow agent for partially closed
"Reg S" offering, completed in January, 1998 981,517
Funds held by escrow agent for balance due
on purchase of Cat Canyon leases 500,000
----------
Total $1,613,696
In the ordinary course of business, the Company has to occasionally place funds
in certificates of deposit and pledge these certificates to various third
parties to guarantee the Company's performance pursuant to various contracts. As
of December 31, 1997, a certificate of deposit in the amount of $32,178 was
pledged or otherwise restricted.
NOTE 15 - EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standards number 128,
Earnings Per Share, which establishes new standards for computing and presenting
earnings per share. Basic income per share has been computed using the weighted
average number of common shares outstanding during the respective periods. Basic
income per share has been retroactively restated in all periods presented to
F-20
<PAGE>
give recognition to the adoption of Statement number 128. In computing average
outstanding shares, the Company has converted Horizontal Ventures shares
outstanding prior to the merger to equivalent Petro Union shares on a pro rata
basis. The Statement provides that diluted earnings per share be computed by
considering the effect of outstanding options and warrants. However, it further
provides that diluted earnings per share is the same as basic earnings per share
in instances where a loss from continuing operations has been incurred.
Accordingly, diluted earnings per share has not been presented.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The accompanying table presents information concerning the Company's oil and gas
producing activities and is prepared in accordance with Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Also shown, in a comparative format, is similar information about
the Company's investment in limestone reserves.
The Company acquired its limestone reserves in July, 1992 through the
acquisition of Calox, Inc. The Company has not commenced production and
development activities on these acquired reserves. The following summarizes
activity related to these reserves:
LIMESTONE OIL
RESERVES RESERVES
----------- -----------
Capitalized costs:
Proved reserves $ 3,500,000 $ 1,963,337
Unproved reserves -- 400,000
----------- -----------
3,500,000 2,363,337
Less, Accumulated depreciation,
depletion and amortization -- (57,598)
----------- -----------
Balance, December 31, 1997 $ 3,500,000 $ 2,305,739
=========== ===========
LIMESTONE OIL
RESERVES RESERVES
(TONS) (BBLS)
------------ ----------
Proved reserves,
December 31, 1995 73,458,000 1,827,000
Production -- (615)
Change in Estimates -- --
---------- ----------
Proved reserves,
December 31, 1996 73,458,000 1,826,385
Purchases of minerals in place -- 728,734
Production -- (2,112)
---------- ----------
Proved reserves,
December 31, 1997 73,458,000 2,553,007
========== ==========
Proved developed reserves:
December 31, 1996 -- 94,287
December 31, 1997 -- 231,758
F-21
<PAGE>
The accompanying table reflects the standardized measure of discounted future
net cash flows relating to the Company's interests in proved reserves:
OIL AND
December 31, 1997: LIMESTONE GAS
------------- -------------
Future cash inflows $ 367,290,000 $ 32,874,000
Future costs:
Development (18,000,000) (3,000,000)
Production (202,374,000) (21,003,000)
------------- -------------
Future net cash flows before income taxes 146,916,000 8,871,000
Future income taxes (44,075,000) (2,600,000)
------------- -------------
Future net cash flows after income taxes 102,841,000 6,271,000
Discount at 10% per annum (77,699,000) (2,400,000)
------------- -------------
Standard measure of discounted future net
cash flows $ 25,142,000 $ 3,871,000
============= =============
OIL AND
December 31, 1997: LIMESTONE GAS
------------- -------------
Future cash inflows $ 367,290,000 $ 40,103,600
Future costs:
Development (18,000,000) (5,281,800)
Production (202,374,000) (23,805,600)
------------- -------------
Future net cash flows before income taxes 146,916,000 11,016,200
Future income taxes (44,075,000) (3,304,800)
------------- -------------
Future net cash flows after income taxes 102,841,000 7,711,400
Discount at 10% per annum (77,699,000) (2,400,000)
------------- -------------
Standard measure of discounted future
net cash flows $ 25,142,000 $ 4,610,300
============= =============
Future cash inflows are computed by applying year-end prices of oil and gas and
limestone relating to the year-end quantities of those reserves. Future
development and production costs are computed by independent consultants by
estimating the expenditures to be incurred in developing and producing proved
limestone and oil and gas reserves at the end of the year, based on year-end
costs and assuming continuation of existing economic conditions.
Future income tax expenses are computed by applying the appropriate statutory
tax rates to the future pretax net cash flows relating to proved reserves,
exclusive of the tax basis of the properties involved. The future income tax
expense gives effect to permanent differences and tax credits, but does not
reflect the impact of continuing operations. Future income tax expense has been
reduced by estimated future nonconventional fuel source income tax credits to be
utilized.
The 10% annual discount is applied to reflect the timing of the future net cash
flows. The standardized measure of discounted cash flows is the future net cash
flows less the computed discounts.
F-22
<PAGE>
HORIZONTAL VENTURES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 838,547
ACCOUNTS RECEIVABLE, TRADE, NET OF ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF $74,092 12,663
INVENTORY 3,272
------------
TOTAL CURRENT ASSETS 854,482
------------
PROPERTIES AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION AND DEPLETION
OF $824,151 7,748,147
------------
DEPOSITS, PREPAYMENTS, AND DEFERRED CHARGES 325,267
------------
TOTAL ASSETS $ 8,927,896
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG TERM NOTES $ 15,771
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 57,172
OTHER CURRENT LIABILITIES 2,500
------------
TOTAL CURRENT LIABILITIES 75,443
------------
LONG TERM NOTES PAYABLE, NET OF CURRENT
MATURITIES 52,283
------------
TOTAL LIABILITIES 127,726
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK, NO PAR VALUE, 50,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED AND OUTSTANDING --
COMMON STOCK, NO PAR VALUE, 50,000,000 SHARES
AUTHORIZED, 1,570,981 SHARES ISSUED AND
OUTSTANDING 11,672,519
ACCUMULATED DEFICIT (2,872,349)
------------
TOTAL STOCKHOLDERS' EQUITY 8,800,170
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,927,896
============
The accompanying notes are an integral part of this statement.
F-23
<PAGE>
<TABLE>
<CAPTION>
HORIZONTAL VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 9,704 $ 31,659 $ 129,852 $ 160,824
COST OF REVENUES 29,942 19,165 119,334 133,029
----------- ----------- ----------- -----------
GROSS MARGIN (20,238) 12,494 10,518 27,795
GENERAL AND
ADMINISTRATIVE
EXPENSES 394,967 124,423 1,270,978 296,509
----------- ----------- ----------- -----------
LOSS FROM
OPERATIONS (415,205) (111,929) (1,260,460) (268,714)
OTHER INCOME
(EXPENSES) 22,408 (8,660) 72,011 (45,025)
----------- ----------- ----------- -----------
LOSS BEFORE
INCOME TAXES (392,797) (120,589) (1,188,449) (313,739)
PROVISION FOR
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (392,797) $ (120,589) $(1,188,449) $ (313,739)
=========== =========== =========== ===========
NET LOSS PER
COMMON SHARE $ (0.25) $ (0.12) $ (0.76) $ (0.31)
AVERAGE SHARES
OUTSTANDING
USED FOR
COMPUTATION
OF LOSS PER
COMMON SHARE 1,570,981 1,000,018 1,570,981 1,000,018
The accompanying notes are an integral part of these statements
F-24
</TABLE>
<PAGE>
HORIZONTAL VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(1,188,450) $ (313,739)
ADJUSTMENTS TO RECONCILE NET LOSS TO
CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION, DEPLETION AND
AMORTIZATION 226,225 144,273
(GAIN) LOSS ON SALE OF ASSETS -- 21,062
STOCK AND PARTNERS= CAPITAL
INTEREST ISSUED FOR SERVICES -- 300
CHANGE IN ACCOUNTS RECEIVABLE 7,952 40,011
CHANGE IN INVENTORY (3,272) --
CHANGE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES (213,874) (62,589)
CHANGE IN CURRENT PORTION OF
LONG-TERM DEBT (6,011) --
CHANGE IN OTHER ASSETS (270,754) --
CHANGE IN OTHER LIABILITIES (525,000) --
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (1,973,184) (170,682)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (1,180,560) (122,488)
----------- -----------
INCREASE IN ACCOUNTS RECEIVABLE,
PETRO UNION, INC -- (9,170)
PROCEEDS FROM SALE OF PROPERTY
AND EQUIPMENT -- 55,181
NET CASH USED BY INVESTING ACTIVITIES (1,180,560) (76,477)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM SALE OF COMMON STOCK 84,446 600,000
INCREASE IN DUE TO RELATED PARTIES -- 60,478
STOCK ISSUED FOR NET ASSETS OF LIMITED
PARTNERSHIP -- 972,858
LESS, PARTNERS= PRIOR CAPITAL
CONTRIBUTIONS -- (818,000)
CHANGE IN CUSTOMER PAYMENTS
RECEIVED IN ADVANCE -- (30,000)
REPAYMENT OF NOTES PAYABLE (24,802) (182,614)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,644 602,722
----------- -----------
F-25
<PAGE>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,094,100) 355,563
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 3,932,647 6,458
----------- -----------
END OF PERIOD $ 838,547 $ 362,021
=========== ===========
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
STOCK ISSUED FOR SERVICES $ -- $ 40,300
STOCK ISSUED FOR SUBORDINATED
CONVERTIBLE DEBENTURES -- 433,231
STOCK ISSUED FOR NET ASSETS OF
PARTNERSHIP -- 972,858
STOCK ISSUED IN CONNECTION WITH
MERGER AND REORGANIZATION -- 4,132,469
SUPPLEMENTARY CASH FLOW DATA:
INTEREST PAID $[5,694] $ 23,601
INCOME TAXES PAID -- --
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
HORIZONTAL VENTURES, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(Unaudited)
NOTE 1 - THE COMPANY:
Horizontal Ventures, Inc., a Colorado corporation (the "Company"), is an energy
company engaged primarily in the business of exploiting proven producing oil and
gas reservoirs by utilizing a low cost proprietary horizontal drilling
technology to increase production rates. On July 13, 1998, the Company amended
its Articles of Incorporation to change its name from Petro Union, Inc. d/b/a
Horizontal Ventures, Inc. to Horizontal Ventures, Inc.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, HVI Cat Canyon, Inc.,
a Colorado corporation ("HVI Cat Canyon"), and Calox, Inc., an Indiana
corporation, and HVI Acquisition Corporation, a Delaware corporation. All
significant intercompany accounts and transactions have been eliminated.
The interim period financial statements presented herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
interim financial statements should be read in conjunction with the Company=s
annual financial statements included in the Company=s Annual Report on Form
10-KSB for the year ended December 31, 1997.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results that may be expected for future periods.
In the opinion of management, the unaudited interim financial statements
furnished reflect all adjustments necessary (which all are of a normal recurring
nature) for a fair presentation of the Company's financial condition as of
September 30, 1998, and the results of its operations and cash flows for the
interim periods ended September 30, 1998 and 1997.
F-27
<PAGE>
The Company, then named Petro Union, Inc. ("PUI"), was a debtor in possession
under Chapter 11 of the U.S. Bankruptcy Code until August 28, 1997, at which
time the Bankruptcy Court approved its plan of reorganization. As a part of its
plan of reorganization, PUI agreed to acquire all the outstanding stock of
Horizontal Ventures, Inc., an Oklahoma corporation (AHVI-Oklahoma@). The
acquisition of HVI-Oklahoma was completed on September 9, 1997, and after the
acquisition, HVI-Oklahoma shareholders owned more than 50% of the outstanding
shares of PUI. Pursuant to the rules of the Securities and Exchange Commission,
the transaction was accounted for as a "reverse merger." Accordingly, the
accompanying consolidated statements of operations and consolidated statements
of cash flows reflect the historical operations and cash flows of HVI-Oklahoma
(including those of PUI after September 9, 1997, the effective date of the
acquisition), whereas quarterly reports filed by the Company prior to September
9, 1997 reflected operations and cash flows of PUI. Subsequently, HVI-Oklahoma
was merged with and into the Company.
Certain reclassifications have been made to the 1997 amounts to conform to the
1998 presentation.
NOTE 3 - CONTINGENCIES:
As of September 30, 1998, the Company was the plaintiff in a lawsuit against
David J. LaPrade, a former officer and director of HVI-Oklahoma, and Mr.
LaPrade's current employer. The Company seeks to recover losses from the alleged
breach of fiduciary duty, misappropriating confidential information and property
of the Company, using it in unfair competition with the Company, interfering
with the Company's existing and prospective relationships with its customers,
interfering with the Company=s relationships with its employees, and conversion
of Company property. Mr. LaPrade has made counterclaims against the Company for
breach of his employment agreement, libel and slander, and intentional
infliction of emotional distress; he seeks actual damages in excess of $10,000
and punitive damages in an unspecified amount. The Company believes that the
ultimate outcome of Mr. LaPrade's counterclaims will not have a material adverse
effect on the Company=s financial condition, results of operations or cash
flows. The accompanying financial statements do not include a provision for any
loss which might result from Mr. LaPrade's counterclaims, nor do they include
any asset that might result from the Company's claims against Mr. LaPrade.
NOTE 4 - SUBSEQUENT EVENTS:
Since September 30, 1998, the Company has entered into the following
transactions relating to the acquisition of Saba Petroleum Company ("Saba"), an
independent energy company engaged in the acquisition, development and
exploration of oil and gas properties in the U.S. and internationally:
F-28
<PAGE>
On October 6, 1998, the Company entered into a Preferred Stock Transfer
Agreement (the "Preferred Stock Transfer Agreement") with RGC International
Investors, LDC ("RGC"), pursuant to which the Company acquired on October 6,
1998 690 shares of the 8,000 shares of issued and outstanding Series A
Convertible Preferred Stock of Saba (the "Saba Series A Preferred Stock") 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"), a significant
shareholder of the Company. The Company has executed a Promissory Note to repay
the $500,000 to IPH without interest on or before December 31, 1998, which
maturity dae subsequently was extended to January 31, 1999, in the form of cash
or shares of Saba Series A Preferred Stock held by the Company. The Promissory
Note is secured by a pledge of two-thirds of the Saba Series A Preferred Stock
held by the Company. Under the Preferred Stock Transfer Agreement, the Company
was granted the exclusive right until November 6, 1998 to acquire from RGC up to
an additional 6,310 shares of Saba Series A Preferred Stock held by RGC in
exchange for cash in the amount of approximately $6,859,000, with such exclusive
right subject to an extension for an additional thirty days by the Company's
payment of $500,000, which is nonrefundable but if the option is exercised
within the extended thirty day period is applied to the acquisition price. On
November 6, 1998, the Company paid $500,000 to RGC to extend the term of the
exclusive right until December 6, 1998. In addition, the Company was granted the
exclusive right to acquire any remaining shares of Saba Series A Preferred Stock
held by RGC after RGC converts a sufficient number of shares of Saba Series A
Preferred Stock to cover its short position with respect to 653,000 shares of
Saba Common Stock. On December 7, 1998 the board of directors of Saba agreed to
permit HVI to convert the Series A Preferred Stock and accrued dividends to
common stock at the ratio of $1.50 per common share. The 690 shares of Series A
Preferred Stock acquired by HVI and the minimum of 6,310 shares of Series A
Preferred Stock which HVI has the exclusive right to acquire from RGC, along
with the accrued but unpaid dividends thereon, would be convertible into an
estimated aggregate of 5,066,667 shares of Saba common stock. All agreemnts on
conversion prices expired on December 8, 1998. The parties are negotiating to
extend the terms.
On October 8, 1998 HVI and Saba entered into a Common Stock Purchase
Agreement (the "Common Stock Purchase Agreement") pursuant to which Saba's Board
of Directors agreed to issue to HVI an aggregate of 2,500,000 shares of Saba
common stock as follows:
* 333,333 shares of Saba common stock in exchange for $1,000,000 in cash
by November 6, 1998; and
* 2,166,667 shares of Saba common stock in exchange for $6,500,000 in
cash by December 4, 1998.
IPH in conjunction with HVI has made open market purchases of just around
5% of the issued and outstanding shares of Saba common stock. Pursuant to an
Option Agreement dated July 22, 1998 between HVI and IPH, HVI holds a call
option to acquire the approximately 568,000 shares of Saba common stock
purchased by IPH at an exercise price equal to the cost to IPH of acquiring such
shares plus twenty percent, which is estimated to be approximately $1,020,000.
HVI has the option of paying such exercise price to IPH in the form of cash or
shares of HVI common stock.
On October 14, 1998, HVI and IPH as a group filed a Schedule 13D with the
SEC that disclosed the foregoing purchases and contractual arrangements to
acquire Saba securities and that HVI was acquiring the securities of Saba for
the purpose of gaining control of Saba. Subsequently, HVI during October and
early November 1998 directly acquired 80,000 shares of Saba common stock in open
market purchases at an aggregate cost of approximately $70,130.
F-29
<PAGE>
On November 6, 1998, HVI paid Saba $1,000,000 for 333,333 shares of Saba
common stock pursuant to the Common Stock Purchase Agreement and $500,000 to RGC
to extend the term until December 6, 1998 of HVI's exclusive right to acquire
the Saba Series A Preferred Stock from RGC pursuant to the Preferred Stock
Transfer Agreement. These payments were financed by HVI's issuance to IPH on
November 4, 1998 of a Promissory Note payable in the amount of $1,500,000, with
6% interest, by December 31, 1998. This note has now been extended to January
31, 1999.The Promissory Note is secured by HVI's pledge of all of the issued and
outstanding shares of HVI Cat Canyon, Inc., a wholly owned subsidiary of HVI.
On November 23, 1998, as amended at closing on December 18, 1998 HVI
entered into a Stock Exchange Agreement with Saba Acquisub, Inc. ("SAI"), which
owned 2,976,765 shares of Saba common stock. SAI was controlled by Capco
Resources Ltd. which is controlled by Ilyas Chaudhary. Under the Stock Exchange
Agreement, HVI would acquire the Saba common stock owned by SAI in exchange for
the issuance by HVI to the shareholder of SAI an aggregate of 1,340,000 shares
of HVI common stock and SAI would merge with and into HVI. The Stock Exchange
Agreement also contains the following provisions:
* By February 18, 1999, HVI shall register for resale up to 1,000,00 of
the 1,340,000 shares HVI common stock issued to Capco Resources Ltd.;
* HVI shall indemnify the former shareholders of SAI to the fullest
extent permissible by law and the corporate by-laws against any claim
arising from the Stock Exchange Agreement;
* Until December 31, 1999 Capco Resources Ltd. or any approved assignee
shall give Mr. Grewal its proxy to vote the shares of HVI common stock
acquired by it under the Stock Exchange Agreement; and
* Until December 31, 2001 HVI shall have a right of first refusal with
respect to any proposed disposition by Capco Resources, Ltd. of the
HVI common stock acquired by it under the Stock Exchange Agreement.
On December 7, 1998, HVI announced that the Saba Board of Directors had
approved the acquisition of all the remaining outstanding shares of Saba common
stock through a proposed merger with HVI based on an exchange ratio of one share
of HVI common stock for each six shares of Saba common stock. The exchange ratio
is based on the following:
* a 55% premium for Saba common stock ($2.02 per share) above the
average closing price of Saba common stock over the preceding 31
calendar days as compared to the average closing
quotation for HVI common stock over the same period with no premium
and
* 11,385,726 shares of Saba common stock issued and outstanding,
including the 333,333 shares issued to HVI on November 6, 1998.
HVI also announced that Saba had agreed to extend from December 4, 1998 until
January 31, 1999 the final closing deadline of the Common Stock Purchase
Agreement and that the merged company intends to divest certain non-core assets
to satisfy outstanding liabilities.
On December 10, 1998 HVI closed the Stock Exchange Agreement with SAI dated
November 23, 1998, thereby raising HVI's ownership stake in Saba to
approximately 35%.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Saba Petroleum Company
We have audited the accompanying consolidated balance sheets of Saba
Petroleum Company and subsidiaries as of December 31, 1997 and 1996, 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, 1997 and 1996, 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 LLP
- -------------------------------
Los Angeles, California
April 15, 1998
F-31
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
ASSETS (unaudited)
- ------
Current assets:
<S> <C> <C> <C>
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 (1998) 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 103,559 235,608 239,146
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 24,279,948 39,075,063
9,163,757
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), 10,883,908 (1997)
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 23,640,124 30,090
17,715,210
------------
$ 49,116,886 $ 77,656,946 $ 53,921,074
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years ended December 31, 1995, 1996 and 1997
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended
Years ended December 31, September 30,
-------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(unaudited)
Revenues:
<S> <C> <C> <C> <C> <C>
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 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
The accompanying notes are an integral part of these consolidated financial statements.
F-33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Capital In Cumulative Total
----------------------- Excess Translation Unearned Retained Stockholders'
Shares Amount Of Par Value Adjustment Compensation Earnings 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 24,000 24
for compensation 25,476 25,500
Issuance of Common Stock 150,000 150 599,850 600,000
Cumulative translation 22,480 22,480
adjustment
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 (11,198) (11,198)
adjustment
Unearned compensation 8,500 8,500
Debenture conversions 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 conversions 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 (unaudited) 11,052,393 $ 11,052 $ 16,971,131 $ (242,791) -- $(16,709,302) $ 30,090
================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, Nine months ended
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 2,826,684 5,527,418 7,264,956 5,011,562 5,500,339
amortization
Writedown of oil and gas properties -- -- 254,937 -- 17,852,367
Amortization of unearned 17,000 8,500 -- -- --
compensation
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 55,632 241,403 55,883 89,994 (77,886)
(loss) of consolidated
subsidiary
Gain on issuance of shares of (124,773) (8,305) (4,036) (5,533) --
subsidiary
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 2,396,976 (237,328) 4,768,747 8,216,016 2,498,446
liabilities
Income taxes payable and other 509,343 650,644 (973,681) (1,281,441) 1,441,524
liabilities
----------------------------------------------------------------------------
Net cash provided by operating 1,735,907 6,913,517 14,953,880 11,976,523 4,683,358
activities
----------------------------------------------------------------------------
Cash flows from investing activities:
Deposit (purchase) of restricted (1,750,000) 1,750,000 -- -- --
certificate of deposit
Expenditures for oil and gas properties (12,807,412) (12,171,392) (32,874,800) (26,729,697) (5,677,036)
Expenditures for land and equipment, net (2,660,120) (585,893) (2,039,234) (2,344,326) (542,232)
Proceeds from sale of oil and gas 157,933 256,646 234,141 -- 5,254,066
properties
(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 (16,756,631) (11,855,894) (36,165,737) (30,812,536) (599,056)
activities
----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable and 34,814,900 17,085,315 28,725,454 28,649,983 4,241,925
long-term debt
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 (47,120) (21,251) (131,562) -- --
companies
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 -- -- 8,511,450 -- --
stock, net
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) 14,850,021 5,036,753 21,990,597 18,330,926 (4,397,191)
financing activities
----------------------------------------------------------------------------
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 (158,697) 93,749 773,605 (506,640) (320,970)
equivalents
Cash and cash equivalents at beginning of 798,984 640,287 734,036 734,036 1,507,641
year
Cash and cash equivalents at end of year $ 640,287 $ 734,036 $ 1,507,641 $ 227,396 $ 1,186,671
=============================================================================
F-35
</TABLE>
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Saba's
principal assets were located in the United States. In 1994 and 1995, Saba
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
Saba'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 Saba's outstanding
Common Stock was owned directly, or indirectly, by Saba's Chief Executive
Officer.
* Management's Plans
Saba'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. Saba 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 Saba's
principal lender during the next year. Saba is in a capital intensive
business, and during 1997, Saba'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 Saba could borrow and
the projected cash flow with which to service debt. Saba's immediate needs
for capital will intensify should Saba be successful in one or more of the
exploratory projects it is undertaking, in that Saba 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. Saba's exploratory prospect in Indonesia requires a
three-year work commitment of $17.0 million. Saba is in negotiation with
several potential joint venture partners to participate in this project.
Saba 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 Saba's principal lender
to restructure existing indebtedness to allow sufficient time for the
contemplated business combination to be concluded. Saba 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 Saba and its
wholly and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
F-36
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
* 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 Saba'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 - Saba 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 - Saba does not hold or issue financial
instruments for trading purposes. Saba's financial instruments consist of notes
receivable and long-term debt. The fair value of Saba's notes receivable and
long-term debt, excluding the Debentures, is estimated based on current rates
offered to Saba for similar issues of the same remaining maturates. The fair
value of the Debentures is based on quoted market prices.
Derivative Instruments - Saba does not utilize derivative instruments in
the management of its foreign exchange, commodity price or interest rate market
risks.
The fair value of Saba'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>
<CAPTION>
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
Saba's oil and gas producing activities are accounted for using the full
cost method of accounting. Accordingly, Saba 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.
F-37
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Saba's exploration, development and production
activities are conducted jointly with others and, accordingly, the
financial statements reflect only Saba'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, Saba 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, Saba 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, Saba 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.
F-38
<PAGE>
* Income Taxes
Saba 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 Saba'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.
F-39
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
* Sale of Subsidiary Stock
Saba 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, Saba's Board of Directors approved a two-for-one
forward stock split effected as a stock dividend on all outstanding shares
of Common Stock. Saba'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.
F-40
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Acquisitions
In September 1995, Saba 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. Saba's gross
acquisition cost for the acquired interests was $12.25 million, which was
reduced by Saba'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, Saba assumed an
oil imbalance obligation of approximately $1.25 million at the closing
date. In December 1995, Saba 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 Saba 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 Saba.
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 Saba 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.
Year Ended
December 31,
1995
------------
(unaudited)
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
======================
F-41
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Nine Months
Ended
September 30,
1995
-------------------
(unaudited)
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
====================
--------------------------
(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"), Saba'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:
Working capital deficiency $ (105,981)
Oil and gas properties 316,420
----------
$ 210,439
===========
On the same date as the share exchange with Saba, 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,
Saba 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, Saba owned 74.2% of the outstanding common stock of BLRC at
December 31, 1997.
F-42
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIAREIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Saba has reported in current operations. Deferred income taxes have not been
recorded in conjunction with these transactions as Saba 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:
1996 1997
------------ ------------
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 Saba with quarterly
interest only installments, due
October 31, 1998, collateralized by
vested stock options to purchase
the Common Stock of Saba 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 Saba 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
============ ============
F-43
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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>
<CAPTION>
_________________ 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.
F-44
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Costs incurred in oil and gas property acquisition, exploration, and development
activities are as follows:
<TABLE>
<CAPTION>
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.
Saba 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 Saba'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>
<CAPTION>
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, Saba awarded 24,000 shares of Common Stock with a fair market
value of $25,500 to an employee.
F-45
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Saba.
In October 1995, Saba'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 Saba's
Canadian subsidiary and cancellation of notes receivable in the amount of
$157,311.
In February 1996, Saba issued 14,000 shares of Common Stock to a director of
Saba 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.
Saba 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.
Saba 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.
Saba 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.
Saba 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 year
ended December 31, 1997.
Saba 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.
Saba 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.
Saba 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.
Saba 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.
Saba 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.
F-46
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Saba in the amount of $2,390,354, and the issuance of a
stock subscription payable recorded at a cost of $750,000.
Saba 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 Saba 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:
1996 1997
------------ -------------
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
============ =============
F-47
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
1995 1996 1997
------------ ------------- ------------
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
=========== =============== =============
Components of income tax expense (benefit) for the years ended December 31,
1995, 1996 and 1997 are as follows:
1995 1996 1997
------------ ------------- --------------
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
============ ============= ==============
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:
1995 1996 1997
------- ------- -------
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%
======= ======= =======
F-48
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effected temporary differences which give rise to the deferred tax
provision consist of the following:
1995 1996 1997
----------- ----------- -----------
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
============ =========== ===========
The components of the tax effected deferred income tax asset (liability) as
of December 31,1996 and 1997 are as follows:
1996 1997
-------------- ------------
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)
============== ==============
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, Saba 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. Saba 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.
F-49
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Debt
Long-term debt at December 31, 1996 and 1997 and September 30, 1998,
consists of the following:
September30,
1996 1997 1998
----------- ----------- ------------
(unaudited)
9% convertible senior subordinated $ 6,438,000 $ 3,599,000 $ 3,575,000
Debentures due 2005
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
=========== =========== ===========
On December 26, 1995, Saba issued $11,000,000 of 9% convertible senior
subordinated debentures ("Debentures") due December 15, 2005. The Debentures are
convertible into Common Stock of Saba, 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. Saba has reserved 3,000,000
shares of its Common Stock for the conversion of the Debentures. The Debentures
were not redeemable by Saba 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 Saba and are effectively subordinated to all
liabilities of subsidiaries of Saba. The principal use of proceeds from the sale
of the Debentures was to retire short term indebtedness incurred by Saba 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 Saba's revolving credit agreement. On February 7, 1996, Saba issued an
additional $1,650,000 of Debentures pursuant to the exercise of an allotment
option by the underwriting group. Net proceeds to Saba were approximately $1.5
million and a portion was utilized to reduce the outstanding balance under
Saba's revolving line of credit.
Certain terms of the Debentures contain requirements and restrictions on Saba
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
Saba's former Chief Executive Officer, Ilyas Chaudhary; and the limitations of
fundamental changes and certain trading activities, on Mergers and
Consolidations (as defined) of Saba, 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
Saba'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 Saba 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, Saba is restricted from paying dividends and advancing
funds in excess of specified limits to affiliates. Saba was not in compliance
with financial covenants at September 30, 1998.
F-50
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1997, Saba 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 Saba's Chief Executive Officer.
In November, 1997 Saba 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 Saba'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.
Saba'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.
Saba 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 Saba 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 Saba owns mineral interests. The note bears interest at the
rate of 13.5%, and is classified as a current liability.
In June 1998, Saba borrowed $4.2 million from Omimex Resources, Inc. (Omimex),
of which $2.0 million was paid to Saba's principal commercial lender to reduce
indebtedness under one of Saba'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 Saba's
50% interest in the Velasquez-Galan pipeline in Colombia.
The 9% promissory notes -Capco were due to Saba'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 Saba principally in connection with the acquisition of
producing oil and gas properties in Colombia. The notes were paid in 1997.
F-51
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long term debt at December 31, 1997 are as follows:
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
9. Related Party Transactions
Related party transactions are described as follows:
In 1995, 1996 and 1997, Saba charged its affiliates $92,900, $26,300 and
$18,600, respectively, for reimbursement of certain general and administrative
expenses.
In 1995, Saba charged an affiliate $7,600 and was charged $30,000 by
affiliates for interest on short-term advances.
In 1995, Saba 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, Saba received a short-term advance in the amount of $10,500 from
an affiliate.
In 1995, Saba loaned $101,700 to a company controlled by Saba'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, Saba borrowed $350,000 from a company controlled by a director of
Saba. 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 Saba, 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 Saba. The balance of
the borrowings is due April 1, 2006 and is subordinated to the same extent as
the Debentures are subordinated. Saba incurred interest expense in the amount of
$67,600 in 1995 as a result of this indebtedness.
In 1996, Saba provided a short-term advance to an affiliate in the amount
of $10,000.
In 1996, Saba 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, Saba charged affiliates $19,400 and was charged $152,300 by
affiliates for interest on promissory notes.
In 1996, Saba loaned $30,000 to a director of Saba, on an unsecured basis,
at an interest rate of 9% per annum.
In 1996, Saba loaned $300,000 to the Chief Executive Officer of Saba 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 Saba charged interest in the amount of $45,343 to affiliates and
was charged interest in the amount of $60,220 by affiliates. Saba 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 Saba 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 Saba.
In 1997 Saba 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.
F-52
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year 1997, Saba 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 Saba's oil properties.
In 1997, Saba incurred airplane charter expenses in the amount of $72,774
from non-affiliated airplane leasing services, for the use of an airplane owned
by Saba's Chief Executive Officer
10. Preferred Stock
On December 31, 1997, Saba 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
Saba, can be paid either in cash or through the issuance of shares of Saba's
Common Stock. The Preferred Stock is senior to all other classes of Saba's
equity securities. The conversion price of the Preferred Stock is based on the
future price of Saba'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 Saba's Common Stock. The Preferred Stock is
redeemable, at the option of Saba, 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 Saba 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 Saba's common stock underlying the Preferred
Stock on the date of redemption. Those circumstances include Saba's failure to
issue and transfer shares of Common Stock to the Preferred Stockholder upon
conversion of the Preferred Stock; Saba's failure to remove a restrictive legend
from the common stock when required to do so; Saba'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; Saba's assignment for the benefit of creditors, or
consent to the appointment of a receiver for Saba or for all or substantially
all of its property; the institution by or against Saba or any of Saba's
subsidiaries of a bankruptcy or insolvency proceeding, which continues
undismissed for 45 days; and Saba's failure to maintain a listing on AMEX.
Should Saba choose to redeem the issue, the Preferred Stock holder will be
entitled to receive 200,000 warrants to purchase Saba's Common Stock. Upon the
liquidation of Saba, 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, Saba 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. Saba 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) Saba 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 penatly 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, Saba's results of operations include a charge
of $742,000. RGC International Investors, LDC ("RGC"), holder of 7,310 shares of
Preferred Stock had agreed to waive, subject to certain provisions,
substantially all of the accrued penalty under the terms of the transaction with
Horizontal Ventures, Inc. ("HVI") (see Subsequent Events).
11. Common Stock and Stock Options
In January 1995, Saba 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, Saba canceled its Incentive and Nonqualified Stock Option
Plans. No options were granted under either plan prior to cancellation.
During the year 1995, Saba issued options to acquire 200,000 shares of
Saba'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 canceled. Saba also issued options to acquire
200,000 shares of Saba's Common Stock to an employee under the terms of an
employment agreement.
F-53
<PAGE>
In April 1996 and June 1996, Saba's Board of Directors and shareholders,
respectively, approved Saba's 1996 Incentive Equity Plan ("Plan"). The purpose
of the Plan is to enable Saba 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 Saba'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, Saba issued options to acquire 100,000 shares of
Saba'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. Saba also issued options to
acquire 20,000 shares of Saba's Common Stock to an employee under the terms of
an employment agreement.
On May 30, 1997, Saba 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, Saba 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. Saba 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, Saba's stockholders approved Saba'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 Saba'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, Saba's stockholders approved an increase in the number of
shares of Saba'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, Saba had outstanding options for
548,000 and 480,000 shares, respectively, of Common Stock to certain employees
of Saba. 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>
<CAPTION>
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
Canceled (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>
F-54
<PAGE>
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>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------------
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise prices December 31, Contractual Exercise December 31, Exercise Price
1997 Life Price 1997
---------------- ----------------- --------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.25 - $1.38 308,000 (1) $ 1.29 240,000 $ 1.29
220,000
$1.50 (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.
Saba 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 Saba's 1995, 1996 and 1997 grants to employees had
been determined consistent with SFAS No. 123, Saba's net income and net earnings
per common share (basic) for 1995, 1996 and 1997 would approximate the proforma
amounts set forth below:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------- -------------------------------- --------------------------
As Reported Proforma As Reported Proforma As Reported Proforma
----------- -------- ----------- -------- ----------- --------
<S> <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, Saba's Board of Directors authorized, on a deferred basis,
the issuance of 200,000 shares of Common Stock to Saba's President, the issuance
of such shares being contingent upon the officer remaining in the employ of Saba
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.
F-55
<PAGE>
Additionally, the Board of Directors authorized the issuance of 100,000
shares of performance shares to Saba's President, issuable at the end of
calendar year 1998 provided that certain operating results are reported by Saba
at the end of that year.
In March 1998, Saba 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. Saba recognized compensation expense of
$22,600 in the nine months ended September 30, 1998, attributable to the option
grant.
In March 1998, Saba 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. Saba recognized compensation expense of
$22,600 in the nine months ended September 30, 1998, attributable to the option
grant.
In March 1998, Saba 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, Saba 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>
<CAPTION>
1995 1996 1997
----------------------------- -------------------------------- ----------------------------------
Income Shares Per share Income Shares Per share Income Shares Per 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
0.43
Effect of dilutive
securities:
Contingently issuable 330 371 350
shares
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 $ 0.2
========= ======= =========== ========= ======== ========== ========== ========== ==============
</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>
<CAPTION>
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
============= ============ ==============
F-56
<PAGE>
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
Saba 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. Saba currently provides matching contributions
equal to 50% of each employee's contribution, subject to a maximum of 4% of
employee earnings. Saba'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
Saba 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 Saba's financial statements or operations.
Leases
Saba 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:
Year Ending December 31,
1998 $308,660
1999 233,521
2000 86,503
2001 35,697
2002 13,105
=========
$677,486
=========
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
Saba 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). Saba has not incurred losses related to such cash balances.
Saba'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 Saba's
customer base. Ongoing credit evaluations of the financial condition of joint
interest partners are performed and generally, no collateral is required. Saba
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):
F-57
<PAGE>
1996 1997
---- ----
Customer A $ 2,566,700 $ 1,482,600
==================== ===============
Customer B $ 1,267,100 $ 931,965
==================== ===============
Customer C $ 899,600 $ 745,567
==================== ===============
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:
Geographic Area 1995 1996 1997
---- ---- ----
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 $ - $ -
============= ============= ============
All sales to the geographic area of Colombia are to the government owned oil
company.
Contingencies
Saba 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. Saba 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 Saba might also incur
remediation obligations with respect to the refinery, Saba 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. Saba, however, believes that all required remediation will be
completed by the seller within the five year period. Environmental compliance
surveys such as those Saba 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, Saba and the operator were required
to perform various environmental remedial operations, which the operator advises
have been substantially, if not wholly, completed. Saba and the operator are
awaiting an inspection of the Concession area by Colombian officials to
determine whether the government concurs in the operator's conclusions. Based
upon the advice of the operator, Saba does not anticipate any significant future
expenditures associated with the environmental requirements for the Cocorna
Concession.
F-58
<PAGE>
In 1993, Saba acquired a producing mineral interest from a major oil
company ("Seller"). At the time of acquisition, Saba'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 Saba assumed
operation of the property, Saba became aware of the fact that diluent was
seeping into a drainage area, which traverses the property. Saba 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. Saba 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 Saba be required to remediate the area itself, the cost to Saba could be
significant. Saba 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, Saba 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 Saba assume the obligation to abandon any wells that
Saba did not return to production, irrespective of whether certain consents of
third parties necessary to transfer the property to Saba were obtained. Saba 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 Saba 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. Saba is currently unable to assess its
exposure to third parties if Saba elects to plug such wells without first
obtaining necessary consent.
Saba, 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 Saba. No
assurance can be given that the costs of closure of any of Saba's other oil and
gas properties would not have a material adverse effect on Saba.
F-59
<PAGE>
16. Business Segments
Saba 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 Saba's operations by geographic area for the years ended December
31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) United Corporate &
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>
F-60
<PAGE>
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 Saba's bank or
reducing the principal balance that was outstanding at September 30, 1998.
Additionally, Saba was not in compliance with the loan agreement's financial
covenants at September 30, 1998. Saba and its bank are in discussions to address
such non-compliance.
Saba has negotiated, and continues to pursue, the sale of certain producing oil
and gas assets and real estate assets. In September 1998, Saba listed certain of
its California real estate properties with a broker, and in October 1998, Saba
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 Saba's outstanding Common Stock, with the intent to gain control of
Saba. On October 14, 1998, a Schedule 13D was filed by HVI. On October 8, 1998,
Saba 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 Saba'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, Saba 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 Saba'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 exclusive right was extended for 30 days pursuant to HVI's payment to RGC of
an additional $500,000. 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 has 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, Saba 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 Saba 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 Saba and
RGC toward the private placement of 2.5 million shares of Saba's Common Stock
under the Common Stock Purchase Agreement and toward acquiring from RGC as much
as 7,000 shares of Saba's Preferred Stock. Of this amount, Saba 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 merge with the Company. 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 412.14 during
the same period.
F-61
<PAGE>
In October 1998, Saba executed a letter presented by the operator of the North
Nare Association in Colombia whereby Saba 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 ("Sabacol"), 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, of consummating the plan.
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 next thirty days prior to the event of 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, 1999, 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.
F-62
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Estimated Proved Reserves
Estimates of Saba'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 Saba's oil and
gas properties:
<TABLE>
<CAPTION>
United
States Canada (1) Colombia Total
------ ---------- -------- -----
Year ended December 31, 1995
- ----------------------------
Oil (Barrels)
Proved reserves:
- ----------------
<S> <C> <C> <C> <C>
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 (2) 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)(2) See references (1) and (2) on page F-[ ]
F-63
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Year ended December 31, 1996
- ----------------------------
Oil (Barrels)
Proved reserves:
- ----------------
<S> <C> <C> <C> <C>
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 (2) 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 (2) (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)(2) See references (1) and (2) on page F-37
F-64
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
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.
1995 1996 1997
---- ---- ----
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
(2) Revisions of previous estimates are primarily the result of product prices
changes during the respective year-ends presented above.
F-65
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
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 Saba
(dollars in thousands).
<TABLE>
<CAPTION>
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
========= ========= ========= =========
(1) See reference (1) on page F-[ ]
F-66
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
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).
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
F-67
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
1997
----
United
States Canada (1) Colombia Total
------ ---------- -------- -----
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
(1) See reference (1) on page F-[ ]
F-68
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
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- _____
of this Form S-4. 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-4.
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
F-69
<PAGE>
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance at Charged Charged Deductions Balance at
beginning to to other from close of
of period income accounts reserves period
--------- ------ -------- -------- ------
1995
Amounts deducted from applicable assets:
<S> <C> <C> <C> <C> <C> <C>
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
F-70
</TABLE>
<PAGE>
Annex I
I-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
As permitted by the provisions of the Colorado Business Corporation Act
(the "CBCA"), HVI has the power to indemnify any person made a party to an
action, suit or proceeding by reason of the fact that they are or were a
director, officer, employee or agent of HVI, against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by them in
connection with any such action, suit or proceeding if they acted in good faith
and in a manner which they reasonably believed to be in, or not opposed to, the
best interest of HVI and, in any criminal action or proceeding, they had no
reasonable cause to believe their conduct was unlawful. Termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which they
reasonably believed to be in or not opposed to the best interests of HVI, and,
in any criminal action or proceeding, they had no reasonable cause to believe
their conduct was unlawful.
HVI must indemnify a director, officer, employee or agent of HVI who is
successful, on the merits or otherwise, in the defense of any action, suit or
proceeding, or in defense of any claim, issue, or matter in the proceeding, to
which they are a party because they are or were a director, officer employee or
agent of HVI, against expenses actually and reasonably incurred by them in
connection with the defense.
HVI may provide to pay the expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding as the expenses are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that they are not entitled to be indemnified by HVI.
As permitted by Section 7-108-402 of the CBCA, the HVI Articles of
Incorporation provide that directors shall not be personally liable for monetary
damages for breaches of their fiduciary duty as directors except for (I)
breaches of their duty of loyalty to HVI or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) certain transactions involving unlawful payment of
dividends or unlawful stock purchases or redemptions, or (iv) transactions from
which a director derives an improper personal benefit. The general effect of
this provision is to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care.
The HVI Articles of Incorporation provide for indemnification of HVI's
officers and directors to the maximum extent permitted by law.
The CBCA also permits a corporation to purchase and maintain liability
insurance or make other financial arrangements on behalf of any person who is or
was a director, officer, employee or agent of HVI, or is or was serving at the
request of the corporation as a director, officer, employee or agent, of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against them and liability and expenses incurred by them in
their capacity as a director, officer, employee or agent, or arising out of
their status as such, whether or not HVI has the authority to indemnify them
against such liability and expenses. HVI does not presently carry such
insurance.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits. The following is a list of exhibits furnished as part of this
Registration Statement:
Exhibit No. Exhibit Description
- ----------- -------------------
2.1 Agreement and Plan of Merger dated December 18, 1998 (See Annex I)*
3.1 Restated Articles of Incorporation of HVI (filed as Exhibit 3A to
HVI's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1998 (File No. 0-20760) and incorporated herein by reference)
3.2 By-Laws of HVI (incorporated by reference to Exhibit No. 3 to the
HVI's Registration Statement (#33-24265-LA)
4.1 Specimen Common Stock Certificates of HVI (incororated by reference to
Exhibit Nos. 1A and 1B of HVI's Form 8-A/A registration Statement
(File #0.20760)
5.1 Opinion of Cohen Brame & Smith Professional Corporation**
<PAGE>
10.1 Post-Petition Loan Agreement (incorporated by reference to Exhibit 10E
to HVI's Annual Report on Form 10-KSB for the year ended December 31,
1996).
10.2 Amended Post-Petition Loan Agreement (incorporated by reference to
Exhibit 10-F to HVI's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
10.3 Horizontal Drilling Services Letter Agreement (incorporated by
reference to Exhibit 10-G to HVI's Annual Report on Form 10-KSB for
the year ended December 31, 1996).
104. Agreement and Plan of Acquisition (incorporated by reference to
Exhibit 10.1 to HVI's Current Report on Form 8-K for event dated
August 11, 1997).
10.5 Randeep S. Grewal Employment Agreement (incorporated by reference to
Exhibit 10.1 to HVI's Current Report on Form 8-K for event dated
August 28, 1997).
10.6 Post Petition Loan Agreement (incorporated by reference to Exhibit
10.1 to HVI's Current Report on Form 8-K for event dated August 28,
1997.
10.7 Cat Canyon Lease Purchase Agreement (filed as Exhibit 10K to HVI's
Annual Report on Form 10-KSB for the year ended December 31, 1997
(File No. 0-20760) and incorporated herein by reference).
10.8 Employment Agreement with Ilyas Chaudhary (filed as Exhibit 10.3 to
Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.9 Employment Agreement with Walton C. Vance (filed as Exhibit 10.31 to
Saba's annual report on Form 10-KSB for the year ended December 31,
1996 (File No. 001-13880) and incorporated herein by reference)
10.10 First Amendment, Letter Agreement with Bradley T. Katzung (filed as
Exhibit 10.33 to Saba's annual report on Form 10-KSB for the year
ended December 31, 1996 (File No. 001-13880) and incorporated herein
by reference)
10.11 Second Amendment to Employment Agreement with Bradley T. Katzung
(Filed as Exhibit 10.5 to Saba's annual report on Form 10-K for the
year ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.12 Employment Agreement with Burt Cormany (filed as Exhibit 10.1 to
Saba's quarterly report on Form 10-QSB for the quarter ending March
31, 1997 (File No. 001-13880) and incorporated herein by reference)
10.13 Employment Agreement with Alex Cathcart, dated March 1, 1997, (filed
as Exhibit 10.38 to Saba's Quarterly Report Form 10-Q for the quarter
ended June 30, 1997 (file No.001-13880) and incorporated herein by
reference)
10.14 Retainer Agreement with Rodney C. Hill, A Professional Corporation,
dated March 16, 1997 (filed as Exhibit 10.39 to Saba's Quarterly
Report Form 10-Q for the quarter ended June 30, 1997(File No.
001-13880) and incorporated herein by reference)
10.15 Amendment to Retainer Agreement with Rodney C. Hill, A Professional
Corporation dated March 13, 1998 (Filed as Exhibit 10.9 to Saba's
annual report on Form 10-K for the year ended December 31, 1997 (File
No. 001-13880) and incorporated herein by reference
10.16 Saba Petroleum Company 1996 Equity Incentive Plan (filed as Exhibit
4.4 to Saba's Registration Statement on Form S-8, dated August 21,
1997 (File No. 333-34035) and incorporated herein by reference
10.17 Saba Petroleum Company 1997 Stock Option Plan for Non-Employee
Directors (filed as Exhibit 4.5 to Saba's Registration Statement on
Form S-8, dated August 21, 1997 (File No. 333-34035) and incorporated
herein by reference)
10.18 First Amended and Restated Loan Agreement between Saba and Bank One,
Texas, N.A. (filed as Exhibit 10.1 to Saba's quarterly report on Form
10-QSB for the quarter ended September 30, 1996 (File No. 001-13880)
and incorporated herein by reference)
10.19 Amendment Number One to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.20 to
Saba's annual report on Form 10-KSB for the year ended December 31,
1996 (File No. 1-12322) and incorporated herein by reference)
10.20 Amendment Number Two to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.1 to
Saba's quarterly report on Form 10-Q for the quarter ended September
30, 1997 (File No. 001-13880) and incorporated herein by reference)
10.21 Amendment Number Three to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.2 to
Saba's quarterly report on Form 10-Q for the quarter ended September
30, 1997 (File No. 001-13880) and incorporated herein by reference)
10.22 Amendment Number Four to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10 to Saba's
Current Report on Form 8-K filed September 24, 1997 (File No.
001-13880) and incorporated herein by reference)
10.23 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 Saba and Bank One, Texas, N.A. (filed
as Exhibit 10.4 to Saba's quarterly report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 001-13880) and incorporated
herein by reference)
<PAGE>
10.24 Amendment Number Five to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.4 to
Saba's Current Report on Form 8-K filed January 15, 1998 (File No.
001-13880) and incorporated herein by reference)
10.25 Consent Letter to Preferred Stock Transaction by Bank One, Texas, N.A.
dated December 31, 1997 (filed as Exhibit 10.2 to Saba's Current
Report on Form 8-K filed January 15, 1998 (File No. 001-13880) and
incorporated herein by reference)
10.26 Amendment of the First Amended and Restated Loan Agreement between
Saba 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)
10.27 Amendment Number Seven to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (Filed as Exhibit 10.21 to
Saba's annual report on Form 10-K for the year ended December 31, 1997
(File No. 001-13880) and incorporated herein by reference)
10.28 Stock Purchase Agreement (filed as an exhibit to Saba's Current Report
on Form 8-K dated January 10, 1995 (File No. 1-12322) and incorporated
herein by reference)
10.29 Processing Agreement between Santa Maria Refining Company and Petro
Source Refining Corporation (filed as Exhibit 10.6 to Saba's
Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.30 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 Saba's Registration Statement on Form SB-2 (File No.
33-94678) and incorporated herein by reference)
10.31 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd. and
Texas Petroleum Company to acquire Cocorna Field (filed as Exhibit
10.8 to Saba's Registration Statement on Form SB-2 (File No. 33-94678)
and incorporated herein by reference)
10.32 Agreement among Saba Petroleum Company and Cabot Oil and Gas
Corporation to acquire Cabot Properties (filed as Exhibit 10.9 to
Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.33 Agreement among Saba Petroleum Company, Beaver Lake Resources
Corporation and Capco Resource Properties Ltd. (filed as Exhibit 10.10
to Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.34 Amendment to Agreement among Saba, Omimex de Colombia, Ltd. and Texas
Petroleum Company to acquire the Teca and Nare fields (filed as
Exhibit 2.2 to Saba's Current Report on Form 8-K dated September 14,
1995 (File No. 1-12322) and incorporated herein by reference)
10.35 Promissory Notes of Saba (filed as Exhibit 10.13 to Saba's
Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.36 CRI Stock Purchase Termination Agreement (filed as Exhibit 10.14 to
Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.37 Form of Common Stock Conversion Agreement between Capco and Saba
(filed as Exhibit 10.15 to Saba's Registration Statement on Form SB-2
(File No. 33-94678) and incorporated herein by reference)
10.38 Form of Agreement regarding exercise of preemptive rights between
Capco and Saba (filed as Exhibit 10.16 to Saba's Registration
Statement on Form SB-2 (File No. 33-94678) and incorporated herein by
reference)
10.39 Letter Agreement, as amended, between Omimex de Colombia, Ltd. and
Saba (filed as Exhibit 10.17 to Saba's Registration Statement on Form
SB-2 (File No. 33-94678) and incorporated herein by reference)
10.40 Promissory Note of Mr. Chaudhary (filed as Exhibit 10.2 to Saba's
quarterly report on Form 10-QSB for the quarter ended June 30, 1996
(File No. 001-13880) and incorporated herein by reference)
10.41 Form of Stock Option Agreements between Mr. Chaudhary and Messrs.
Hickey and Barker (filed as Exhibit 10.3 to Saba's quarterly report on
Form 10-QSB for the quarter ended June 30, 1996 (File No. 001-13880)
and incorporated herein by reference)
10.42 Form of Stock Option Termination Agreements between Saba and Messrs.
Hagler and Richards (filed as Exhibit 10.4 to Saba's quarterly report
on Form 10-QSB for the quarter ended June 30, 1996 (File No.
001-13880) and incorporated by reference)
10.43 Agreement Minutes concerning Colombia oil sales contract between
Omimex as operator and Ecopetrol (filed as Exhibit 10.21 to Saba'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 Operating Agreement between Omimex and Sabacol-Velasquez property
(filed as Exhibit 10.22 to Saba's annual report on Form 10-KSB for the
year ended December 31, 1996 (File No. 001-13880) and incorporated
herein by reference)
<PAGE>
10.45 Operating Agreement between Omimex and Sabacol-Cocorna and Nare
properties (filed as Exhibit 10.23 to Saba's annual report on Form
10-KSB for the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.46 Operating Agreement between Omimex and Sabacol-Velasquez-Galan
Pipeline (filed as Exhibit 10.24 to Saba'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 Operating Agreement between Omimex and Sabacol-Cocorna Concession
property (filed as Exhibit 10.25 to Saba'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 Life insurance contract on life of Ilyas Chaudhary (filed as Exhibit
10.26 to Saba's annual report on Form 10-KSB for the year ended
December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.49 Life insurance contract on life of Ilyas Chaudhary (filed as Exhibit
10.27 to Saba's annual report on Form 10-KSB for the year ended
December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.50 Agreement for Assignment of Leases between Saba and Geo Petroleum,
Inc. (filed as an exhibit to Saba'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)
10.51 Amendment to Agreement for Assignment of Leases between Saba and Geo
Petroleum, Inc. (Filed as Exhibit 10.45 to Saba'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 Agreement to Provide Collateral between Capco and Saba Petroleum
Company (filed as Exhibit 10.29 to Saba's annual report on Form 10-KSB
for the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.53 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 Saba's annual report on Form 10-KSB for the
year ended December 31, 1996 (File No. 001-13880) and incorporated
herein by reference)
10.54 Beaver Lake Resources Corporation March 1997 Re-Financing Agreement
(filed as Exhibit 10.3 to Saba's quarterly report on Form 10-QSB for
the quarter ending March 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.55 Production Sharing Contract between Perusahaan Pertambangan Minyak Dan
Gas Bumi Nagara (Pertamina) and Saba Jatiluhur Limited (filed as
Exhibit 10.5 to Saba's quarterly report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 001-13880) and incorporated herein
by reference)
10.56 Agreements among Saba, Amerada Hess Corporation and Hamar Associates
II, LLC dated November 1, 1997 (Filed as Exhibit 10.50 to Saba's
annual report on Form 10-K for the year ended December 31, 1997 (File
No. 001-13880) and incorporated herein by reference)
10.57 Agreements among Saba, Chevron U.S.A. Production Company and Nahama
Natural Gas (Filed as Exhibit 10.51 to Saba's annual report on Form
10-K for the year ended December 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.58 Exchange Agreement between Saba and Energy Asset Management Company,
L.L.C. dated March 6, 1998 (Filed as Exhibit 10.52 to Saba's annual
report on Form 10-K for the year ended December 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.59 Office Lease Agreement, 3201 Airpark Drive, Santa Maria, California
(filed as Exhibit 10.2 to Saba's quarterly report on Form 10-QSB for
the quarter ending March 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.60 Office Lease Agreement, 17526 Von Karman Avenue, Irvine, California
(Filed as Exhibit 10.54 to Saba'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 Purchase and Sale Agreement between Saba and Statoil Exploration (US)
Inc. dated August 19, 1997 (filed as an exhibit to Saba's Current
Report on Form 8-K dated September 24, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.62 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)
10.63 Registration Rights Agreement dated as of December 31, 1997(filed as
Exhibit 3(I).1(a) to Saba's Registration Statement on Form S-1, dated
January 27, 1998 (File No. 333-45023) and incorporated herein by
reference)
10.64 Stock Purchase Warrant (Closing Warrant) dated December 31, 1997(filed
as Exhibit 3(I).1(a) to Saba's Registration Statement on Form S-1,
dated January 27, 1998 (File No. 333-45023) and incorporated herein by
reference)
<PAGE>
10.65 Stock Purchase Warrant (Redemption Warrant) dated December 31,
1997(filed as Exhibit 3(I).1(a) to Saba's Registration Statement on
Form S-1, dated January 27, 1998 (File No. 333-45023) and incorporated
herein by reference)
10.66 Finder Agreement dated as of December 31, 1997 (Filed as Exhibit 10.60
to Saba's annual report on Form 10-K for the year ended December 31,
1997 (File No. 001-13880) and incorporated herein by reference)
10.67 Stock Purchase Warrant (Finder Warrant) dated as of December 31, 1997
(Filed as Exhibit 10.61 to Saba's annual report on Form 10-K for the
year ended December 31, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.68 Preliminary Agreement To Enter Into A Business Combination dated March
18, 1998 by and among Saba and Omimex Resources, Inc. (filed as
Exhibit 10.1 to Saba's Current Report on Form 8-K dated March 30, 1998
(File No. 001-13880) and incorporated herein by reference)
10.69 Press Release announcing the Proposed Combination between Saba and
Omimex Resources, Inc. dated March 18, 1998 (filed as Exhibit 10.2 to
Saba's Current Report on Form 8-K dated March 30, 1998 (File No.
001-13880) and incorporated herein by reference) 10.70 Preferred Stock
Transfer Agreement dated October 7, 1998 between HVI and RGC (filed as
Exhibit 10.1 to HVI's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.71 Common Stock Purchase Agreement dated October 8, 1998 between HVI and
Saba (filed as Exhibit10.2 to HVI's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998 and incorporated herein by
reference).
10.72 Option Agreement dated July 22, 1998 between HVI and IPH (filed as
Exhibit 10.3 to HVI's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.73 Promissory Note dated October 6, 1998 payable by HVI to IPH (filed as
Exhibit 10.4 to HVI's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.74 Pledge Agreement dated October 6, 1998 between HVI and IPH (filed as
Exhibit 10.5 to HVI's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.75 Promissory Note dated November 4, 1998 payable by HVI to IPH (filed as
Exhibit 10.6 to HVI's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.76 Pledge Agreement dated November 4, 1998 between HVI and IPH (filed as
Exhibit 10.7 to HVI's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.77 Agreement and Plan of Reorganization dated as of June 1, 1998 by and
among Saba and Ominex Resources, Inc. et al. (filed as Exhibit 10.1 to
Saba's Curretn Report on Form 8-K dated June 16, 1998 (File No.
001-13880) and incorporated herein by reference).
10.78 Consent letter to provisions of Section 1.7 of the Agreement and Plan
of Reorganization by Bank One, Texas, NA, dated June 2, 1998 (filed as
Exhibit 10.2 to Saba's Current Report on Form 8-K dated June 16, 1998
(File No. 001-13880) and incorporated herein by reference).
10.79 Amendment ot First Amended and Restated Loan Agreement dated September
23, 1996, as amended among Saba et al. And Bank One, Texas, NA dated
June 9, 1998 (filed as Exhibit 10.3 to Saba's Current Report on Form
8-K dated June 16, 1998 (File No. 001-13880) and incorporated herein
by reference).
10.80 Mutual Termination and Release Agreement dated September 15, 1998 by
and among Saba, Saba Acquisition, Inc., Omimex Resources, Inc., the
Omimex Resources, Inc. stockholders and Ilyas Chaudhary (filed as
Exhibit 10.67 to Amendment No. 2 to Saba's Registration Statement on
Form S-1 dated December 22, 1998 (File No. 333-45023) and
incorporated herein by reference).
<PAGE>
10.81 Letter Agreement dated October 8, 1998 between Saba and HVI (filed as
Exhibit 10.3 to Saba's Current Report on Form 8-K dated October 6,
1998 (File No. 001-138807) and incorporated herein by reference).
10.82 Employment Agreement with Imran Jattala dated July 23, 1998 (filed as
Exhibit 10.71 to Amendment No. 2 to Saba's Registration Statement on
Form S-1 dated December 22, 1998 (File No. 333-45023) and
incorporated herein by reference).
10.83 Stock Exchange Agreement dated November 23, 1998 among HVI and the
Shareholders of Saba Acquisub, Inc.
10.84 Extension and Amendment to Preferred Stock Transfer Agreement dated
December 4, 1998 among RGC International Investors, LDC, HVI and Saba*
10.85 FirstAmendment to Common Stock Purchase Agreement dated October
8, 1998 between Saba and HVI dated December 4, 1998 (filed as Exhibit
10.1 to Saba's Current Report on Form 8-K dated December 18, 1998
File No. 001-13880) and incorporated herein by reference).
21.1 Subsidiariesof HVI Acquisition Corporation.*
21.2 Subsidiaries of Saba (filed as Exhibit 21.1 to Saba's Registration
Statement on Form S-1 dated January 21, 1998 and incorporated herein
by reference).
23.1 Consent of Bateman & Co., Inc., P.C., Independent Certified Public
Accountants, related to the financial statements for Horizontal
Ventures, Inc.*
23 Consent of PricewaterhouseCoopers,LLP, Independent Certified Public
Accountants, related to the financial statements for Saba Petroleum
Company*
23. Consent of Netherland, Sewell & Associates, Inc.*
23.4 Consent of Sproule Associates Limited*
23.5 Consent of Cohen Brame & Smith Professional Corporation (contained in
Exhibit 5.1)**
99.1 Form of HVI Proxy*
99.2 Form of Saba Proxy*
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules.
The following financial statement schedule has been furnished as part of
this Registration Statement:
Schedule II - Valuation and Qualifying Accounts of Saba Petroleum Company
and Subsidiaries
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of rule 145(c) under the Securities Act of 1933, as amended (the
"Securities Act"), the issuer undertakes that such reofferinig prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
<PAGE>
(2) That every prospectus (I) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415 under the Securities Act, will be filed as a part
of an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, 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) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to presently existing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities 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.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on December 22, 1998.
HORIZONTAL VENTURES, INC.
By: /s/ Randeep S. Grewal
----------------------------------------------
Randeep S. Grewal, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: December 22, 1998 /s/ Randeep S. Grewal
-----------------------------------------------
Ramdeep S. Grewal, Chairman and Chief
Executive Officer and a Director
Date: December 22, 1998 /s/ Jan F. Holtrop
-----------------------------------------------
Dr. Jan F. Holtrop, a Director
Date: December ____, 1998
-----------------------------------------------
Dirk Van Keulen, a Director
Date: December 22, 1998 /s/ George Andrews
-----------------------------------------------
George Andrews, a Director
EXHIBIT 21.1
SUBSIDIARIES OF HORIZONTAL VENTURES, INC.
Wholly Owned Subsidiaries of Horizontal Ventures, Inc.:
HVI Cat Canyon, Inc., a Colorado corporation
Calox, Inc., an Indiana corporation
HVI Acquisition Corporation, a Delaware corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Horizontal
Ventures, Inc. on Form S-4 (File No. 333-_________), and any amendment thereto
pursuant to Rule 462 promulgated under the Securities Act of 1933, as amended
(the "Securities Act") of our report dated April 14, 1998, on our audits of the
consolidated financial statements of Petro Union, Inc. dba Horizontal Ventures,
Inc. as of December 31, 1997 and for each of the two years in the period ended
December 31, 1997. We also consent to the reference to our firm under the
caption "Experts" in this Registration Statement and any amendment thereto
pursuant to Rule 462 promulgated under the Securities Act.
/s/ Bateman & Co., Inc., P.C.
------------------------------
Bateman & Co., Inc., P.C.
Houston, Texas
December 22, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Horizontal
Ventures, Inc. on Form S-4 (File No. 333-_________) of our reports which
contained an explanatory paragraph regarding the Company's ability to continue
as a going concern dated April 15, 1998, on our audits of the consolidated
financial statements of Saba Petroleum Company and subsidiaries as of December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997. We also consent to the reference to our firm under the caption
"Experts" in this Registration Statement and any amendment thereto pursuant to
Rule 462 promulgated under the Securities Act.
/s/ PricewaterhouseCoopers, LLP
------------------------------
PricewaterhouseCoopers, LLP
Los Angeles, California
December 21, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the reference to this firm under the caption "Experts" and
elsewhere in this Registration Statement of Horizontal Ventures, Inc. on Form
S-4 (File No. 333-_________), and any amendment thereto pursuant to Rule 462
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to certain oil and gas reserves of Horizontal Ventures, Inc. and
Saba Petroleum Company as of December 31, 1995, 1996 and 1997.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
----------------------------------
Title: Frederic D. Sewell, President
December 22, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the reference to this firm under the caption "Experts" and
elsewhere in this Registration Statement of Horizontal Ventures, Inc. on Form
S-4 (File No. 333-_________), and any amendment thereto pursuant to Rule 462
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to certain oil and gas reserves of Saba Petroleum Company as of
December 31, 1995, 1996 and 1997.
SPROULE ASSOCIATES LIMITED
By: /s/ R. Kieth MacLeod
-------------------------------
R. Kieth MacLeod, Vice President,
Engineering U.S. and International
December 22, 1998
EXHIBIT 99.1
- --------------------------------------------------------------------------------
Horizontal Ventures, Inc.
630 Fifth Avenue, Suite 1501
New York, New York 10111
- --------------------------------------------------------------------------------
PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS - FEBRUARY 5, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HORIZONTAL VENTURES, INC.
The undersigned hereby appoints Randeep S. Grewal, Chairman and Chief
Executive Officer of Horizontal Ventures, Inc., a Colorado corporation ("HVI"),
with full power of substitution, the proxy of the undersigned to represent and
vote, as designated below, all shares of HVI common stock, no par value ("HVI
Common Stock"), standing in the name of the undersigned with the powers the
undersigned would posses if personally present at the Special Meeting of the
Shareholders of HVI to be held on February 5, 1999 at 10:00 a.m. local time at
the principal executive offices of Saba Petroleum Company ("Saba") at 3201
Airpark Drive, Suite 201, Santa Maria, California, and at any reconvened meeting
after any adjournment or postponement thereof.
1. To approve the issuance by HVI of up to an aggregate of 1,300,000
shares of HVI Common Stock shares (the "HVI Share Issuance") pursuant
to the Agreement and Plan of Merger dated December 18, 1998 among HVI,
HVI Acquisition Corporation (a wholly owned subsidiary at HVI), and
Saba.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To approve a change in the name of HVI to GREKA Energy Corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the issuance of up to an additional 2,000,000 shares of
common stock for possible future acquisitions.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The HVI Board of Directors recommends that you vote "FOR" each of the above
proposals.
4. On any and all other matters that may properly come before the
meeting.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO SPECIFIC DIRECTIONS ARE GIVEN,
THIS PROXY WILL BE VOTED "FOR" EACH OF THE ABOVE PROPOSALS.
------------------------ ------------------------
Print Name Signature of Shareholder
------------------------ ------------------------
Number of Shares Signature if Held Jointly
------------------------
Date
Please sign exactly as name appears on the certificate or certificates
representing shares to be voted by this proxy. When signing as executor,
administrator, attorney, trustee or guardian, please give full titles as such.
If a corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
EXHIBIT 99.2
- --------------------------------------------------------------------------------
Saba Petroleum Company
3201 Airpark Drive, Suite 201
Santa Maria, California 93455
- --------------------------------------------------------------------------------
PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 5, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SABA PETROLEUM COMPANY
The undersigned hereby appoints Susan M. Whalen, Secretary of Saba
Petroleum Company, a Delaware corporation ("Saba"), with full power of
substitution, the proxy of the undersigned to represent and vote, as designated
below, all shares of Saba Petroleum Company ("Saba") common stock, $.001 par
value per share ("Saba Common Stock"), standing in the name of the undersigned
with the powers the undersigned would possess if personally present at the
Special Meeting of the Shareholders of Saba to be held on February 5, 1999 at
2:00 p.m. local time at Saba's principal executive offices at 3201 Airpark
Drive, Suite 201, Santa Maria, California, and at any reconvened meeting after
any adjournment or postponement thereof.
1. To approve the Agreement and Plan of Merger dated December 18, 1998
(the "Merger Agreement"), among Horizontal Ventures, Inc., a Colorado
corporation ("HVI"), HVI Acquisition Corporation (a wholly owned
subsidiary of HVI), and Saba, pursuant to which Merger Agreement the
shares of Saba common stock which are issued and outstanding
immediately before the closing of the Merger Agreement, other than
shares owned by HVI, will be exchanged for shares of HVI common stock
to be issued based on an exchange ratio of one share of HVI common
stock for each six shares of Saba common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Saba Board of Directors recommends that you vote "FOR" approval of the
Merger Agreement
2. On any and all other matters that may properly come before the
meeting.
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. IF NO SPECIFIC
DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED "FOR" APPROVAL OV THE
MERGER AGREEMENT.
------------------------ ------------------------
Print Name Signature of Shareholder
------------------------ ------------------------
Number of Shares Signature if Held Jointly
------------------------
Date
Please sign exactly as name appears on the certificate or certificates
representing shares to be voted by this proxy. When signing as executor,
administrator, attorney, trustee or guardian, please give full titles as such.
If a corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
